February is the month of love. Well, recent Sens announcements from Santova, the technology-driven logistics solutions provider, would have made shareholders’ hearts flutter.
First, on January 29, Barca Capital LLC, through one of its funds, acquired a 15% stake in Santova. US investors don’t typically turn up in the registers of JSE companies all that frequently — even less so when talking about a small-cap counter such as Santova.
Barca Capital is run by portfolio manager Ryan Floyd and, according to its one-page website, is a Boston-based investment adviser with a long-term, value-orientated perspective. Further research reveals that it had just under $300m in asset management as per its last Securities & Exchange Commission filing and that it focuses on emerging and frontier markets. So Santova would sit in the sweet spot of its investment universe.
Santova’s share price went on a nice little run after the Sens announcement. It popped above 800c before falling back to 743c. Then, on February 11, Santova released a cautionary Sens announcement, saying it “has entered into negotiations with parties relating to potential strategic transactions”.
This may indicate a bid for Santova itself from Barca Capital and others. Or it may be that Santova is finalising a suite of acquisitions to grow the business. It has a long history of primarily bolt-on acquisitions but has been relatively quiet on the acquisition front since the partial impairment of its US business, A-Link Freight, acquired in 2022.
Before this, Santova had been acquiring or buying out minorities from previous acquisitions on a yearly basis. CEO Glen Gerber said in its interim results to end-August 2024, released at end-October, that “Santova’s appetite for acquisitions has returned as industry earnings have normalised”. Further acquisitions, Gerber believed, would “boost volumes by accessing new customers, new geographies, new service offerings and new sectors”.
Santova’s appetite for acquisitions has returned as industry earnings have normalised
— Glen Gerber
In the absence of recent acquisitions, Santova has been paying down debt and clearing deferred and contingent consideration liabilities due to vendors from prior acquisitions. This has left the balance sheet with a fair degree of flexibility for acquisitions or, for an acquirer, a healthy balance sheet that can be used following any takeover to continue growing the business in the private arena. Santova has also been repurchasing shares, so the share register has become slightly more concentrated in the hands of the major holders. Santova has been saying for some time that it prefers to grow the business rather than return capital to shareholders via dividends.
While container freight rates and volumes are well down from the peak Covid levels, of which Santova was a net beneficiary, container freight rates remain above pre-pandemic prices, a net positive for Santova. But Santova benefits more when its customers push additional volumes through its global network.
The business has experienced some natural downdrafts in earnings as global supply chains normalised. Coupled with rising inflation, rising interest rates and reduced stimulus, crimped trade volumes have led to an almost perfect storm of macroeconomic conditions for a business such as Santova over the 2022 to 2024 period.
This leaves it arguably in the position of experiencing cyclical low earnings levels just as we enter a lower inflationary and interest rate environment, which should mean a positive outlook for trade volumes. The caveat is the looming impact of trade wars arising from tariffs imposed by the US on its trading partners and the rational countermeasures in response to these tariffs. Still, tariffs in President Donald Trump’s first term appeared to have had minimal impact on global trade, and many were relaxed and removed following negotiations and new trade deals.
Where does all this leave Santova investors? The situation provides a decent set of options for investors. A takeover would have to be done at a tasty premium to the share price, given that the last stated NAV is 915c a share.
Alternatively, an essentially debt-free balance sheet could allow Santova to add some modest gearing to its balance sheet to scoop up a couple of smaller players with depressed profitability and valuation metrics, along with a decent outlook ahead for the sector.
So, as the second Sens announcement says, “shareholders are advised to exercise caution when dealing in the company’s securities until a further announcement is made”. In brief, we wait.
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