Keith McLachlan, chief investment officer at Integral Asset Management, selected three stocks he likes during a recent JSE SA Stock Picks event – Santova Logistics, Momentum Metropolitan, and Transaction Capital.
McLachlan has been investing on the JSE for over 20 years, specialising in small and mid-caps.
He was previously a chartered accountant at PwC and became an equity analyst at Standard Bank.
McLachlan entered institutional investing as a fund manager at Alpha Wealth, a family office and advisory firm.
He joined Integral Asset Management as a chief investment officer in 2021. Throughout his investing career, McLachlan has shared his investment analysis on smallcaps.co.za.
The three companies McLachlan identified as good investments are all trading at significant discounts to their fair value, which may take some time to realise.
McLachlan also emphasised the importance of companies having good track records of growth, good management, and efficient capital allocation.
Below are his stock picks and why he selected them.
Santova is a global logistics company with a phenomenal track record of long-term growth in revenue and headline earnings.
Over the last ten years, Santova has grown its revenue at a compound annual growth rate of 14%. More importantly, it has managed to grow its headline earnings per share at a compound annual growth rate of 24%.
Headline earnings per share increasing at a greater rate than revenue indicates good management and efficient capital allocation.
Furthermore, three-quarters of Santova’s earnings come from outside South Africa, and the company has recently expanded to the United States.
According to McLachlan, this makes the company a good rand-hedge with plenty of room to grow.
As one of South Africa’s largest life insurers, Momentum is well-positioned to benefit from a decline in excess mortality rates post-Covid.
Excess mortality rates are beginning to normalise, which should result in life insurers paying out fewer claims and thus becoming more profitable businesses in the short term.
McLachlan estimates Momentum’s fair value to be R32 per share, nearly double what it currently trades.
Furthermore, life insurers are forced by regulation to hold substantial amounts of cash to cover potential client payouts. This cash is interest-earning, so with the rise in interest rates, Momentum should get “free returns” from its cash holdings.
Momentum also offers a hefty dividend yield of 6%.
Transaction Capital is “offering significant value at its current price”, with McLachlan estimating that it trades at a 50% discount even if one were to write off SA Taxi.
Aside from SA Taxi, Transaction Capital has two other substantial businesses – Nutun and WeBuyCars.
Nutun is a domestic debt collection agency progressively becoming an offshore customer experience management company.
McLachlan said this transition has been hugely successful, with over 40% of Nutun’s earnings coming from outside South Africa.
McLachlan values Nutun alone at R8 a share, worth more than what Transaction Capital is currently trading at.
WeBuyCars is worth R8 to R10 a share, making these two businesses worth over double what the entire company is worth at its current share price.
When market darlings such as Transaction Capital fall, the market often overreacts, which presents an opportunity.
However, McLachlan does caution that the company will take three to four sets of results to return to its fair value.