(Disclaimer – as at the time of posting this article, I own shares in Santova)
When determining a growth rate in your valuation of a stock, there are essentially two ways in which a company can grow. Through investing into new assets (e.g.: acquisitions) or through improving efficiencies on existing operations. In times of economic slow-down (such as that being experienced globally), cost cutting and improving efficiencies is your go-to option. One such way of doing this is looking at your company’s supply chain. And who can help you do this? Santova.
What is it that Santova does? Amongst other services, they primarily co-ordinate the movement of goods across the entire supply chain for clients from transportation to storage by making use of third-party providers. For example, they will get DHL to move your products from Johannesburg to Durban via truck, put them on a DSV ship to go to Australia and then employ the likes of Aramex to take it from the harbour to your warehouse in Perth. But why use Santova instead of doing this yourself? Santova can achieve economies of scale which individual companies cannot. The process of moving goods across the supply chain is also considerably time consuming which detracts from you being able to focus on your core business.
Santova is also non-asset based. They don’t physically own any trucks/warehouses/ships etc that are used in transporting goods. They make use of third-party providers. This means that their cost structure is almost entirely variable. So, in tough times, there’s very little fixed costs which they have to cover. This allows them to run a lean business, better enabling them to weather most storms.
I also like entities where management have a large stake in the equity. Management hold 19% of Santova’s shares. This means that the decisions they make are probably aligned with those of the shareholders and long-term value creation is at the top of their priorities instead of cutting corners to inflate short term results to meet profit/bonus targets.
With all the shenanigans going on in South Africa from corrupt politicians to load shedding, many investors are looking to buy into shares which act as a hedge against Rand volatility. You could invest in an offshore ETF, or you could buy shares in Santova. Over 50% of Santova’s revenue is earned in foreign currencies from their operations in the UK, Australia, Europe and Hong Kong.
With a very low debt to equity ratio, being significantly geographically diversified, showing consistent growth and providing a niche service, it’s difficult to see why they’re trading at a PE of 5.21.
So, what is it worth? When doing a valuation, it’s difficult to remain objective and keep your emotions out of it when you go into a valuation with a pre-conceived notion about the company being good or bad. To avoid this, I like to do a bit of a sensitivity analysis/sense check by calculating a ‘worst case scenario’ value to make sure that I’m not getting too carried away. I try being as prudent as I can be and assume the worst. My worst-case scenario value for Santova is R5.28. It’s currently trading at R2.45. This would suggest that it should be at a PE of 11.7, which to me doesn’t seem unreasonable at all, or perhaps I’ve completely lost the plot.
Why is it so cheap? As I mentioned with AdaptIT (see here: https://what-the-finance.com/2019/02/21/why-is-adapt-it-so-cheap/) I believe it boils down to small cap stocks being ‘too risky’ for investors’ appetite in the current market conditions.
With that said, Santova is one of my favourite stocks and I’m trying to pick up as many shares as I can at this price. If you think otherwise, drop me a comment or if you want to see how I got to this value, let me know!
(And a thank you to Michael Casey for the input)
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