Could Santova be a multi-bagger?

Santova Logistics (SNV) is a world wide non-asset-centered (technology) source chain manager benefitting from the requirement of world-wide trade, trade’s rising complexity (the far more complicated supply chains, the a lot more consumers outsource that complexity), higher freight prices and, in the end, the ‘network effect’ from owning far more clientele throughout much more territories buying and selling on additional routes with a lot more volumes.

I’ve been really open about my bullish look at on this JSE-detailed tiny cap stock (see my historical feelings listed here), and I hold it in my and a lot of of my client’s portfolios.

The team not too long ago published a buying and selling update for FY22 where by it states it expects its earnings for every share (EPS) and headline earnings for every share (Heps) to additional than double to concerning 121.21 and 127.75 cents per share (cps) in other words and phrases, to increase among 161% and 171% 12 months-on-12 months.

The inventory rose on this information and has by itself additional than doubled in the past 12 months.

Nonetheless the stock even now trades on a measly 8.3x cost-earnings (PE) ratio, although that investing update puts Santova shares on a PE of involving 5x and 4.8x. Why?

I’ve been speaking about Santova for a long time and have encountered a assortment of counterarguments. This is wholesome and practically nothing to shy away from.

All fantastic investment cases should be debated brazenly. These arguments are summarised below together with my rebuttals.

‘Santova is a South African business’

My rebuttal: While ‘Santova Logistics Ltd’ is integrated in South Africa and its shares are outlined on the JSE, the group’s H1:22 results confirmed that all-around 90% of its earnings arrived from exterior of South Africa. Incorporation and listing are incidental, but earnings and dollars flows are actuality. As a result of that lens, Santova is not a South African business but a world-wide a single. Should it not, for that reason, entice a world wide ranking?

‘Santova’s dollars flows are very poor and it has huge debtors in South Africa’

My rebuttal: South Africa is the only country that sites the tax collection burden on to the clearing and forwarding agents for import duty and linked. Santova follows legislation below, pays the tax above straight away and then collects it from the consumer (although earning an desirable interest price on this powerful lending arrangement).

3 factors are essential below:

1. Santova’s debtors ebook in South Africa is predominantly of blue chip credit-worthiness
2. Santova manages credit chance thoroughly and has exceptional poor personal debt and collections information and
3. As Santova grows globally (see previously mentioned stage about it not getting a South African enterprise), it is progressively uncovered to geographies that do not have this rule in location, and thus generates steadily better and better (totally free) money flows.

You can regard the subsequent graph of conversion of working gains into working income flows as proof of this.

Resource: Refinitiv, Integral Asset Management

‘Santova is a smaller/micro cap’

My rebuttal: Worldwide, non-asset primarily based supply chain professionals – so-named fourth-celebration logististics (4PL) operators – trade on an ordinary PE of 13.3x (see chart beneath).

Using the reduced conclusion of the buying and selling update’s vary of Heps, if Santova shares traded at this multiple, the group’s sector cap would be R2.3 billion (in other words and phrases, almost triple its present-day share price tag).

Even at half that many, Santova would still have a sector cap higher than R1 billion.

Consequently, the argument that Santova is a little/micro cap, and consequently need to trade cheaply, is round logic (Santova shares are low-priced since it is compact and it is smaller since it is low-cost).

Source: Refinitiv, Integral Asset Administration

‘Santova shares are illiquid’

My rebuttal: For starters, see the previously mentioned position about Santova’s sizing. If the share traded on a comparable many, the share price tag would be larger, and therefore the rand-price of no cost float (and linked liquidity) would be improved.

Secondly, when its illiquidity may perhaps be a legitimate argument from an institutional perspective, from a retail investor point of view I disagree.

This is an prospect to outperform. Let the fund administrators purchase Santova stock from you at a much larger a number of soon after a long time of growth once its ‘liquidity’ can ultimately be absorbed by the inventory.

‘Santova is stated on the JSE’

My rebuttal: A world of money is incentivised to locate excellent alternatives, and a truthful share of this cash is ‘exchange agnostic’.

This argument could possibly keep fat if Santova was a massive fat of a significant index, and therefore passive flows distorted its price. But it is not, and the JSE listing is thus a moot stage.

‘Santova’s opponents are big world groups the smaller cap will battle to compete with/as a lesser player, you are not able to extrapolate worldwide peer team valuations to Santova’

My rebuttal: Global trade is a these types of a huge industry that it can accommodate numerous substantial gamers. Additionally the large set up players usually have legacy methods (you can read through up about the billions of pounds published off by UTi Around the globe and other individuals hoping – and failing – to modernise their main technology platforms).

So Santova can contend agilely with them – a lot like how Capitec has overwhelmed the older, legacy-large retail banking institutions.

In simple fact, the earnings progress premiums beneath clearly show that Santova is beating most of the older, legacy gamers – and I hope this hole to preserve developing larger.

Supply: Refinitiv, Integral Asset Management workings working with interim described revenue figures for Santova

In conclusion, supplied what I consider is a reasonable debunking of the earlier mentioned counterarguments towards Santova’s financial investment situation, I retain my watch that, from these stages, Santova could be a multi-bagger investment.

Pay attention to Simon Brown’s interview with Santova CEO Glen Gerber in this MoneywebNOW podcast (or browse the transcript in this article):

Keith McLachlan is financial investment officer at Integral Asset Administration.

* McLachlan and some shopper portfolios maintain Santova shares.