Global trade is the lifeblood of international technology-based trade solutions specialist Santova. So the fact that Donald Trump won the US election probably did not thrill executives at Santova. Trump had promised blanket import tariffs of between 10% and 20% on all goods irrespective of origin, and 60% on merchandise from China.
To be clear, the impact won’t be direct; besides having a nascent US start-up, Santova focuses largely on trade routes between Africa, Europe and Asia. But any trade war could depress global freight rates and weigh on the frail post-pandemic economic recovery in Europe and Asia. Persistently low freight rates, which feed into Santova’s billing rates for clients, are even weaker now than before Covid, and have caused a slump in Santova’s earnings in recent reporting periods.
Of course, Trump’s threats could simply point to a negotiating tactic and, should his attempts at brokering peace in Ukraine and the Middle East turn out to be successful, international trade could even flourish during his presidency (especially if inflation and interest rates continue to moderate). It illustrates, however, that Santova’s financial performance is influenced by macroeconomic cycles.
Operationally, Santova has done well. As a technology-enabled asset-light business, it has managed to increase its client base and transaction throughput in a difficult environment. While management likes to highlight its proprietary software — which, among other things, allows clients to track and trace goods across the entire supply chain in real time — good, old-fashioned client service and relationship management is probably the cornerstone of Santova’s success.
Historically, the company’s biggest clients were in South Africa and the UK. It has now done the hard work of establishing offices in Europe (Germany and the Netherlands) and in Asia Pacific (Singapore, Australia, Hong Kong and Vietnam). The plan is to acquire senior clients in these territories too, with comprehensive end-to-end supply chain management contracts offering better margins than basic agent referral work (this includes consulting work of advising on tariffs, regulatory and procedural barriers and the subsidies available in each territory). With logistics often comprising 50% of a landed product’s cost, Santova has a good story to sell. While the majority of its trade is conducted by sea, it also sees opportunity in European road transport.
Outside organic growth, Santova is also looking to make more acquisitions. Given strict investment criteria, it has turned down many opportunities because the potential targets didn’t have sustainable revenues or the asking price was too high. Management believes its patience will pay off, as the current downturn could make company owners more realistic about valuations.
Good, old-fashioned client service and relationship management is probably the cornerstone of Santova’s success
Notwithstanding a traditional client base built up over many years, Santova isn’t overly concentrated in this regard (normally a major risk factor for smaller companies). An impressive feature of the business is that no client contributes more than 1.7% of revenue; also, a diversified range of industries is represented, from chemicals and textiles to pharmaceuticals and retail. The various global offices in Europe, Asia and Africa operate independently and don’t rely on each other for work, which further reduces risk. The only negative is that lumpy project revenue is sometimes part of the numbers, which can distort the recurring business trajectory.
Balance sheet-wise, Santova has a cash pile of about R415m and material credit facilities, which is important when you need to incur recoverable disbursements such as customs, VAT and duties on behalf of big clients (and explains the discrepancy between billings and revenue). The resultant large trade debtor balance is derisked by credit insurance, which typically covers 80%-90% of the book, though a 10% loss on a R1bn book could still hurt if there’s an extreme economic downturn.
A more buoyant South African economy, driven by reduced load-shedding and a business-friendly government of national unity, is one of the macroeconomic positives for Santova. As the majority of its local business is import related, a stronger currency should boost customer activity, especially since stock levels are low.
So is Santova a buy? Considering its long-term growth prospects and solid management, the company looks like a good fundamental bet, even though investors probably need to temper their near-term earnings expectations. Freight rates have retraced to relatively low levels after spiking earlier in the year due to the Red Sea crisis, and the company says there’s evidence that some clients placed their orders for peak season earlier. This means full-year results are likely to be muted, unless freight rates spike, either due to geopolitical tensions in Ukraine or the Middle East, or because of global traders trying to front-run Trump’s threatened tariffs by stockpiling. Conserving cash for acquisitions and share buybacks also mean Santova is not a great dividend payer.
Having said that, the company trades on a trailing earnings multiple of only seven at the time of writing, based on the interim results, which is undemanding for a small cap with good-quality earnings and growth prospects — noting that, despite the recent slowdown, earnings are still more than double the pre-pandemic figure. Considering the frequent bouts of illiquidity in the South African small-cap space, it can get cheaper, but these are probably attractive levels to start accumulating.
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