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What Clover is telling us about the state of the market

There is value that is being underappreciated.

On October 19 Clover Industries announced that it was in talks with an unnamed company that is looking to acquire all of its shares and delist it from the JSE. In the four weeks since then, the company’s share price has climbed from R14 to its current levels of around R18.

This means Clover’s listed value has jumped close to 30% in less than a month. Clearly the market suddenly realised that the business is probably worth a lot more than it was being priced at.

“The base from which that bounced was at a price-to-earnings (PE) multiple of 6.5 times,” says Andrew Vintcent, portfolio manager at ClucasGray Asset Management. “It’s still not even at an 8 PE on our numbers.”

Clover is not a widely held company, and not everyone is that bullish on its business model, but there are a number of analysts who believe there is substantial value in it that has been overlooked by the market.

“Fundamentally it is a very high quality businesses now that they have got rid of the milk farming operations,” says 27four Investment Managers portfolio manager Nadir Thokan. “What it now owns is the cold storage distribution and the brand. Replicating that cold storage would be extremely expensive and the distribution Clover has would be extremely difficult to match.”

This strong position is likely what has attracted a potential acquirer. That, and the incredibly depressed share price.

“Given the way that the company has changed its business model, given the way it has grown its branded portfolio, given its good logistics and distribution network in the cold storage space, we think this is a business that could earn you R2.50 to R3 a share over the next 18 months to two years,” Vintcent argues. “A business earning you R3 a share shouldn’t be bought out at R20.”

Delistings, plural

What is even more telling is that Clover is far from the only JSE company under cautionary. Verimark’s management has stated its intention to delist the company (again), and Torre Industries has been in talks around a potential delisting since July. This week the company announced that its former CEO would be taking it private at between R1.40 and R1.50 per share, which is a 44.67% premium to its 30-day volume weighted average price.

Read: Torre Industries to delist

In the days just before Clover made its announcement, Cargo Carriers was taken private at a price of R21 per share. That was a 40% premium to its prevailing price of R15.02.

This number of potential delistings is significant, because it is a signal that private investors are starting to see a lot of value that is being ignored.

“When you see delistings, it is often a sign that the market is cheap,” says Thokan. “When the public market fails to recognise the value in a business, the private market will step in and unlock that value.”

Chief investment officer at Northstar Asset Management, Adrian Clayton, agrees.

“Having done this for almost a quarter of a century, private money is often a lot brighter than listed money,” Clayton says. “A lot of us in the listed space are looking at prices, and not the true through-the-cycle valuations.”

This is exacerbated by the current weakness in both the overall market and the local economy.

“We are in the depths of an ugly cycle and everyone is only looking one step ahead of themselves,” Clayton says. “But if there is any chance of getting through this cycle, some of these smaller companies are probably worth a lot more money.”

It is particularly in the mid-cap and small-cap space where valuations are now at levels rarely seen. They have been sold-down across the board because of the negative narrative on the South African economy, but fundamentally many of them are quality companies.

Perceptions and generalisations

“There are a number of good businesses that are all being stuck together in this basket,” says Clayton. “Investors don’t want to be in there because of the perception of liquidity in this sector, that the economy is not in their favour, and the backdrop is terrible. So there has been a blanket approach to writing them all down.”

As the number of delistings suggests, however, there is a lot of value that is being underappreciated.

“I have not seen an opportunity set so compelling for some time,” says Vintcent. “You are paying trough multiples for bottom-of-the-cycle earnings for some really good companies.”

There is good reason for investors to be looking at what they might be missing.

“I wouldn’t use delistings as the only gauge, but they are an indication that there is value in the market,” Thokan says. “Perhaps they could be a catalyst for investors to ask where else they might find value, and they could look at gems like Italtile or Hudaco.”

Clayton agrees.

“I’ve seen this before,” he says. “This is exactly what happens before you see a rerating in that area of the market.”

Read: Torre Industries to delist

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Or else Clover are doing an “ Elon Musk” and artificially inflating the share price by planting a rumor of a potential sale and delisting? Time will tell.

What does it say about the financial future of dairy farmers when Clover improved its business model by moving out of dairy farming?

The state of the local market is a reflection of risk as perceived by investors. Any economy is built on the rule of law. All the rules and regulations of the JSE has no value when the state is contemplating expropriation without compensation. The right to own property forms the basis of a prosperous economy. The most important task of any government is to protect this right with everything at its disposal.

How does anybody determine the value of a listed company with a local footprint, when the value of the risk-free benchmark, to government bond, is at jeopardy? Ignorant and inept politicians detonated an explosive device that shook the foundations of the JSE. The longer the expropriation debate lasts, the more the JSE will crumble.

While the president invites investors to bring their money, he himself is busy destroying the bastion of capital building with his party’s expropriation debate.

demand for dairy products will always be there. Where Clover left the gap someone else will fill it.

I agree, the problem is not he demand. The problem is the oversupply caused by cheap diary products that is subsidized in the country of origin. A dairy farmer in Europe can make a living with 20 cows while a local farmers struggles to turn a profit with 2000 dairy cows. Can you imagine yourself artificially inseminating 2000 cows? You basically spend your entire life at the rear end of a cow…..

Rattray sold Mala Mala
Karan beef sold their farms to Bbeee
I bet Clover ALSO sold to to BBee
The smart money continues to vote with it’s feet – exiting commie Azania
Leave it to Ramaphosa /Motsepe /Rabede inlaws – no jealousy from me , i want no part of this Mafia state

When they all thought SA was going to dust under Zuma they hastily rand and bought businesses all over the globe FBR, BRAIT, Steinhoff, Netacare, Mediclinic. Zuma went and they were left with massive write-downs. Something similar happened in 1994 with Anglo, De Beers, Old Mutual etc, suffice to say with the same result. SA business have a lot of advantages here that they do not have elsewhere in the world and that fools them into thinking they are that good or that they know hat they are doing…

Clover needs cows, cows need farms, farms need property rights. No actuary required to figure this one out.

Not so. While AI is taking over thousands of jobs cloning animals will require no farms. Aqua culture is proving more productive than traditional vegetable farming and requires minimal space. The future is arriving ever faster.

I think your commentators are spot on ; Vincent, Adrian et al
Clover certainly will not de-list at R18.
Probably closer to R22-R26 if one looks at similar businesses worldwide and even then the buyer will be getting it at a good price.
Now a new cleaned up and unique business –

I am betting on one of the large European players – time will tell – roll on the next SENS

Not European. Gupta’s Estina Dairy will be the new owner; working with Ace’s siblings as conduits

……in this country farmers must be optimists or they wouldn’t still be farmers…

Methinks the Fosters will start counting their money after the 30 % rise in the share price – before this market also collapses due to the milk supply that will dry up as a result of the ”restitution of land” – Estina Dairy Farm Style!

Farmers say that farming is like visiting a brothel, you know that it is wrong, but you keep on going.

Many companies is undervalued Eg – SEBATA , Trading at R 5.05 BUT – NAV is R 8.31 ???

More details are required.

Clover is a cold distribution company now..

What EPS doesn’t tell you is

– how much the company has to invest in its fleet to keep it running.
– Margins sustainability
– Competition in this space

Look a bit deeper and maybe there is a reason it’s trading at PE of 8.

Patrick, Maybe you could also tell us what the value and market indices would have been without shareholders property given away for free – sort of EWC… – without deals such as: “Vodacom’s BEE deal shrinks profit” “Vodacom’s R16.4 billion empowerment deal in September..eclipsing the R7.5 billion YeboYethu ..10 years ago. It’s also come at the expense of first-half profit due to the once-off costs associated with the deal. To facilitate the new black economic empowerment structure, it issued an additional 114.5 million shares. … Excluding those transactions, it said HEPS would have been 6% higher” Vodacom share price down 29.5% from high; Down almost 10% since 7 November 2018.
What’s the impact on pensioners’ income of all the share dilution and ridiculous costs of BEE deals. After all value destroyed by fat cats at top does not only happen in Steinhoff.

There is nothing more depressing than identifying an undervalued share buying it and then seeing it sold out under ones nose. I think this is hugely unfair and an insult to small investors.
The buyers appoint some analyst to pronounce on a “fair” price and you just have to swallow it even if you KNOW the company is worth a lot more.

It is no surprise that so-called smaller companies like Clover have little price discovery or investor interest. The JSE is unashamedly a market for institutional investors to the exclusion of private/retail capital. It is a profitable business model but one that is slowly eating itself. The high barriers to direct entry to the JSE caused by high fees and infrastructure charges mean that brokers cannot profitably manage small portfolios and low value trades. Private money has thus been directed into unit trusts and related fund products which have low barriers to entry. This has created an imbalance between the size of institutional investors and the availability of listed shares with sufficient market cap size (i.e) . Top 40 (in reality the top 23). To keep up with the benchmark index fund managers (including boutiques) seldom deviate from the Top 40 shares only dabbling outside to obtain “alpha” or whatever new marketing metric they can sell. To further compound the concentration in Top 40 shares, passive index tracker funds have to buy the Top 40 irrespective of value. All these demand factors not only lead to inflated valuations (simple supply/demand). but also crowd out investment in the small/medium cap shares. Only R7 billion out of an industry total of R2.3 trillion is invested in small cap stocks.

Globally, small cap stocks are strongly supported by retail investors and private money. Less than 0.3% of volumes on the JSE are retail compared to 8% – 12% in comparable markets. It is no surprise that there is very little real price discovery and liquidity in small/medium cap companies that list on the JSE. Eventually they end up disappointed as they see little value from the high cost of listing on the JSE and the overburdensome compliance that accompanies a listing. So they delist. Excluding corporate unbundlings the number of companies listed on the JSE has been decreasing over the past few years.

The advent of new exchanges such as ZAR X can hopefully address the problem by offering low cost access to market and a more simplified and practical listings regime. Institutional capital will always follow a big listing irrespective of the exchange. Hopefully these exchanges can attract a pool of retail capital to support the small companies. If so, smaller companies that struggle on the JSE could move to a new pool of liquidity where more transparent pricing will occur and the benefits of listing will be more obvious.

Without access to capital our economy cannot grow.

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