Five rough diamonds are sleeping on the JSE
CAPE TOWN - Deep value investing has become de rigueur among many asset managers, so I’ve listed five unloved and low-priced shares I believe will in time surrender great value to the market.
The first of these is the private equity firm Brait. Majority-held by Christo Wiese’s Titan, this was once an investor favourite on the JSE and its share price peaked at more than R170 on the JSE in 2016.
Unfortunately, net asset value has fallen by almost a third every year since then, and net asset value was at R41.80 on March 31. It is also sitting on a pile of debt of about R12billion.
The share price was trading 1.24percent higher on Friday morning at R17.20, which puts the discount that the share is trading for at more than 100percent.
Brait holds majority stakes in Virgin Active, Premier, Iceland Foods as well as about 18percent in New Look in the UK.
Over the past few months, a number of investors approached Wiese to turn Brait around and Mergence Asset Managers have come aboard now with a 9percent stake after taking 27.2 million Brait shares from Titan at R15.40 each.
Mergence, which pioneered impact investing in South Africa, apparently values Brait shares north of R30.
Wiese took a bath in Steinhoff; he was hoodwinked along with every other financial institution that dealt with Steinhoff, but extracting value is what he is good at.
Brait is a diamond in the rough, even if it needs to be broken up.
Another company worth considering is international construction group Aveng. Much of the news around Aveng this year has been around the disposal of non-core assets.
Like other construction groups, Aveng was caught in a storm, with multiple business units, high debt, operational and financial weaknesses, civil disruptions at some contracts, a weak share price, a barely growing economy and slumping infrastructure and private sector capital investment.
But the asset disposals are part of a turnaround and by the last year to end-June, its two major subsidiaries, McConnel Dowell, which delivers specialised projects in the Asia Pacific region, and Moolmans in Africa, were operating profitably, with a reasonable order book.
Net asset value at that date was 13cents a share. Investors have lost a great deal of money in the construction sector in the past few years and perhaps that is what is keeping Aveng’s share price at a low 2c - it was untraded on Friday morning.
In my view, Aveng is not going to fold like some of its peers, such as Group Five or Basil Read. It is pulling its operations through the eye of the storm.
Another company that appears to offer value for investors is the facilities, services and risk solutions company CSG Holdings, which was untraded at 38c on Friday.
Its last financial year to June 30 was not good, with bad debts, goodwill impairments, stock devaluations and fraud resulting in a 74percent decline in headline earnings to R29.1milion.
These were once-off costs and operational issues, such as the establishment of a security control room in Pretoria, are on the mend.
For an idea of how much discount the share price is trading at, consider that its net asset value at year end was 87c.
Another share I believe is destined to unlock value is Santova, which has grown from a single office in Durban in 2002 into a multinational global trade solution business.
Some analysts predict the offshore component will grow in the next few years, from just under half of revenue in the past year.
Its earnings dipped in the last year, but annual dividend and revenue growth has shown uninterrupted growth since 2013.
In August it completed the acquisition of MLG Maritime Cargo Logistics in Germany.
The share price is trading at a * :e of about 4, and the price was up 5.1percent to R1.65 on Friday.
Master Drilling Group, a leading global rock borer drilling group, is a company frequently mentioned by small market capitalisation analysts when they start talking about deep value.
Most of its income is from offshore, and its business is affected by global geopolitical uncertainties and the commodity cycles.
It is using diversification into different markets to counter this, and has alluded to new markets in more economically stable countries such as Canada, the US and Australia.
Its share price was up 1.85percent to R11 on the JSE on Friday. Its net asset value at the last year end was 106.9 US cents (about R15.75).
Results were reasonable in its 2019 interim period, with headline earnings up 5.6percent to R76.7c a share. Better still, the order book was reported to be solid.
Value investing is a conservative way to invest, and requires great discipline on the part of the investor to usually do nothing when events hit the headlines that might affect the business, to trust the management of the shares they have invested in and to stay invested until the share reaches its full value.
It is not for the faint-hearted.