I worked in the early 2000s with Peter Armitage, an analyst I rate highly.
Pete has come a long way in the 25 years I’ve known him — from top-rated investment analyst to founder and CEO of Anchor Capital. His analytical abilities to look cleanly at an investment story and articulate the salient facts inspire me.
One lesson I learnt from him two decades ago was his view that markets are often fixated on a tiny part of a business that in reality has minimal bearing on its true valuation, while the bigger, profitable and dominant valuable side is overlooked. This leads to opportunity when the market wakes up to the valuation reality.
I use this parable to aptly describe the market’s current irrationality on mid-cap investment holding company Sabvest Capital. The stock has an enviable long-term track record of returns. Simplistically, Sabvest is the family wealth office of businessman Christopher Seabrooke. Private investors can therefore co-invest via JSE-listed Sabvest into the connections, intuition and deal flow of a well-regarded, seasoned investor.
At the time of writing, Sabvest’s market value was R3.045m, trading at R76.50 a share. The last reported NAV at the year to end-December 2022 was R110.07 per share, a rise of 17.6% year on year.
Much of Sabvest consists of unlisted private equity-type assets. Sabvest had a blistering share price performance in 2022 and hit a high of R94, but is since off 18.6%.
Much of this, I believe, is tied to its minor 5-million shareholding in Transaction Capital. That stake, as at the 2022 financial year-end, was worth R165.5m. At the time of writing, its value was R62.6m as TCP shocked the market in mid-March with an announcement about problems at its SA Taxi division.
On the SA Taxi news, TCP was slammed 72% and hit a recent low of 878c. It’s now trading at R12.52. Now, to Sabvest this hit was certainly not pleasing, but the loss in value of R103m, or 260c per share, from TCP is hardly material. However, Sabvest holds three listed assets — TCP, Metrofile and UK-listed Corero, and all of these stocks are off their year-end valuations.
On the back of an envelope, the loss in value of TCP, Metrofile and Corero is R153m, and the value of these assets has shrunk to R304m as I write. The market is seemingly fixated on the TCP drop, but the impact to Sabvest is negligible. The total listed asset decline in value in the first quarter of 2023 is 387c per share, from a NAV valuation of R110.07.
The fastest-growing asset is Apex Partners, whose industrial portfolio is powering ahead, with its valuation rocketing 442% since 2019
As Armitage would say, the market is fixated on the insignificance that is 6.5% of Sabvest’s NAV. The broader portfolio has several new growth drivers in infrastructure and electrification (ARB Holdings) and liquor (Halewood), not forgetting that the China reopening story should kick-start ITL Holdings, which is the portfolio’s fourth-biggest asset, valued at R786m.
The fastest-growing asset is Apex Partners, whose industrial portfolio is powering ahead, with its valuation rocketing 442% since 2019, to R504m. Many deals are afoot within Apex, IM has learnt. A quick calculation using the lower valuations of the listed assets brings the Sabvest NAV down to about R106. At the current share price, the look-through discount is near 28%.
Granted, all investment holding companies trade at fat discounts. They are dinosaurs and lumbering mammoths — Sabvest is not. It once also traded at a wide discount. That was tackled by refining the portfolio and adding new investments.
Seabrooke remains confident of another year of double-digit growth in NAV. In the next 12 months, I expect asset disposals amounting to R350m to be on the cards. With the stock having fallen unjustifiably, I’d wager Sabvest, adept at buying its own shares, must be considering the option.
TCP is nothing more than a blip in a well-structured and strategically positioned portfolio. The 13% drop in Sabvest’s share price on TCP seems a little overreactive on such a small morsel. At R76.50, I’d certainly recommend buying Sabvest while waiting for the market to wake up to the resilience that is its portfolio.
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