The law of supply and demand, you’d think, would mean scarcity of stock in a quality listed company would light a fire under the share price.
On paper, yes. In reality, not always.
The fact is the real market movers — the institutional investors and mainstream asset managers — tend to ignore illiquid stocks in which they cannot build a large enough position to have a bearing on a portfolio.
There are exceptions, such as Combined Motor Holdings or Caxton & CTP. While institutional participation is scarce, it’s not uncommon to see the names of well-known — even so-called rock star — portfolio managers, in their personal accounts, on the share register.
In the past the JSE has hosted numerous counters that had a scarcity of tradeable stock and were dominated by a single shareholder or by a few parties holding the vast majority of issued shares.
The market ignored these counters, and most slunk off quietly after buying out uninterested minority shareholders. Probably the best example would be Ronnie Price’s investment company Eureka, which barely traded in the years before its delisting in 2009.
But recently, several companies have benefited from a scarcity of scrip. One thinks of the recent shifts in the share price of investment trust Sabvest Capital, which is controlled by founder Christopher Seabrooke. The same applies to the old Cartrack — now Karooooo — where founder and CEO Zak Calisto still holds the bulk of issued shares. In both instances, the companies produced hard-to-ignore performances and strategies that pressed professional investment entities to scour the market for shares.
The JSE will in future probably insist on a compelling reason before it allows companies to list without a decent free float of shares. But for now the local bourse still plays host to a good number of illiquid counters, many of which look highly unlikely to trigger a "liquidity event" like a placement of shares with new strategic shareholders.
Readers might well be familiar with single-shareholder-dominated stocks such as telecoms specialist Telemasters, services group Workforce, investment company Rex Trueform, industrial conglomerate Deneb Investments, services group Sebata, technology group Cognition, London Finance & Investment Group, condiments maker AH-Vest and radio broadcast group African Media Entertainment.
Some, including small (but highly profitable) insurance group Indequity, logistics group Cargo Carriers, wood group KayDav and property group Adrenna, have delisted recently, and some, such as chemicals group Spanjaard, are in the process of doing so.
Interestingly, last week no fewer than four illiquid counters reported results that might well be worth a closer look:
PBT GROUP
This technology group taps some sweet niches in data and analytics, software development, cloud computing and insurance technologies. Arguably its main asset is its 750-plus army of consultants, who drummed up R789m in revenue in the year to end-March (up 17% from the previous year). Earnings before interest, tax, depreciation and amortisation were R98m, with cash generated from operations coming in at R92m — equivalent to more than 100c a share. Normalised headline earnings came in at 46c a share, putting the company on a trailing multiple of about 10 times.
Perhaps most impressive was the dividend of 38c a share. This represents a nifty yield of more than 8%, but a mind-blowing yield of better than 20% for those punters that determinedly scratched for PBT shares at 186c last July.
Should patient investors be scrapping for scrip? The group has an asset-light business model that services mainly listed A-grade clients, of which there is a reassuring spread — the biggest two each represent only 10% of total revenues. The business is highly cash generative, and with acquisitions unlikely, spare cash will be mobilised for share buybacks and dividends. Overall, the data explosion and digital transformation should keep PBT’s consultants on their toes for a while still. That said, the company acknowledges that long-standing client relationships can put pressure on profit margins, and that a shortage of quality consultants can limit growth.
Still, it’s worth noting a possible short-term X-factor from PBT’s investment in Australian software group Zuuse. Zuuse automates and digitises for the construction industry, and improves management of buildings and infrastructure assets. PBT holds 9.6-million shares in Zuuse, which recently placed new shares with strategic investors at A$1 a share. At this week’s exchange rates the Zuuse stake is worth more than R100m to PBT, which has a market capitalisation of just R445m.
NICTUS HOLDINGS
This company was split off from the larger Nictus Bpk, which is listed on the Namibian Stock Exchange. It houses the SA-based furniture retailing and insurance operations, which are really tiny, generating some R53m in revenue.
There is, at first glance, not much to attract market attention aside from the R77m cash on hand. But look past the small operational cluster and there is an intriguing value proposition. On the income statement there is a R39m gain in investment income. Digging into the notes in Nictus’s just-released annual report, there is a sizable investment portfolio of R123m in unit trusts, listed shares worth about R7m, listed debt securities worth R17m and about R60m in short-term deposits. This number does force one to refocus on the operations, which seem to comprise just two furniture stores in SA, in Louis Trichardt and Polokwane.
Next to the investment portfolio the operational cluster is insignificant. For dogged investors, the key question is whether to regard Nictus as a furniture retailer or an investment company. There seems little evidence that Nictus wants to expand its retail footprint in SA, which might raise questions around maintaining a listing on the JSE. Any offer to minority shareholders would need to reference a NAV of about 200c a share.
In the meantime, investors could look at playing a yield game, with Nictus declaring a 5c a share dividend and unlikely to renege on further declarations for the foreseeable future.
MARSHALL MONTEAGLE
Though listed on the JSE, this diversified group is based in the UK and specialises in procurement, logistics and trading in various hard and soft commodities, industrial raw materials and consumer food and nonfood products. There is also a portfolio of commercial and industrial properties and a smattering of listed equities.
Deadly dull, one might argue, but this has been a solid performer for a good many years — though never surprising too much on the upside.
Marshall Monteagle has always been conservatively run, and at the end of the interim period to end-March cash balances sat at $17.5m. That’s equivalent to R250m, and more than a quarter of the group’s market capitalisation. In fact, Marshall Monteagle’s NAV is equivalent to about R35 a share against a share price of R27 — remarkable for a company that earns the bulk of its keep from services.
Interestingly, the group chose to point out that assets outside Africa, net of proposed dividends, are worth $70.1m — close to R1bn, which is roughly the current market capitalisation. The group had a rousing recovery from the Covid lull with interim revenue to end-March up 32% to $83m, which sparked a swing back into the black to the tune of $1.5m. An interim dividend of US1.9c a share will be paid at the end of his month. There might be something here for the patient investor.
Marshall Monteagle will probably not soar to great heights, but there is a steady churn that will accommodate regular dividend flows and a gradual uplift in the share price.
PRIMESERV
If the share’s relative illiquidity is a drawback, then so is the perceived business focus on resources. As unhip as this sector has become in investors’ eyes, Primeserv has done rather well over the past decade.
Of course, the past year was very different, with Covid badly hobbling key parts of the business. In short, the group incurred costs that would ensure the sustainability of key operations. So while revenue declines were restricted, gross profit plunged more than 20% to R89.7m. But Primeserv managed strong debtor collections and a reduction in working capital.
Earnings came in at 20c a share, meaning Primeserv is still trading on an undemanding earnings multiple with much better prospects in the financial year ahead. With stronger cash flows evident (especially in the second half), the group saw its cash balance balloon from R13.5m to R37m.
For the record, cash flow from operations was R31m, which is equivalent to 36c a share. Despite a torrid time during the pandemic, Primeserv’s NAV increased to 218c (more than double the current share price). Tangible NAV is 166c a share — and this for a services company!
The upside from operational endeavours might be modest over the longer term but, with a decent dividend regime to boot, there can’t be too much downside for determined dabblers in this stock. It’s probably prudent not to rule out corporate action either.
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