Small caps that beat the market - Finweek 23 June 2016

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23 June 2016

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Small caps

that beat the market

By Jaco Visser

The most liquid small caps on the JSE have comfortably outperformed their large rivals on the JSE over the past 12 months.

The CEOs of the top five performers on the AltX discuss their companies’ successes.

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he JSE’s Alternative Exchange, also known as the AltX, has proven to be an incubator for many medium-sized companies, which subsequently migrated to the main board. It has also given investors the choice of investing in smaller, growing companies who, in return, benefitted from the AltX’s less strict regulations and lower listing fees.

The FTSE/JSE AltX-15 index, comprising the largest and most liquid companies on the AltX, returned 17.3% to investors over the 12 months through 6 June compared with the FTSE/JSE Top40’s return of 4.54%, according to INET BFA data. Over the past 12 months, the AltX’s top five performers – Jubilee Platinum, PSV Holdings, SilverBridge Holdings, Accéntuate Holdings and NVest Holdings – have returned between 45% and 102.7% to shareholders.

Of the 65 stocks listed on the AltX, 16 are suspended and a further three are not trading.

One of the biggest risks for investors investing in a small cap is the lack of share liquidity. That means that the stocks are not readily offered for sale or there is insufficient demand for them at any given time. This may distort the price-finding mechanism, which is essential for a market, and especially a stock market, to operate.

On the other hand, a benefit of investing in these stocks is that the investor buys into a growing company. Prospects for the investor include the possibility of a buyout at a premium at a later stage. Usually, but not always, a company’s management holds a significant proportion of the stocks, giving it a vested interest to succeed and turn profits.

With the market capitalisations of AltX-listed companies ranging from as small as R12m to as high as R7.1bn, investors have a large variety to choose from. Investors need to consider a number of factors when making the decision to invest: ■ Do you want to buy and hold the share for a number of years and thus overcome the lack of liquidity in a stock?

■ Is the stock aligned to your view and expectations of the local economy?

■ Do you have the stamina to weather significant share price swings, which may occur due to the low price of some of the stocks? Remember that a 5c decline in the price of a stock worth 25c has a much harsher impact on an investment than a 5c decline in a stock worth R3. www.fin24.com/finweek

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Jubilee Platinum Share price (9 June): 75c 12-month return: 102.7% Market capitalisation: R675m Revenue: £49 000 (FY June 2015) Loss: £2.9m (FY June 2015) CEO: Leon Coetzer

Junior miner, Jubilee Platinum, with its head office in London, runs two tailing plants in South Africa and is in the process of acquiring a mining licence on the eastern limb of the platinum-rich Bushveld Complex.

Following the financial crisis in 2008, and after CEO Leon Coetzer took over as head, Jubilee changed its business model from that of a traditional exploration company to one which utilised its engineers’ broad knowledge of processing. This led to the miner focusing on extracting platinum group metals (PGMs) and gold from surface stocks, or rather tailings.

“Jubilee is a company known for its strong metallurgical knowledge,” says Coetzer. “We built on that core skill and market it. We did processing consultation work for a number of companies.”

This led to the company establishing its first tailing processing agreement at Mitsubishi-owned Hernic Ferrochrome, the world’s fourth-largest ferrochrome producer. The deal, signed in January 2015, will see Jubilee processing about 55 000 tons of tailings per month once the chrome and platinum beneficiation plants are completed.

The chrome plant will likely be completed by August and the platinum plant by December, says Coetzer. When completed, the beneficiation plant will be the largest of its kind in the world, he says.

“This is a highly technologically advanced plant we’re building and it is to the company’s credit that Mitsubishi chose us to construct it,” says Coetzer.

The first of the company’s two tailing projects, at Dilokong Chrome Mine, which is owned by ASA Metals, also consists of two plants, one to beneficiate chrome and the other platinum from the surface stock. The chrome plant at ASA was commissioned at the beginning of

Gallo Getty Images/iStockphoto

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Leon Coetzer CEO of Jubilee Platinum

March and in May the company generated its first income from the plant, being R6m from chrome, says Coetzer.

The processing of the platinum is now the next key focus for the company.

“We received funding late last year to build the beneficiation plants at ASA and Hernic simultaneously,” explains Coetzer. “The chrome plant at ASA is performing far above expectations, both from a production throughput and financial point of view.”

Jubilee is also in discussions with other miners to double its capacity to extract and beneficiate chrome and platinum at two further miners, says Coetzer.

With the spot price of platinum at around $995 per ounce, Jubilee benefits from the low cost to extract the metal from surface stock.

Around “The margin on platinum beneficiation is very high,” explains Coetzer. “We work at a project break-even rate of $500 to $600 per ounce, depending on of the cost of platinum the feed source.” production is attributable to Around 65% of the cost of platinum the extraction, or physical production is attributable to the extraction, mining, of the metal. or physical mining, of the metal, he says.

When the ore is already on the surface, the cost of production declines substantially.

In addition, Jubilee holds a 63% interest in the Tjate platinum exploration project on the eastern limb of the platinum-rich Bushveld Complex. The project, which is awaiting its mining licence from the department of mineral resources, has the potential to produce 65m ounces of PGMs. The company, which counts former Mpumalanga premier Mathews Phosa as one of its non-executive directors today, gained the exploration licence in 2004. ■

65%

“Jubilee is a company known for its strong metallurgical knowledge. We built on that core skill and market it. We did processing consultation work for a number of companies.” @finweek

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PSV Holdings Share price (9 June): 40c 12-month return: 90.5% Market capitalisation: R106m Revenue: R243m (FY February 2016) Loss: R40.5m (FY February 2016) CEO: Abie da Silva

Abie da Silva CEO of PSV Holdings

SilverBridge Holdings Share price (9 June): R2.99 12-month return: 75.9% Market capitalisation: R106m Revenue: R80.9m (FY June 2015) Profit: R4.1m (FY June 2015) CEO: Jaco Swanepoel

Jaco Swanepoel CEO of SilverBridge Holdings

The company’s sales to the “Our offering had to be affordable and rest of Africa contributed able to be rolled out quickly,” he says.

The company’s sales to the rest of Africa contributed 55% of total revenue for the financial year ending 30 June 2015, compared with 39% for the of total revenue for the previous year, according to the company’s financial year ending 30 June financial statements. Swanepoel 2015, compared with 39% for the previous year. says this fluctuation is ascribable to implementations being done or not.

SilverBridge’s aim is to increase the proportion of annuity-like income and it is a core strategy of all its business models, he explains.

In the meantime, the company has ventured into the cloud-computing space where customers store their data offsite rather than on bulky servers on their own sites.

“This unit beat our wildest expectations,” says Swanepoel. “If you don’t move in the direction of cloud computing, you will experience difficulties in future.”

The demand for off-site data storage is huge, he says.

Not only is it beneficial to clients who don’t need to buy expensive hardware, it also eases the solving of technical problems, he explains. Whereas highly trained technical staff are needed to recover data, for example when a system has crashed, it is easier to recover it off the cloud, he says.

“There is quite some growth in this market in South Africa,” he states, adding that smaller companies are leading this growth. ■

PSV Holdings, a supplier of engineering products to government continued to extract more taxes from industrial companies in SA, turned around its prospects miners amid faltering international commodity prices, in a difficult year, which saw the company closing its he says. unit in the Democratic Republic of the Congo and With regard to its SA business, PSV optimised selling its business in Zambia. operations at its head office and streamlined its Investors rewarded PSV with a strong increase in specialised services business, which is “very contract its share price over the past 12 months. based”, according to Dreisenstock.

“We came through,” says Tony Dreisenstock, chief “We reduced the head count by about 20%,” he says financial officer of PSV. of the specialised services business.

Sales increased to R243m for the 12 months This unit consists of African Cryogenics and through 29 February, compared with R230m a year Engineered Linings. The company appointed new earlier, according to the company’s latest financial management at the cryogenics business and retained statements. The loss from continued operations the expertise of the former managers on a consulting narrowed to R19.3m from R22.4m, basis, according to PSV’s financial Sales increased to while the loss from discontinued statements. operations – mainly the Congolese “It is now under control,” says and Zambian ones – widened to Dreisenstock.

R21.2m from R4.5m.

The linings business is experiencing for the 12 months through 29 February, PSV’s Congolese operations an “improvement” as industrial compared with were hit by one of resource giant customers start to comply with Glencore’s mines being mothballed environmental waste management for 18 months. PSV had a lucrative legislations, which require them to put contract with this operation, says new linings into disposal equipment, a year earlier.

Dreisenstock. he says.

In Zambia, a country that relies The company’s industrial supplies heavily on mining for government revenue and foreign unit, Omnirapid, reported solid cash flow and a good exchange earnings, Glencore also halted production, order book for last year, he says. The division is pricing as did other mining operators, explains Dreisenstock. its products competitively and has a reputation PSV sold its stake in its business there as Zambia’s stretching back 16 years, according to him. ■

Software developer and financial services supplier SilverBridge Holdings is banking on the growth of insurers in the rest of Africa and the expansion of local niche insurance providers to boost its future profits.

The company, whose subsidiaries include Rubix, Connect and Cirrus, is also venturing into cloud computing and offsite data storage for clients. SilverBridge’s Exergy platform is used by financial services companies, especially in the insurance industry, to manage policy contracts with clients, and includes a web portal to ease contact with brokers, administrators and clients.

The ease with which the system can be modified and rolled out has boosted the company’s outlook on the rest of the continent.

“Insurance companies in the rest of Africa don’t really have these systems,” says Jaco Swanepoel, CEO of SilverBridge. “They have options from Europe or the US, which are expensive. Some companies use systems from China or India, but they don’t really work here.”

SilverBridge’s focus on the rest of the continent is mainly on insurers in Anglophone countries in East and West Africa, he says.

“We have good relationships with clients in the English-speaking countries,” he says. “The demand for our product offering is big.”

To capitalise on this demand, the company had to be more competitive in its pricing and packaging its offering to fit budgets of insurers in the rest of Africa, Swanepoel explains.

The company’s industrial supplies unit, Omnirapid, reported solid cash flow and a good order book for last year.

“If you don’t move in the direction of cloud computing, you will experience difficulties in future.”

R243m R230m

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Accéntuate Holdings

Share price (9 June): R3

12-month return: 73.5%

12-month return: 45.22%

Market capitalisation: R105m

Market capitalisation: R908m

Revenue: R318.6m (FY June 2015)

Revenue: R216.4m (FY February 2016)

Profit: R4.7m (FY June 2015)

South Africa’s only producer of vinyl flooring products and an emerging player in the water-treatment industry, Accéntuate returned 73.5% to investors over the 12 months to 10 June.

The company’s East London-based subsidiary, FloorworX, manufactures vinyl floor coverings and is a large player in the outfitting of newly-built schools and hospitals. Founded in 1953, the company imports highend vinyl flooring products to SA. “The increased focus on education and healthcare by Treasury creates many opportunities for our company,” explains Fred Platt, CEO of Accéntuate. “The question, however, is what government’s capacity is to deliver in the current macroeconomic environment.”

Nevertheless, FloorworX has seen an uptick in government spending lately, says Platt. On the other hand, the residential housing market remains depressed, according to him.

In the commercial sector, the company is seeing a big push into luxury vinyl flooring, he says. FloorworX adapted to this through supplying customers with a large range of specialised flooring products.

FloorworX’s sales, which contribute 78% of Accéntuate’s revenue before intergroup eliminations, rose 1.4% for the six months ending December 2015 compared with the same period a year earlier, according to the company’s financial statements. The unit returned a pre-tax profit of R7.35m in the six months, up from R5m a year earlier.

In addition, Accéntuate’s Safic subsidiary, with its plant in Steeledale south of Johannesburg, manufactures accessory products to flooring, including adhesives and floor screening. Safic’s also makes metal-cleaning and

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NVest Holdings

Share price (9 June): 80c

CEO: Fred Platt

Profit: R59.4m (FY February 2016) CEO: Anthony Godwin

Fred Platt CEO of Accéntuate Holdings

high-end heavy-duty detergents.

“This business has struggled,” says Platt. “The mining, metal and steel markets have been challenging recently.

We are looking to put more volumes through this business this year.”

Safic posted flat sales of R39.2m for the six months ending December 2015, when compared with the same period a year earlier, and returned R498 000 in pre-tax profit compared with R117 000 a year earlier, according to the company’s financial statements.

In the meantime, Platt explains, the company’s domestic joint venture with Ion Exchange India, one of Asia’s top water-treatment providers, is gathering speed.

Accéntutate plans to become one of the top local players in the design, construction and maintenance of watertreatment plants in the nearby future.

“Water is the single biggest enabler of economic growth,” says Platt. “And we are entering into an incredible phase in our business.”

With the SA government planning to invest around R700bn over the next 10 years in water infrastructure, Accéntuate has been positioning itself to benefit from public and private projects focusing on water delivery.

The company has “strategically chosen” pilot projects to test its capability of delivering water-treatment solutions, Platt explains.

“It has been a very slow process and deliberately so,” he says, explaining that the company wanted to gain experience in order to be ready when it starts to roll out its projects. “We want to be the leaders in public-private partnerships on water.”

The company is in the final stages of tying up the first water-treatment projects, he explains. ■

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Anthony Godwin CEO of NVest Holdings

Eastern Cape-based NVest Financial Holdings, having been in business for 31 years, we have found, with a 31-year history in financial services including since our JSE listing, that the increased visibility has stockbroking, listed on the AltX last year. resulted in our being presented with an increased The company had a busy acquisitive year, during number of opportunities.” which it increased its stake in NVest Properties to Due to an increasingly regulated financial services 96% from 45%, which boosted revenue to R216.4m market, a number of smaller players want to partner up for the 12 months through 29 February compared with with or sell to larger and established businesses as they R114.6m a year earlier. The company also acquired NFB experience higher compliance costs and regulatory Gauteng, a stockbroker, in September, and bought burdens, explained Godwin. three further buildings in East London in November.

“We do, however, wish to highlight that we are “Revenue grew strongly in taking a cautious approach to all the major business units,” acquisitions at this stage, given The group’s move into property has landed it with a portfolio worth Anthony Godwin, CEO, said in an the volatile markets and in order e-mailed response to questions. to ensure that we select our “ H o w e v e r, t h e a d v i s o r y targets wisely,” he said. businesses in the Eastern Cape, T h e g ro u p ’s m o v e i n to namely NFB Private Wealth property has landed it with a at the end of February.

Management together with the portfolio worth R297.2m at the stockbroking business NVest end of February. A large portion Securities, were the major contributors.” of this portfolio is situated outside the Eastern Cape and NVest Properties was accounted for as a subsidiary the company is “comfortable” to consider new additions for the first time in February rather than as an associate, from anywhere in the country, according to Godwin. according to the company’s financial statements.

“In the current rising-interest-rate environment, NVest provides wealth management, stockbroking, we have taken a cautious view on property, but will insurance brokering and trust services to clients. continue to expand when attractive opportunities In the meantime, the company will continue its present themselves,” he said. “The focus of this acquisitive path, according to Godwin. portfolio is to have strong tenants with longer term “We are especially looking at the Eastern Cape, leases, for example tenants such as Standard Bank, Western Cape and Gauteng in terms of targets,” he Steinbuild, Massmart and so on.” ■ said. “Although the group already had a broad footprint, editorial@finweek.co.za

R297.2m

“We have found, since our JSE listing, that the increased visibility has resulted in our being presented with an increased number of opportunities.”

With the SA government planning to invest around R700bn over the next 10 years in water infrastructure, Accéntuate has been positioning itself to benefit from public and private projects focusing on water delivery.

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