It’s been a rarity to gain a listing on the JSE. Not all of the handful of new listings have gone well. Southern African-based fast moving consumer goods (FMCG) distribution and marketing business CA Sales (CA&S) could be considered an example of this.
The company was initially listed on the Cape Town Stock Exchange. The stock trundled along, but the plans of the majority shareholder, PSG Group, to unbundle and CA&S’s decision to move its listing to the JSE in late June caused CA&S to be off to the races.
It left the Cape Town bourse at 505c and shot up to a high of R16.50 in mid-July, but in extremely thin and scrappy volumes. The bid and offer were so wide you could drive a bus through them. Caution should have been the order of the day at this surging volatility — the sheer irrationality of a stock rising 33% in one day on a few shares was utterly unsustainable, especially ahead of PSG Group’s unbundling of its 47% stake.
There was, predictably, some extreme price action, with CA&S sliding from a R16.50 high to 889c ahead of the unbundling, but since the unbundling CA&S has been trading steadily in good volumes in the 530c-560c range.
Many institutions were unfamiliar with this Southern African FMCG and distribution counter. However, some older investors might recall its previous incarnation as CIC Holdings, which was sold to Imperial Holdings in 2010 for R724m. CA&S is a larger business than CIC, but operates in much the same fashion.
So what does CA&S do? It’s a collective of well-established FMCG service businesses operating throughout Southern Africa. They represent the top 200 local and international blue-chip consumer packaged goods companies and have a distribution network to 35,000 retail outlets in SA, Botswana, Zambia, Zimbabwe, Namibia, Eswatini, Mozambique and Lesotho. Companies such as Distell, Diageo, Tiger Brands and Unilever rely on CA&S to get their goods to points of retail. The company offers a full-service provision of warehousing, merchandising, logistics, data services and marketing for these consumer brands.
To put it simply, it is an expert at operating in the formal and informal retail channels in Southern Africa, an area where others simply do not have the expertise or network to tread.
Interim results to end-June were released on the JSE in early September. This coincided with PSG’s unbundling. Shareholders received 1.03650 CA&S shares for every PSG share held.
At the interim results presentation, CA&S reported a solid improvement in headline earnings, which surged 44% to 30c a share. Revenue in the period increased 20% to R4.3bn and operating profit rose 47% to R215m. IM’s forecast for the second half, which is usually the company’s busiest period, is minimum headline earnings of 70c a share (+18%) — though the chances are good that CA&S will exceed this. On a forward earnings multiple of 7.8 this seems a rather undemanding market rating. The dividend policy is 20% of headline earnings.
More than 70% of the business is derived from branded groceries, with alcohol sales also increasing throughout the network. Business has been fairly robust despite challenging economic conditions.
It operates in formal and informal retail channels in Southern Africa where others do not have the expertise or network to tread
CA&S’s management has a respected pedigree of working in the Southern African FMCG sector and has bold revenue targets of R20bn by 2026 as an objective. Revenue in financial 2021 was a respectable R8bn, with R10bn estimated for financial 2022. From the interim results presentation it was clear that CA&S has sufficient runway to expand. Simply adding a few more goods and FMCG partners to an existing distributed basket can be done at modest incremental cost, but aids overall operating margin.
Given its footprint, it is logical to assume it could expand to other regional territories, as long as it avoids the usual graveyard countries for FMCG consumer stocks, such as Angola and Nigeria.
The market must be puzzling about what the correct valuation for this unique stock is. It is a retail support business with deep relationships and ties in Southern Africa, an area that is largely ignored by the consumer majors, and there is no similar business to compare it with. An earnings multiple of less than eight to December 2022 for a stock with a consistent track record and a clear runway for growth seems rather miserly.
IM believes the recent share weakness on the PSG unbundling has gone too far, and that there must be an opportunity as the market starts to accept the prospects for CA&S. IM rates the stock a “buy” and places a bold target of 850c on it.
Anthony Clark
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