MFL, RLF – A buyer’s market

2019 has seen buy-out offers for three of my core holdings, namely Metrofile (MFL), Rolfes (RLF) and Clover (CLR). This number of take outs is unprecedented and the trend is further supported by other JSE-listed small and medium caps such as Interwaste and Pioneer Foods going through similar processes this year. There is much common ground between these transactions, all of them showing just how cheap small cap shares are in the South African market at the moment.


In February beverage and dairy group Clover announced that Milco, headed by CBC, a bottling and beverage business based in Israel will delist the company for R25/share or R4.8bn. This represents a 35% premium to the trading price of around R18/share prior to the deal, but three years prior, the group had traded at R25/share. The deal closed in October 2019. The acquisition was at a PE of 13.5 and at around 8.5 times 2017 EBITDA.


In October chemical group Rolfes announced that Phatisa, a Mauritian domiciled private equity fund, would delist the company for R3/share or R480m. This represents a premium of 33%, as the company was trading at around R2.30/share, however, as recently 30 months ago the company was trading at R6/share. The deal is expected to close in early 2020. Phatisa is acquiring RLF at bottom of the cycle earnings of 27c or a PE of 10. EBITDA was R92m, so the acquisition is 5.5 times EBITDA.


Yesterday document management company Metrofile announced that Housatonic Partners, a US based private equity firm, intends to acquire and delist the company at R3.30/share or R1.4bn. This represents a premium of 126%, as the company was trading around R1.50/share, but around 30 months ago, the share was at R5/share. The deal is expected to close around Q2 2020. Housatonic is paying a for 20c of earnings or a PE of 16. EBITDA was R225m, so the acquisition is 6.5 times EBITDA.

The following trends are apparent from these three deals:

  • Whilst the acquisitions are at significant and fair premiums to the recent share prices just prior to the announcement of the deals, in two cases they represent large discount to the price of the business a mere 2.5 years ago. This shows just how much these smaller companies have fallen out of favour in the last few years and how this is being recognised by private companies.
  • The acquisitions are all undertaken by non-South African players, who are seeing the value in Africa’s most mature economy. With global valuations stretched, South African businesses remain very cheap and outsiders are not blinded by the general negativity pervasive in South Africa at the moment.
  • All three companies are strongly cash generative in a tough economy. The average EBITDA multiple of these transactions is 7, around half of global businesses (prior to any control premiums).
  • The average PE ratio of 13 is equally undemanding, in particular, if we consider that earnings are at the very bottom of a cycle in a local recession.
  • All three acquired companies did not have a major founding shareholder with a large controlling stake. It is unlikely that a founder would have excepted a take out at these low valuations.
  • All three companies are too small to be included in the Top 40 index or any other index tracker. In fact, most equity funds would also consider these businesses too small to hold.

The streak of buy outs on the JSE clearly reflects that small caps and, in particular South African small caps are extremely out of favour and are therefore trading at valuations that make them attractive targets for private buyers. The premium paid to suffering investors offers small consolation, as minority shareholders with a long term focus cannot participate in the upside that is sure to materialise when the economy and sentiment turn.

So what can we small investors do?

We can either look for similar cash generative undervalued and under appreciated businesses in the hope of another buyout. For me these could be Value (VLE), Indluplace (ILU) or Santova (SNV).

Or we can invest in businesses that share the same characteristics but that are unlikely to be sold at current bargain prices due to the presence of strong founder shareholders. These businesses may not benefit from a short term acquisition premium, but they are likely to benefit all shareholders in the long term. These are companies such as ARB Holdings (ARH), Balwin (BWN), Masterdrilling (MDI), Bowler Metcalf (BCF) or Nuworld Holdings (NWL).



GRT – My favourite REIT keeps on giving


Watershed Piazza in Mahalapye owned by LLR Properties

I first decided to be a shareholder in Grit Realty (GRT), when they were still known as Delta Africa and controlled only three properties: A mall in Morocco (which has since been renovated), a building in Mauritius and an office block in Maputo. I spent a long weekend in Maputo in 2015 and the energy, vibrancy and potential of the city was palpable. The country is on a path to becoming a major gas exporter and the capital city’s infrastructure is woefully under equipped to deal with the expected influx of people, business and wealth.

Grit is a way to benefit from growth in demand for quality property in dynamic African destinations and I have been accumulating shares in the group since that first experience in Maputo. The business has grown to encompass 24 assets in 7 countries across Africa. Whether it is office building in fast growing business friendly cities, logistics warehouses, housing for expats, hotel properties, that benefit equally from a growing European travel market and an increasing African traveller, or malls for the rising middle class, Grit is diversified to benefit from all these trends.

This rapid growth has been supported by strong discipline. In an environment where “shady” counter parties and local currency fluctuations are the norm, Grit has acquired only assets with solid international tenants in US$ or EUR denominated leases. Often they ensure that the seller maintains “skin in the game” by partially paying for assets with Grit stock. I have previously commented on an acquisition of a Mozambican mall and in November they announced another deal that perfectly reflects the investment discipline shown by this team.

Letlole La Rona Ltd (LLR) is a property holding company in Botswana, a country with enviable growth and stability in Southern Africa. Grit already held around 6% of LLR and in November 2019 they announced the acquisition of a further 23.75%. LLR has an NAV of $70m, but Grit are paying US$13.8m a discount of 20% to the NAV of their stake. Furthermore, they are paying for this stake by issuing Grit shares at NAV of $1.40/share. In South Africa, these shares currently trade at R16.50 or a further 20% discount to NAV. This means that JSE shareholders are actually receiving the LLR assets at a 40% discount to NAV at their current prices. LLR made $5m in profits last, year implying that the Grit acquisition is at a PE of around 10, but this assumes that no additional leverage will be introduced into the properties.

It is this type of deal discipline that has ensured that, despite the rapid growth in asset base, the dividend has grown steadily in US$ terms. In 2019 a dividend of US$12.20c or R1.75 was paid. At current prices, this puts the stock on a dividend yield of 10.7% in US$ with no exposure to South Africa. Even better, Grit is not actually a REIT on the JSE. They do not require this status as all property income is outside South Africa. Practically, this means that dividends are taxed at the dividend withholding tax rate of 20% for private investors and not at the personal income tax rate.

The growth and discipline has attracted new investors, with a listing on the LSE completed in 2017. This brought several institutional, yield driven shareholders to the registry.

I happened to be in Mauritius last week, so I decided to attend the Grit AGM at their offices in la Croisette shopping centre in Grand Baie. Imagine Melrose Arch in the middle of a northern Natal sugar cane field at the height of summer and you may be able to visualise la Croisette. The Grit team is striking in its youth. CEO, Bronwyn Corbett is in her late 30’s and the CFO is just over 40. I met other senior staff, all young, dynamic South Africans, eagerly hinting that there were more exiting deals in the pipeline.

Given the recent developments at Nampak, I asked how management ensure that they can repatriate cash from countries that may impose currency controls in the future. Grit has full cash repatriation insurance, covered by Lloyd’s. Whilst this insurance is not cheap, I am happy that this is a further safeguard to maintain the dividend in the long term.

In summary, Grit remains my favorite REIT. The dividend yield is in US$, not subject to marginal tax rate and not exposed to the South African economy. The management team is young and dynamic and has a proven record to execute disciplined and conservative growth via acquisitions. They are growing with quality properties in a continent that has the highest global population growth and may well be at the forefront of global economic growth in the coming decades. While I wait for the thesis to play out, I am happy to collect my dividend of just under 11%.