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BUY: Stellar Capital Partners
Share price: 55c
JSE code: SCP
At the time of writing Stellar was trading at a discount of more than 50% to its sum-of-the-parts intrinsic value of 113c/share — a calculation that took account of the latest share price of the investment in JSE-listed Torre Industries (88c).
Such a discount may suggest questionable underlying investments or awful management (or both). Frankly, Stellar has two solid assets in fund manager Prescient and security technology company Amecor — the combined value of which easily exceeds the share price. The major stake in Torre is a drag, but with new management in that firm, a turnaround is not impossible.
In IM’s opinion, management needs to extract the underlying value for shareholders because Stellar has no rationale for continued existence as an investment entity. One might imagine cash-flush investment firm Sabvest bidding for the stake in Torre — especially as it owns a significant minority stake in the business and has experience running similar businesses.
Amecor and Prescient surely will attract interest from potential buyers (Deneb and Sygnia spring to mind). The risk is that management dawdles along. IM suspects the huge discount will mean proactive steps are taken to unlock value, which makes Stellar a buying opportunity with limited downside risk.
HOLD: Unicorn Capital Partners
Share price: 28c
JSE code: UCP
Unicorn is basically the old Sentula Mining business that has been revamped after a rigorous restructuring exercise. The company comprises overburden drilling and blasting services, mobile crane hire and exploration drilling services, as well as an anthracite mine. The contract mining businesses are being disposed of, and Unicorn will convert the diversified mining services group to an investment holding company.
While Sentula was close to toppling over, the restructuring process has meant management — and main shareholder JB Private Equity/RECM & Calibre — has probably learnt some valuable lessons. The first is that Unicorn will never again invest or participate in contract mining activities.
There are still challenges, but Unicorn has a classy asset in Ritchie Crane Hire, which has performed consistently and has recently won new contracts. And Nkomati anthracite mine, expected to achieve steady production in early 2018, is the X-factor.
There are still plenty of mining-related risks to weigh up, but the operational structure is leaner, executives are more street-wise and the balance sheet is considerably degeared. If mining activity picks up in 2018, Unicorn will certainly be able to give it horns. But it may be prudent to watch and wait before plunging in.
SELL: Andulela
Share price: 75c
JSE code: AND
There’s really not much inspiration to be taken from Andulela’s curious operational mix: an 83.59% interest in Kilken Platinum and 100% of steel merchant Pro Roof Steel Merchants (PRSM).
The investment company has trundled along aimlessly for years. Perhaps more diversity would have helped, as both investments operate in sectors where fundamentals are rather brittle.
On the face of it Kilken looks interesting, punted as a low-cost producer and seller of platinum group metals (PGM). Unfortunately, in the six months to end-June, it suffered lower quality tailings feed (resulting in lower PGM grades for recovery), as well as higher chrome content penalties.
Management says it is determined to resolve the production challenges, but it will be some time before the effects are felt. The situation is not helped by PRSM reporting eroded margins and a net loss after tax of R2.3m.
Reading between the lines of commentary accompanying the interim results, it seems Andulela shareholders should not expect too many pleasant surprises in the second half, and the company may need to tap shareholders for fresh funding.
For now, IM thinks it’s probably best to steer clear of Andulela.
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