• Smaller listed companies have been among the hardest hit by market uncertainty. 
  • But the sell-off could create investment opportunities, as some of these companies may flourish in a post-Covid world.  
  • We asked two small-cap experts to single out their favourites.
  • For more articles, go to www.BusinessInsider.co.za.

The Covid-19 pandemic has wiped out large chunks of many companies' market values, with smaller, JSE-listed companies among the hardest hit.

"At times of crisis, like we are currently experiencing, market participants tend to seek the liquidity and perceived safety of large cap stocks and to steer clear of ‘riskier’ small cap stocks," says Ricco Friedrich, executive director at Denker Capital and fund manager of the S-Alt SC Qualified Hedge Fund, which seeks to capitalise on the mispricing opportunities  in South African smaller cap companies.

"Small caps are perceived as being more risky than large caps for various reasons. However, many of these risks can be managed, creating the opportunity to capitalise on the current mispricing opportunities. In fact, for investors with a long-term horizon, the opportunities available in the small cap sector are now even more attractive than in the past few months."

We asked two of South Africa’s most respected small-cap analysts to each pick two companies that may actually benefit in a post-Covid world.

Here’s what they said:

Keith McLachlan, fund manager at AlphaWealth in Johannesburg

Santova Logistics 

JSE-listed Santova describes itself a specialist international trade solutions business that is headquartered in South Africa but has offices in Mauritius, Australia, Germany, Netherlands, United Kingdom, Hong Kong and China. It provides international logistics solutions covering supply chain management, financial services, business intelligence, freight forwarding and IT system integration.

“Santova is essentially a logistics business that owns no physical assets,” says McLachlan. “More than 80% of its earnings come from outside of South Africa and across multiple major trade routes. As the group gets bigger, its ability to aggregate client volumes and logistics needs together and drive down logistics costs from asset-heavy players increases.”

McLachlan says since Santova is able to bulk buy may of its solutions it can pass on significant cost savings to customers. It also shifted much of its business to a cloud-based system in February and is able to operate almost completely online.

Distell Group Holdings 

(Distell)

It may come as somewhat of a surprise that a fund manager is picking South Africa’s biggest producer of wines and spirits fresh after a lockdown-induced alcohol ban. However, McLachlan says it’s precisely because of the lockdown that Distell is such a compelling investment proposition.

“It’s unlikely that anyone is going to stop drinking in South Africa so in a year or two Distell’s revenue will be back to normal,” he says. “However, at the moment the share price is trading at almost half the price it was at the end of last year so you can pick it up relatively cheaply.”

McLachlan says Distell is also likely to benefit from the fact that the alcohol ban at the height of South Africa’s lockdown forced many customers to drink non-alcoholic alternatives, which typically sell at the same price as their alcohol-containing equivalents yet attract no sin taxes. This means an extra profit margin boost for alcohol producers like Distell. The fact that Distell is also a significant payer of excise taxes means it will be difficult for government to reinstate another hard lockdown without further hurting its revenue.

Anthony Clark, analyst at Smalltalkdaily Research

Balwin Properties 

An artist illustration of Balwin's planned Mooikloof Mega City in Pretoria, which could include up to 50,000 apartments

The country’s largest residential builder was hit hard by the lockdown, which caused construction activity and home buying to grind to a halt. For a company that traditionally builds around 2,500 units a year, ranging from studio apartments to three-bedroom units, this will significantly impact interim results when they are released in August.

READ | 50,000 flats are planned in Pretoria East - for people who earn less than R18,000 a month

However, with the stock down almost 22% year-to-date it could be a value pick for investors willing to take a longer-term view on the domestic property market. With interest rates at multi-generational lows, first-time buyers and young families can benefit from its accessible but high quality residential offering. The company’s developments are already dotted all around Johannesburg but are increasingly popping up in Durban and Cape Town. It has also refocussed its energy on one and two-bed units in the R800,000 to R1.5 million range where Clark says “there remains strong demand from those getting their first rung on the property ladder or those trading down to a more secure lifestyle estate development.”

“On an undemanding PE and with a solid cash cushioned balance sheet, Balwin should use the current low interest rate environment to its advantage,” he says.

Stadio 

The tertiary spin-off of sibling school operator, Curro Holdings, Stadio has not been immune to the economic pressures of Covid-19. Like most education stocks, which enjoyed heady valuations just a few years ago, its share price has come down to earth with a thud. Currently trading at R1.40, it reached a high of R8.50 at the end of 2017 just a few months after its listing.

However, Clark believes the surge in demand for online courses and Stadio’s expanding array of tertiary qualifications - some 97 accredited programmes with another 37 in the pipeline - its strong online and distance learning offering should be supportive.

“Unlike private schools, learners at tertiary educators tend to be stickier as their very future livelihoods and careers are under development,” says Clark. “Dropout rates are low though increased provision for bad and doubtful debts were increased.”

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