Lifting the lid: Sleepers
EVERY busy reporting season has wedged in amongst the usual blue chip suspects, an array of diverse "sleepers" - stocks that are openly doing well, but only seem to wake up once every six months at results time!
One change in recent times is that with the introduction of the trading update, the "wake-up" seems to be happening with the update. The broad theme, however, remains the same, attractive valuations in the form of low price:earnings multiple (PE), a high dividend yield or both, backed up by strong operating cash flow numbers.
Variations on the theme include fairly well established management teams, who came through a trial by fire (of some form or another) a few years previously.
Compuclear is often easier to watch on its dividend yield rather than a PE rating. It is illiquid and trades on wide spreads, which means sooner or later it finds itself at the bottom of the channel.
Recent results were a function of margin expansion following business restructure. Operating cash flow before dividend of 30c/share hugely underpins earnings.
Disaster recovery
A business restructure involved a "Business Partner program" (stated intention is 'to establish a geographical presence abroad and to improve service levels') and closure of branches. R3m was invested in the renewal of hardware and improvement of the group's disaster recovery capabilities.
Management expects turnover growth from winning contracts to supply systems to a number of major clients and for the banking and order planning systems to contribute from 2H next year. International systems require some redevelopment and may not contribute for a while.
AGI once expanded its way into trouble, but now is vigorously returning to good health. Volumes rose an aggregate 16% and results reflect a strong commercial and residential building market, and a "back to basics" manufacturing process turnaround.
As a result of the growth in the higher value-add products in particular, the group made more use of its vertical integration and as they put it, "trap margin". As a result of the factory re-organisation, which has also reduced logistics costs, the company is now sitting on vastly increased production capacity.
In addition, there are also signs of a shift away from pure manufacturing improvements, to design either for improved production or improved customer appeal. This is a clear sign of confidence in the turnaround process started two years ago.
Slowdowns
Enviroserve's headlines growth of 40% to 63c/share is a function of turnaround and the harvest of capex past. This is particularly reflected in operating cash flow before dividend and after maintenance capex of 72c/share underpinning heps.
The caveat for the near-term future is no severe slowdowns in manufacturing and mining. In the domestic waste market, management is satisfied that the scale of operations is in line with the amount of work available and activity in Angola looks positive too.
Iliad's interim earnings growth of 20% defied the price pessimism, following the reserve bank's shift in stance to rate hikes. However, just as home prices and rentals do not move in sync, so too does home building and renovation also move in a desynchronised fashion.
Of course, steep hikes, such as we saw in 1998, would wipe all of the above cycles out, but God willing we won't see that anytime soon!
Acquisitions have certainly featured, but there seems to be a solid model for their digestion. Management are not being complacent about the state of the debt affordability for homeowners, nor the fact that confidence of builders is starting to decline, but is planning for a scenario of some slippage rather than "all fall down".
Mature small cap
City Lodge's earnings growth of 17.6% really did catch the market napping despite an accurate I-Net consensus forecast of three analysts. A case of seeing is believing, though certainly growth in room occupancies from 77% to 79% wasn't a common or garden achievement!
Spur is a far from mature small cap, even though it has grown steadily for 20 years of being listed. That the company is prepared to grow earnings through use of shares buybacks, shows that this old dog is not out of tricks!
They seem determined to keep operations tight, as evidenced by the outsourcing of national distribution of restaurant supplies from the group's central kitchens to an independent distributor.
It's worth remembering that franchising is a relatively low-risk business, since income is driven on a royalty basis and the economic cycle would tend to impact the degree of growth, rather than imperil it.
Even so the prospects commentary put out by management is somewhat more cautious than other consumer stocks have been, and dare we say it, possibly more realistic?
That's a good sign, the number of managements I've heard recently say that they are unaffected by rate hikes would lead one to conclude that the economy doesn't exist!
Cycle stock
Advtech's interim earnings growth of 40.3% belies its slightly different "sleeper" status: it's a lagging economic cycle stock, and the real test will come in the 2007 enrolment year. It may also have upside if it's litigation against the Welihockyjs (vendors of a business that it once purchased) is successful.
Digicore's earnings growth of 55% made for a large "wake up" by the market. Turnover rose 27.7% and unit sales increased by 52% and the company continues to insist that it could lay in extra volume at minimal extra overhead. Strong local and export trading are gearing up ever improving overhead recovery.
Digicore designs and manufactures units and software for the continual tracking of moving vehicles, as well as providing the support services for this in local and export markets. Stolen vehicle recovery has also recently been added to the suite.
There has been growth in international business through distribution contracts - i.e. the distributor takes the risk. Government off take is growing, with potential to improve service delivery by monitoring their vehicles e.g. ambulances going directly to destinations instead of via the Tote etc.
Approximately half of all units are exported, with most growth coming from Europe and Pakistan. So while high vehicle crime rates in South Africa are a small boon, the main selling proposition is efficient fleet management. Netstar will be entering this market as a competitor, but have some way to catch up.
'China risk'
It is notable that almost none of the above have any meaningful "China risk". Without presuming to know the resurgent Mr (Jacob) Zuma (who to the best of my knowledge has expressed very few public opinions on economics), broad opinion has it that economic policy would be left-leaning. If that were the case, then there is one new potential sleeper, which we would also expect to do well in the current environment.
KAP International is an interesting agglomeration of asset based businesses coming out of turnaround. Industrial businesses include vehicle leather trim production, industrial footwear and PET resin and the Consumer segment include Jordan shoes (Asics, Bronx and Jordan brands) Glodina and Bull Brand.
Realisation of economies of scale have resulted in good results for Bull Brand. Management's prospects commentary is bullish for every single major business unit.
Why do I say such a stock would benefit from Mr Zuma's presidency?
Simplistically, one would expect a more left-leaning policy to embrace a more active import tariff schedule. This would benefit companies (having to square off against Chinese companies - who have a habit of not pricing in for depreciation) engaged in manufacturing export, or import substitution.
Other examples might include Seardel, Metair, Bell, Dorbyl, Hudaco, Nampak, Astrapak, Argent, AECI.
News source: www.news24.co.za
Posted by: www.SouthAfrica-CarHire.com
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