SNV – Building a Global Network

Santova (SNV) is an asset-light logistics company. They don’t own the ships, cranes and trucks that move your goods, but they arrange and track the moving of freight and goods. They have the computer systems, network, warehouses and connections to organise cross-border transport of goods, facilitate customs and clearance and expedite issues if required.

I see great demands for these services from companies with global supply chains, who increasingly focus on improving working capital and managing their inventory. If goods move faster, they spend less time in inventory. Secondly, large multi-million dollar construction projects are often extremely time critical and a networked logistics company can ease pressure on a constrained project schedule whilst savings costs.

The important barrier to entry for a business of this nature is to have a truly connected global presence. Santova is in the process of building this network through a chain of acquisitions. Whilst it is important to remain wary of acquisitive growth, in SNV’s case the acquisitions are well priced and structured and improve the value of the entire operation. This is demonstrated by the three most recent deals below.

  1. In August 2018 – they completed the acquisition of ASM Logistics in Singapore, which has a presence across South East Asia. The purchase price is not mentioned, but “less than 5% of the market capitalisation” suggests something around R20m.
  2. In October 2018 – they completed the acquisition of SAI logistics in the United Kingdom:
  • The previous owner is staying on as Managing Director for at least 3 years.
  • A 3 year profit guarantee is provided.
  • The price is 3.2m GBP, with an annual EBITDA of 0.6m GBP, suggesting an EBITDA margin of 5.5. Depending on the tax rate and gearing used, the acquisition PE is around 7.
  • SAI has a strong presence and network in India. India is likely to be an engine of global growth for decades and this connection can be leverage across the Santova group.
  1. In March 2019 – they completed the acquisition of MCL in Hamburg, Germany:
  • The previous owner is staying on as Managing Director and taking the lead of the Santova Germany operations, giving them a well-connected replacement for their current retiring MD.
  • A 2 year profit guarantee is provided.
  • The price is 1.9m EUR, with an annual EBITDA of 0.35m EUR, suggesting an EBIDA margin of 5.5. Depending on the tax rate and gearing used, the acquisition PE is around 7.
  • MCL has a strong presence in Northern Europe.
  • They specialise in shipping and handling of explosives, an expertise that can now be employed across the Santova group.

With such a global supply chain, it is no surprise that 61% of the 2018 earnings are offshore, a number that is likely to increase with these recent acquisitions. The company is therefore an excellent Rand hedge. However, Santova, like most of the JSE small cap market, is trading at incredibly discounted levels.

Earnings are 21c for the last 6 months, placing the company on an annualised PE of around 7. A growing dividend of 2.5% is also in the offing. Cash on hand is approximately 15% of the company’s market cap of R440m, and cash conversion, whilst weaker in the last interim results, remains positive and is likely to improve as investment initiatives come to fruition. Despite the recent spree of acquisitions, the group’s gearing remains low at 25% of equity. Whilst NAV per share is at R3, slightly higher than the current share price of R2.75/share.

Directors hold 20% of the business. However, in contrast to some other companies, where the founder holds a large stake, the ownership of the business is spread across approximately 20 directors and managers of subsidiaries, probably reflective of the acquisitive culture of the company. I sleep well at night knowing that the managers and operators are working towards the same ends and I am happy to share in any gains.

An international fund, the Barca Global Fund, shares this view and has also taken an interest in this fabulous investment opportunity. They now hold 10% of the business, which they acquired on the open market at discounted prices in mid-2018.

I share the view of management, which wrote in the last interim results:

“… as the Group enters its annual peak trading cycle the Board is optimistic that the Group’s geographic, business activity and currency diversification will help to provide a solid platform for future growth.”

MDI – Deep value, great prospects

The last time I wrote about Masterdrilling (MDI) two years ago, I was impressed with its earnings growth. It’s last annual results, published two weeks ago, showed flat earnings and dividend at 142c/share and 26c/share respectively. However, as MDI’s share price has declined together with all other shares in the South African small cap sector, it remains on a very cheap PE of 7.4 and a dividend yield of around 2.5%.

The company has continued to grow internationally, with presence on most continents and in major mining markets. In the 2018 financial year, the investment in growth initiatives included partnering with Italian construction company on tunnel boring, acquiring the rest of Scandinavian raiseboring company Bergteamet, acquisition of the Atlantis Group and further development of the vertical shaft boring machine (a huge potential industry game changer). The continued diversification across geographies, whilst the bulk of the team remains South Africa based, ensures that this company is an excellent Rand hedge.

The acquisition of the Atlantis group is a case study into how this company conducts its business:

  • The acquisition was for R107m, meaning that it was small enough to ensure that cash reserves can be used
  • It was at 4 times profit, at the bottom of the market, it should therefore be significantly earnings accretive for MDI shareholders
  • It strengthens the presence in key growing mining markets India and Zambia as well as the established market of Zambia
  • The assets, several large raiseboring machines, were acquired at below replacement cost and have now taken the machines in the fleet to 149, no other competitor owns more than 50 machines

Due to the size of MDI’s fleet, it has established itself as a key partner to major mining companies. For example, Codelco, the world’s largest copper miner is using them for their major expansions in Chile and Byrnecut, Australia’s largest contract miner, is leasing one of their machines to execute a contract. It is therefore not surprising that they see their orderbook and pipeline at a healthy US$578m. Assuming that this work is executed at their current margin of +/- 30%, implies that they have close to $200m profits secured. This is almost double the current market cap of the company.

MDI has been caught in the general small cap depression that has plagued shares on the JSE in the last two years. However, the business is truly global, and is guaranteed to profit from continued capital investment in mining. Shares are trading at a 35% discount to NAV, earnings are in US$ and the cash conversion is excellent. The company is cautiously optimistic and provides the following gems in its outlook and prospects section:

“We are experiencing strong demand with increased enquiries across the various regions and commodities and expect this to continue.”

“Various opportunities in first world countries such as Australia, Canada and USA are coming to fruition and are expected to increase the Group’s footprint across the world in the near future.”

“The upswing in the commodity cycle has had a positive impact … Although not immediately reflecting in our numbers, we do expect a positive impact on our revenue during the next reporting period.”