CA&S: Making money even in bad times

CA&S has been one of the great small-cap stories on the JSE in recent years, even though the business came to market with minimum fanfare.

Investors who bought this fast-moving consumer goods (FMCG) services specialist in early 2023 will not be complaining. The share was trading around 700c then, which means at current prices it is still up 100%-plus.

The share, though, is down 16% over six months and 3% over a year — drifting well off its record high of close to R20. Might this be the time to accumulate again?

At face value, the share is not trading on a particularly demanding earnings multiple. But sentiment has obviously been clouded by worries around the economy in Botswana, where concerns about the future of diamonds will probably dampen growth prospects. The uncertainty around Anglo American’s sale of diamond giant De Beers, which has an important partnership with the government of Botswana, also weighs on investor sentiment.

The fretting around Botswana won’t go away soon and may even take a turn for the worse if the diamond market outlook stays flawed. But for now it’s easy to appreciate that CA is still making a decent go of it in that country. Interim revenue of R2.83bn translated into R150m at ebitda level, representing a margin of just over 5%. This, on its own, would not justify a premium rating for what is a specialist services business. But it does confirm that CA can still make money even in bad times.

What does impress, though, is the meticulous and low-risk geographic expansion CA has embarked on in recent years. Revenue from its businesses in Namibia (R1.1bn), South Africa (R989m) and Eswatini (R898m), as well as other African markets, generated more than R3.1bn — more than the R2.83bn sourced from the core Botswana business.

But it’s at ebitda level where things get really interesting. While Botswana remains the single largest profit centre, South Africa accounted for a chunky R115m, Eswatini R72m, Namibia R40m and other African markets R23m. Collectively, the markets outside Botswana earn R25m.

The rub, of course, is sourcing growth opportunities of appropriate scale in a highly specialised market

The margin, at interim level, managed by the South African parts of CA’s business, was more than 11% and a respectable 8% for Eswatini. Other African markets operated on an ebitda margin of 13.5% — and hopefully this will be bolstered by the recent acquisition of 35% of Tradco for R108.4m. Tradco is a route-to-market solutions business based in Kenya that should pave the way for CA to open up further opportunities in the vibrant East African hub.

The margin earned in the Namibian hub is markedly lower than that of other regions. But the expected uplift in the Namibian economy should allow that margin to fatten as the benefits of oil and gas discoveries, as well as the mining of green minerals, start to materialise.

The Southern and East African corridors are likely to be key to CA’s fortunes in the medium term. The trick is enhancing organic growth in these key markets with selective acquisitions that are easily slotted into existing operations and that don’t put dents in the balance sheet or slow CA’s return on capital.

It seems CA’s style is to snag an initial equity stake in a target company and then — if performance is to specifications — look to increase that to a full controlling stake. What group CEO Duncan Lewis also emphasises is the policy of encouraging vendors of acquired businesses to take some meaningful portion of equity in CA. That way the founding/managing partners are pulling in the same direction as the parent company.

The rub, of course, is sourcing growth opportunities of appropriate scale in a highly specialised market … and then ensuring that the price set for the deal is not too steep in terms of potential returns over the medium term. Given that CA has a client list that includes PepsiCo, Tiger Brands, Mondelez, Diageo, Unilever, Nestlé, Coca-Cola and Kellogg’s, smaller FMCG companies might see the benefit of teaming up with it — especially if it brings these brands to new markets.

The group, significantly, has retained its medium-term target of building a R20bn a year revenue business. Revenue reached around R12.5bn in financial 2024, and IM estimates that — with improving economic conditions in Namibia, East Africa and South Africa — full-year turnover in 2025 could top R13.5bn. The trick will be to ensure margins remain reinforced while CA pursues its ambitious turnover growth.