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FIRM BACKING

An investor looking for value in the small-cap space has some choices for above-average prospects in the business support services sector

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No single company dominates the business support services category on the JSE, which is made up of a group specialising in expertise such as human resource management, supply chain management, logistics, fleet management and administration, and even printing.

Nadim Mohamed, analyst and partner at First Avenue Investment Management, says it is hard to equate companies in this category as their business models and areas of specialisation are very different. ‘Although it is difficult to compare, the sector as a whole has not done badly,’ he says.

Novus is the newest member of the group and has the largest market cap of about R5.8 billion – it listed on 31 March. The company was previously known as Paarl Media Group and was majority owned by Media24, part of media giant Naspers. It operates nearly a dozen printing plants and aims to diversify into other African countries, offering printing and ‘associated services’.

It says ‘print will continue to be the core business while we exploit opportunities for organic growth in our manufacturing environment’. The company has invested heavily in technology and is expected to embark on a strong expansion programme.

The next biggest company by market cap is Cartrack, which provides fleet management, stolen vehicle recovery and insurance telematics services. It listed on the JSE’s Main Board in December last year.

Established in 2001, the firm has ‘been at the forefront’ of telematics and car-tracking technology driven by the demand for crime prevention in SA, says Mohamed. Cartrack Holdings’ applications have now been extended into other areas such as fleet management and fuel optimisation, he says.

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‘Although it is difficult to compare, the sector as a whole has not done badly’

NADIM MOHAMED, ANALYST AND PARTNER, FIRST AVENUE INVESTMENT MANAGEMENT

The SA car-tracking market is considered saturated but there are global opportunities, particularly in the US where penetration is low, says Victor von Reiche, senior investment analyst at Cannon Asset Managers. Headed by Isaias Calisto, Cartrack Holdings has operations in 18 countries, including the UAE, Spain, Poland, Portugal, Malaysia, the Philippines and Singapore. It also has operations in various African countries.

The group has increased its net profit after tax at an annual compound rate of 21% for 2012 to 2014, while a quarter of its revenue is earned in foreign currencies, according to its pre-listing statement. At the end of October last year, it had more than 400 000 subscribers.

According to Von Reiche, Cartrack Holdings generates strong cash flows, and plans to maintain a dividend payout ratio of more than 70%, making it ‘very attractive’.

Sean Ashton, chief investment officer at Anchor Capital, said in his investment research paper that the firm ‘has demonstrated remarkable growth from a zero base 10 years ago to build a business of similar scale to peers [such as] Mix Telematics, but with vastly superior fundamentals as measured by operating margins, cash flows and returns on capital’. He rates it as ‘a quality business with an entrepreneurial management team and significant opportunities for growth in its chosen markets’.

Mix Telematics is a fleet and mobile asset management company with a market value of about R2.4 billion. Besides its JSE listing, it is also listed on the New York Stock Exchange.

‘Customers in over 120 countries and across six continents use the actionable intelligence that we generate to reduce fuel and other operating costs, improve efficiency, enhance regulatory compliance, promote driver and personal safety, manage risk and mitigate theft,’ the company stated in its 2014 annual report.

In recently released third-quarter results for 2014, Mix Telematics said it had more than 495 000 subscribers on 31 December 2014 and total subscription revenue of R253.7 million, which had grown 15% over the year. However, the company’s shares have been under pressure, losing 50% in 12 months, says Von Reiche. ‘The valuation of the share got too steamy and the earnings growth didn’t support the valuation.’

Last year, Mix Telematics announced job cuts following the merger of its African consumer and fleet businesses in Stellenbosch and Johannesburg. It revised down its revenue and subscriber targets.

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‘Companies spend on fleet management systems when economies are doing well, and cut back when they are doing badly’

RICHARD MIDDLETON, PORTFOLIO MANAGER, INVESTEC ASSET MANAGEMENT

Richard Middleton, portfolio manager at Investec Asset Management, approves of Mix Telematics as the firm fits in with the bank and asset manager’s investment philosophy theme for smaller-cap companies, namely to invest in growth companies on reasonable valuations, which are expanding outside SA.

‘Generally, companies spend on fleet manage-ment systems when economies are doing well, and cut back on spending when they are doing badly. As such, Mix Telematics’ business is impacted by macroeconomic headwinds, as well as geopolitical factors. However, they have a great product and continue to grow subscribers profitably,’ he says.

Middleton says the firm is focused on growth in the US, and raised cash by listing an American Depository receipt. As a result, it is sitting with a substantial cash balance that can be used for growth. ‘The shares aren’t cheap currently, but with a great management team, we like the medium- to long-term growth prospects of the company,’ he says.

Metrofile is a document-management company that is black-owned and has a market capitalisation of about R2.2 billion. Its largest shareholder is its empowerment partner, the Mineworkers Investment Company, which owns a 34.7% stake, according to Metrofile’s 2014 integrated report.

The business offers a wide range of services related to managing documents, both physical and digital, including back-up storage, destruction of confidential records, paper pulping for paper mills and packaging. Metrofile has operations in Nigeria, SA, Mozambique, Zambia and the UAE.

New laws, such as the Companies Act, Consumer Protection Act and Protection of Personal Information Act, as well as more emphasis on governance, are all positive developments for Metrofile.

‘The marketplace in which we operate has shown resilience during the economic downturn, fuelled in the main by an escalation in corporate governance requirements and a growing awareness of the need for more effective risk management,’ Metrofile stated in its 2014 integrated report.

Three players in SA are doing this – Metrofile, Document Warehouse and Docufile – of which Metrofile is by far the largest, says Mohamed. ‘You think it’s a boring business but it’s consis-tent, predictable and well managed with a good margin,’ says Mohamed.

Von Reiche echoes this. ‘I don’t think Metrofile is going to shoot the lights out; it’s steady as she goes. But the financial metrics look good and it is very resilient as it is not affected by local economic conditions.’ Clients range from banks to telecos, retailers and others, so the demand risk is spread across industries, he says.

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It is hard to equate companies in the business support services category as their business models and areas of specialisation are very different

Countries where Metrofile has opened branches (besides SA) are all virgin territories with no other players providing a similar service. ‘This offers attractive growth and profitability as they are first to market,’ says Mohamed. ‘They have a great management team who, very importantly, has significantly reduced their debt burden over the past few years, and are now looking to grow the company.’

The business has delivered earnings per share growth of 26% a year over the past five years, states the Financial Mail. Revenue increased by 12.7% to R590.2 million for the year ended 30 June 2013.

This is impressive for a company that took a knock when the dotcom bubble burst in the early 2000s. It was a wholly owned subsidiary of IT group MGX, which imploded in 2002, leaving Metrofile as the only surviving part of the business, with huge debt burden. The company has since paid down all the debt and is now paying dividends, he says.

One of the more intriguing listings under business support services is MicroMega, in light of its controversial founder and chairman, Dave King.

After arriving in SA in 1976 – with allegedly just R170 to his name – the Scotsman built a business empire before becoming involved in a protracted 11-year legal battle with SARS. It ended with King agreeing to pay settlements of R706.7 million to the Receiver of Revenue, and nearly R12 million to the National Prosecuting Authority.

In MicroMega’s 2014 integrated report, the firm is described as a holding company ‘primarily focused on the provision of information technology, financial services, occupational health and safety, and human resourcing services’. The report lists the company’s widely diverse subsidiaries, including Amanzi Meters, (which develops and manufactures products such as plastic water meters) and recruitment company MECS Africa (which offers manpower management).

MicroMega has stakes in various financial services companies such as MicroMega Africa Money Brokers, which focuses on spot and forward foreign exchange markets in sub-Saharan Africa. It also includes some occupational health and safety ventures.

Since King settled his disputes, MicroMega’s share price has surged more than 90%, giving it a market capitalisation of about R2 billion. In the company’s most recent results – its interims to 30 September 2014 – revenue was R484 million and profit was R57 million, more than double the R25 million in the previous corresponding period.

‘We finally put the protracted difficulties arising from our main shareholder’s dispute with SARS behind us … [generating] a marked improvement in operating efficiency and growth in our core businesses,’ stated the report.

MicroMega is not followed by most portfolio managers. For this reason there is little analysis of the company. However, given the improving share price, it is cautiously starting to appear on their radars.

Morvest is the smallest of the firms falling under business support services, with a market value of R194 million. The black-empowerment company’s 2014 integrated report describes it as having ‘recently shifted emphasis from an operating to an investment holding company’.

Investments fall into business and industrial services, retail and ICT solutions. The firm has a footprint in SA, Nigeria, Mozambique, India, the UAE and the US.

By Gene Michelson
Image: Ann Cutting/reneerhyner.com