Santova: unloved by the many, great to the few

How can a strong-performing company over many years, with dependable and defendable niches locally and offshore, still attract the market’s scowl?

Exhibit A: technology-driven logistics services company Santova. This month, its margins swelled from 32.4% to almost 46%, while headline earnings per share gained 62% to 78c a share. Critically, cash generated from operations was up 45% to R119m.

Yet, while the share bobbed up a few percentage points after the results, it is still well off its 12-month high of 924c. Some might point out that Santova’s share price is up 20% in six months and a whopping 73% over a year. But that would reflect a bounce off a very low base of 406c last November, when the market was unjustifiably concerned about Santova’s balance sheet.

What has actually happened in the interim period to end-August is that Santova has grown its tangible NAV by 65% to 418c a share. This puts into perspective the kind of bargain that buyers of the stock last November were getting. It also gives a reassuring underpin to the future valuations of this “asset-lite” technology business.

Keith McLachlan, investment officer at Integral Asset Management, says Santova’s asset-lite business model “has been highlighted by the huge gains it has made in clients, volumes and, more recently, in opening up the US market, with a clever beachhead there.”

He says the first-half results were better than expected, and believes that while macro headwinds make any near-term forecast murky, Santova is set up with fantastic prospects.

Santova has tended to expand geographically with bite-size acquisitions before gradually broadening operations with supplementary deals

“Despite these positives and organic growth in its market capitalisation to a little over R1bn, the share still bizarrely trades on a p:e of five.”

For those who need reminding, Santova delivers international end-to-end supply chain solutions in 11 countries through its offices in South Africa, Mauritius, Germany, the Netherlands, the UK, Australia, Hong Kong, Singapore, Thailand, the US and Vietnam.

For Santova, it could be argued, it’s more tech than logistics — not that you’d say so looking at its earnings multiple. Its technology platforms help the  movement of goods between customers, but without having to own and manage the upkeep of fleets of trucks, ships, planes or warehousing facilities.

Like shipping and container leasing companies, it’s been doing brisk business.

Interestingly, Africa — mainly South Africa — was the star performer in the interim period, which explains why offshore revenue dropped to 70% from 90% in the previous year.

Revenue from the African operations surged 53% to R97m notwithstanding the effect of the April floods on logistics infrastructure in Durban as well as ongoing hitches at Transnet’s port and rail operations.

CEO Glen Gerber says that with South Africa becoming a less desirable destination with shipping lines, there’s been a marked increase in air freight activity, with volumes up by 82% to 2,000t. This was driven by customers operating just-in-time inventory models needing emergency stock due to scheduled deliveries being delayed or unpredictable.

The African business operates on a margin of 50% — higher than group level but still markedly lower than the smaller operations in Europe, which managed a seriously beefy margin of over 60%.

Gerber explains that in South Africa Santova’s operating cost structure is higher than it is in Europe, for the same amount of output. “In South Africa, we collect VAT and duties on behalf of the South African Revenue Service, whereas in Europe importers pay these taxes directly to tax authorities. Hence we employ more people to undertake the additional administration.”

Margin watchers will no doubt find the recent foray into the US interesting to monitor. Santova has tended to expand geographically with bite-size acquisitions before gradually broadening operations with bolt-on deals. The group closed the A-Link acquisition in September at a cost of $2.35m (about R40m) but with warranted earnings before interest, tax, depreciation and amortisation of $1.2m (more than R20m) for the next two years.

Says Gerber: “All Santova’s international offices trade with the US, particularly the Asia-based ones. With these volumes now in play, we are in an advantageous position to grow our operations in the US.”

He believes the region may become one of the largest contributors to group earnings within the next five years. “This will also be accompanied by another four offices being established in economic hubs such as Chicago, New York, Dallas and Atlanta.”

Regarding the longer-term US rollout, Gerber explains: “While this is not necessarily obvious, our growth has predominantly been organic — we grow our existing businesses through ‘intelligent’ intervention like technology and global intellectual capital. However, our strategy is ‘acquire small’, and relatively risk free, and build. In this regard, we will be looking to acquire, and then build.”