Pressing aggressively offshore has not always worked out for JSE-listed companies in search of rand hedge status.
For every Naspers, Remgro (see Richemont and British American Tobacco), Aspen and SA Breweries, investors can also count a good number of costly offshore forays — Woolworths, Truworths, Mediclinic, Ascendis and Famous Brands, to name a few. Gaming group Sun International has just finalised the sale of its Latin American investments.
In short, large local companies — even those with good records of merger & acquisition activity — have tended to misread offshore trading conditions and overpay for assets. Curiously though, some of the JSE’s smaller counters have fared quite well in niche businesses offshore.
Trencor, now a cash shell, made a superb long-term investment in container leasing firm Textainer; vehicle tracking counters MiX Telematics and Cartrack have growing businesses across multiple geographies; Metair has a most intriguing offshore presence in the battery market; Hosken Consolidated Invesments built up alternative energy group Montauk into a standalone entity set for a Nasdaq listing; fishing group Oceana seems to have a decent business in Louisiana-based Daybrook; and technology hub Altron will soon list its UK subsidiary.
Small Talk Daily analyst Anthony Clark says small caps seem to have a much better track record overseas as they tend to buy small assets in categories they know well. "They go in to work in that overseas domicile often keeping the systems and personnel in place without trying to impose the SA way on local operations."
The FM has noticed a handful of micro-cap companies — counters with market capitalisations of less than R1bn — that have been making encouraging and profitable progress offshore.
In each instance the common denominator appears to be a determination not to bite off more than the company can chew. Expansion efforts are cautious, and not in any way straining or risking the balance sheet.
Here are five "secret" rand hedge companies worth looking at.
Nu-World Holdings
This supplier of consumer electronics, household goods and (more recently) fine liquor has been consistently profitable since its listing in 1987. The mainstay local business is lean and efficient, and it seems Nu-World has been able to replicate this model in offshore territories spanning Australasia, the Middle East, Brazil, India, Pakistan and Sri Lanka. The offshore business already accounts for a quarter of Nu-World’s turnover, and — in the most recent Covid-affected interim results — a chunky 38% of operating profits. The operating margin reported by the offshore entities is almost 7.5%, markedly higher than the 4.2% for the local operations. Nu-World is fairly reticent in its commentary, but CEO Jeffrey Goldberg did note the group is looking to increase market share and opportunities in these (offshore) markets with additional brands and product categories being offered to the various distributors.
PBT Group
This specialist technology group has always had a small slug of offshore earnings, primarily from markets in the UK and Australia. But there is another rand hedge angle at play here. Only those who bothered to dig into the annual report might have noticed that PBT has a significant minority stake in Zuuse, an Australia-based software company specialising in construction payment applications. The value of this investment came to the fore this month when IFM Investors, a leading Australian asset management firm, invested A$50m for a significant minority interest in Zuuse.
PBT’s effective stake (9.6-million shares) in Zuuse diluted from 6.7% to 5.3% — but more importantly the market can infer that this stake is worth more than R100m. In other words, Zuuse represents about 30% of PBT’s market value. Interestingly, PBT regards its stake in Zuuse as a noncore investment. Presumably, this stake could be offered for sale, adding to PBT’s considerable offshore cash pile and allowing directors to contemplate further offshore forays, share buybacks or a special dividend.
Argent Industrial
Few investors would consider Argent a rand hedge opportunity. But this small industrial conglomerate has been selling off noncore local operations and mobilising part of the proceeds to make selective industrial acquisitions — especially in the UK where operations include recently acquired Partington (trolleys for online shopping warehouses), OSA (industrial roller doors) and Fuel Proof (fuel storage tanks). In the interim period to end-August Argent’s offshore hub generated R288m in revenue, compared with R606m from local operations. But the offshore hub accounted for pretty much all the earnings, with pretax profits coming in at R54m. The share price arguably reflects the earnings of the offshore units at a modest multiple, meaning potential offshore growth is underpinned by further sales of local operations that make up the bulk of the roughly R13 a share tangible NAV.
Alaris
What was listed around 12 years ago as specialist communications group Poynting now comprises Centurion-based Alaris Antennas, COJOT (based in Finland) and the US company mWAVE (based in Windham, Maine).
The group mainly provides communication equipment to the defence and security industries, with major markets mostly offshore. Alaris has been remarkably steady over the past five years with cumulative earnings topping 115c, against a current share price of 220c. Recent (to end-June) results showed R31m of after-tax profits off turnover of R243m. Cash on hand sat at R110m, equal to about 92c a share.
The annual report hints at some interesting developments to come. CEO Jürgen Dressel said a key strategic objective for the financial year ahead was to further strengthen design and manufacturing capabilities. "Ideally, we will achieve this through an acquisition in this field of expertise."
There might also be a listing on an international bourse. Said Dressel: "We are acutely aware of our small size on the stock exchange, which hampers the growth of our share price."
This one is definitely worth keeping on the radar.
Advanced Health
A proposal to sell its remaining day clinics in SA means Advanced could soon become an offshore play — for now — based on its 61.4%-owned subsidiary Presmed Australia. Though the market initially subscribed optimistically to the group’s day clinics pitch, the SA business battled for traction and, sans cash flow, the development debt mounted. If the latest proposal is finalised, Advanced, which forked out R74m in finance costs in the year to end-June, will bank R170m and make a dent in its debt pile.
The group carries a market value of just R86m, which needs to be seen against the value of the remaining Presmed operations. In the past financial year Presmed’s top line was pushed down to R299m from R319m due to the restrictive Covid-19 trading environment. But it still managed to push up earnings to R14m (previously R10m). A recent deal, in which Advanced sold a 25.1% stake in Presmed for R60m, infers a rough value of about R240m for the Australian assets.
The FM reckons patient investors could grab a cheap entry to a bustling Australian business that could be carefully expanded when the balance sheet allows. Since July there have been no Covid-19 restrictions on Advanced’s Australian facilities, so investors will know soon enough whether demand for elective surgery was deferred, rather than lost.
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