Last week the JSE hosted one of its small cap showcases. This series is part of a larger initiative to help smaller cap counters falling on the stock market. Interestingly, the JSE will also introduce a sell-side market making system in the small cap market to help bolster liquidity between desks.
Stock exchanges around the world all want lots of big, liquid quotes, but it’s worth remembering that big companies start life as small businesses. The cheapest new large cap listing for an exchange helps an existing small cap become a large cap.
The small cap sector on exchanges is really the incubator that precedes the rise of new large caps.
Not just from a trade perspective, but generally speaking, the health of the small cap sector is a powerful employment driver (small caps tend to be more labor intensive than large caps), tax revenue (more profits mean more taxes) and, indeed, growth and innovation so vital to long-term economic success. This is a subject that Stefano Marani from Renergen succinctly addresses here.
Five unique small caps were featured in the last showcase, and here is a brief summary and brief thoughts on each one.
Capital Appreciation (CTA)
Listed as an ad hoc acquisition company (Spac) in 2015, Capital appreciation has grown through acquisition into a payments and payment solutions group with a range of point-of-sale, platform, software and service offerings in this rapidly evolving space. The group defines itself as a “business-to-business fintech group” and focuses on banks and insurance companies with services in more than 20 countries.
Read: Capital Appreciation rides the wave of digitalization at home and abroad
The global payments space has strong long-term tailwinds that have been, at least partially, accelerated by Covid pushing more payments into contactless digital channels and away from cash.
Although some of this demand has been driven forward by the pandemic, in the longer term these tailwinds of increasing digitalization should remain valid.
With 530 million rand of cash on its balance sheet – around 40 cents per share (cps) of its 182cps share price – Capital Appreciation is well positioned to fund growth, make acquisitions and pay dividends, assuming it is evolving on the right side of rapidly evolving payment ecosystems.
Regeneration also listed as Spac before acquiring its main underlying asset, which is now called Tetra4.
Tetra4 holds the first and only onshore oil production right in South Africa, in the Free State, approximately 250 km southwest of Johannesburg.
This unique gas field contains large quantities of methane, which will produce liquid natural gas (LNG), and helium. The latter is an essential and essential input in the semiconductor manufacturing, aerospace, MRI and welding industries.
While LNG offers great national exposure to global energy prices, it is helium that is the real hidden gem of this resource.
For a more detailed discussion of helium, see my article on the onsite helium token that Renergen issued: “Go long helium” might be a good tip.
The group is currently accelerating phase 1 while preparing for a much larger phase 2. In securing Phase 2 funding, Renergen has seen strong interest from Ivanhoe Mines, the Central Energy Fund and the Development Finance Corporationamong other donors.
Read: Renergen seals R1bn investment from state-owned Central Energy Fund
All of this decongests and de-risks Phase 2 funding somewhat, while pointing to a much larger second phase than we all originally envisioned.
For research on Renergen, see this helpful article listing of reports.
Southern Palladium (SDL)
Recently listed on JSE, Southern Palladium is a long overdue resource exploration piece.
The group has raised A$19 million to fund a drilling and exploration program at its Bengwenyama project, which it expects to complete over the next two years. If successful, this should lead to a pre-feasibility study that will allow it to apply for a full mining right and begin developing the mine.
The Bengwenyama project lies 290 km from Johannesburg on the eastern branch of the Bushveld complex, focusing on the basket of platinum group metals. With a direct interest of 30% and an indirect interest of 12.3% through Southern Palladium, the community of Bengwenyama around the project area strongly supports the development of this resource. Indeed, a configuration similar to the Royal Bafokeng Platinum (RBP) cooperative work model could be achieved.
The underlying resource has a strong revenue split between rhodium (53%) and palladium (30%) and the group estimates its (unproven) resource at around 19 million ounces (Moz) (inferred) at 53Moz (including additional exploration targets).
Lance Reit (SEA)
Lance Reit is the only regionally oriented national REIT on the JSE (the exchange offers a range of regionally oriented offshore REITs) focusing specifically on the Western Cape.
In the Western Cape, the Reit is diversifying its real estate exposure, with the rest of its portfolio currently in industrial, logistics and convenience properties.
Importantly, Spear insiders own approximately 28% of the REIT’s shares and the group and its properties are managed internally.
This ensures that Spear’s management remains focused on efficiency and returns rather than size (which is what externally managed REITs do, and thus see lower quality properties increasingly added to their portfolios over time. time).
Spear has a reasonable loan-to-value ratio (much like the debt-to-asset ratio of a real estate company) of 39% and paid out 88% of its distributable earnings in FY22, making it tradeable currently on a dividend yield of 10.2. %. Its tangible book value is 1,130cps (with an average capitalization rate on its real estate portfolio of around 9%, which seems reasonable), putting the stock at a discount of 32% or a price-to-book ratio of 0, 67.
Stadium Holdings (SDO)
From Curro (COH), himself from PSG (PSG), Stadium is a game focused on higher education and has gradually built up a tertiary offering that has five faculties and 10 campuses, and offers over 50 qualifications.
Importantly for future growth, the group has 33 new programs in the process of being accredited. These include expanding law school and in-demand IT qualifications with a longer-term plan to deliver a range of engineering qualifications.
Apart from Unisa, Stadio is the largest distance learning offering in South Africa. Indeed, its goal is literally to be the alternative to Unisa (Unisa has 320,000 students).
The group currently has 38,414 students across its offerings and previously communicated a target of 56,000 students by 2026 (this would imply a student growth rate of 8% to 9% per year).
It is ultimately aiming for 100,000 full-term students, which is wonderfully bold.
With a market cap of R2.8 billion, Stadio currently trades at a valuation of R74,172 per student.
The temptation is to compare Stadio to ADvTech (approximately R111,166 market cap per student) and Curro (approximately R81,981 market cap per student), but that would be inappropriate as ADvTech offers higher, school and distance education while Curro only offers than teaching (with some distance offered as well).
Read: Growing student numbers bolster Stadio’s annual results
That said, if Stadio really hits 100,000 students, the rest of its economy, cash flow, earnings, and yes, its valuation should follow.
Keith McLachlan is Head of Investments at Integral Asset Management.
*Keith McLachlan and certain Integral Asset Management portfolios may hold Renergen shares.