Shiloh Capital’s Thamsanqa Netha gave his top three JSE stock picks – Santova, Merafe Resources and Advtech
Netha is the managing director at Shiloh Capital, a privately owned investment company focused on alternative investments.
He has a Master’s degree in Development Finance from Stellenbosch University and almost two decades of experience in the financial services sector.
He has worked at well-known financial institutions like Nedbank and the Development Bank of Southern Africa. Netha has been at Shiloh Capital since 2015.
The JSE began doing its quarterly Stock Picks series as a way to encourage retail investors to participate in investing on the exchange.
Engaging retail investors has been identified as one of the areas the JSE is targeting to revive the exchange by attracting smaller companies to list and stay listed.
Currently, shares in smaller cap stocks are very illiquid and are not attractive for large asset managers, who dominate the JSE, to invest in.
Through the Stock Picks events, the JSE hopes to encourage retail investors to connect with experts in the field to make informed investments and discover new companies to invest in.
In the latest JSE Stock Picks series, Netha chose Santova, Merafe and Advtech as his top three stock picks.
Netha describes Santova as a logistics business that operates globally, with a presence in Africa, Asia, and Europe.
The company specialises in trade services and supply chain management and recently expanded into digital solutions.
Key financial metrics include a 75% increase in offshore earnings, a 16% return on equity (ROE), and a very low debt-to-equity ratio.
Despite challenges like logistics demand fluctuations, softened demand due to interest rates, and post-Covid-19 recovery disruptions, the company strategically ventured into the right sectors with its digital solutions offerings, he said.
The investment rationale for Santova is the post-Covid uptick in demand for its services, particularly in Asia and Europe.
The company has also successfully diversified its revenue risks, achieving profitability in every region of operation, with growing profits in each area.
However, the key element for this company is its progress in digital solutions, notably in providing key supply chain analytics. This service segment has the potential for significant growth, he said.
The company is also diversified across regions that are set for future growth.
Santova is currently listed on the JSE with a market cap of just under R1 billion and a price-to-earnings (P/E) ratio of 5.6.
Merafe Resources specialises in ferrochrome mining and beneficiation, with one of its major partnerships being with Glencore, which holds just under 30% of the company’s equity.
Netha warned that one of the company’s significant challenges is its free float, with 42% held in South Africa, 7% offshore, and the remaining balance is held by Glen Core and the Industrial Development Corporation of South Africa.
This distribution has, therefore, led to a potential value trap due to the major shareholders.
However, he said Merafe’s management is actively seeking ways to address this issue.
Despite these challenges, the company maintains a substantial cash balance of R1.6 billion.
In addition, their revenues, EBITS, and operating margins continue to grow, proving their baility to operate and manage a ferrochrome business.
Netha highlights the high global demand for stainless steel as an investment rationale for Merafe, which the company not only mines but also beneficiates, adding value to its operations.
He said the company’s productivity is up, and the company places a strong focus on cost management, ensuring they do not escalate costs as they navigate being price takers in the commodities market.
The company’s solid balance sheet, minimal debt, proven operational expertise and partnerships like Glencore contribute to the investment rationale for Merafe.
Merafe is currently listed on the JSE with a market cap of R3 billion and a P/E ratio of 1.97.
Netha’s last stock pick is ADvTECH, which specialises in the education and recruitment industries. The company covers primary, tertiary, and high schools.
ADvTECH encompasses brands like Crawford International, Abbott’s College, Trinity House, Vega, Varsity College, and Oxbridge Academy.
The company’s reach extends across the continent, with branches in Kenya and Botswana, contributing to a strong rest-of-Africa portfolio.
Its revenue has grown by 16% from the previous year, and operating profits have seen a notable increase of 23%.
In addition, it offers a dividend of 30 cents per share and has demonstrated robust enrollment growth, surpassing 100,000 students and continuing to expand.
Despite operating in a challenging environment, the business maintains excellent operating margins, he said.
Netha said parents have shown a willingness to pay for their children’s education regardless of economic conditions, reinforcing the company’s resilience.
The return on investment, particularly in the growing and competitive resourcing side, remains strong, he said.
In addition, a noteworthy aspect is the company’s significant shareholder, Value Capital Partners, known for targeting value stocks.
The company exhibits strong cash generation and maintains a sound balance sheet.
However, Netha highlighted some concerns regarding the necessary capital expenditure for school expansion.
Nevertheless, he said the company has proven its ability to generate cash flow once schools are established.
“In conclusion, it is a strong portfolio, there is great underlying demand for quality education, they have a great business model, they operate well, and there is a great dividend pay,” he said.
ADvTECH is currently listed on the JSE with a market cap of R14 billion and a P/E ratio of 15.57.