Capital & Regional
The first of this month’s listings was UK-focused property group Capital & Regional, which listed on the JSE’s main board on October 7.
“It’s always nice to get earnings in Sterling, but to me this listing looks a bit opportunistic,” says Simon Brown of JustOneLap. “Listed property has run hard on the JSE and there will always be those looking to raise some money where everything is hot at the moment.”
He feels that while Capital & Regional has decent assets, there is nothing in its portfolio that really stands out. He believes that the current UK-focused property counters Intu and Capital & Counties still offer more to investors.
Asset manager Sygnia is set to debut on Wednesday October 14. It runs a slightly different business model to the likes of Coronation or Anchor, as its business is predominantly low margin index trackers and multi-managed funds.
“Currently the asset split is heavily geared towards institutional investors who made up close to 94% of the assets as at June this year,” says chief investment officer at Anchor Capital Sean Ashton. “However the ability to attract the higher margin retail assets is where we see the potential growth in earnings.”
Ashton expects that this will be aided by the increased profile Sygnia will enjoy post-listing. Anchor is comfortable with the business’s fundamentals, its management and its ability to gain market share.
For Brown, however, while he believes that Sygnia is a nice business and low cost products do represent the future, he expects that the share price will jump on listing, which will take the counter to very rich valuations. He will therefore not be looking at it as a long-term holding.
“I went into the IPO solely on the expectation that the share will fly on day one,” he says. “But my intention is to get in on the IPO and exit.”
International Hotel Group
Luxemborg-listed International Hotel Group is also expected to list on October 14. The group owns hotels in the UK and other European markets.
While it brings even more international assets to the local market, Brown suggests that this may be another opportunistic property listing.
Probably the pick of the new listings is residential property developer Balwin, due to debut on October 15. It is currently South Africa’s largest turnkey developer of sectional title residential complexes, targeted primarily at the mid to high income market.
“The group’s business model enables very high margins given that it is vertically integrated, with management forecasting a 40% operating margin in FY16 (February year-end), while returns on capital appear very attractive (ROE: 58% in FY15),” says Anchor’s Ashton.
Brown says that Balwin is an exciting addition to the market, given that Calgro M3, which is a similar business although it develops housing for lower income earners, has been such a strong performer.
“Balwin is a bit cheaper, but carries a bit more risk,” he says. “Higher income earners are more susceptible to interest rates or a downturn in the economy, and Balwin also builds on spec and then tries to sell those units, whereas Calgro builds to order.”
Set to list on October 16, Capital Appreciation is a SPAC, which means that it comes to market with nothing but the intention to raise funding to acquire businesses in future. It has to secure one major deal within two years of listing, or any capital raised must be returned to shareholders.
“Basically the intention is to raise circa R2 billion (required R500 million underwritten by management consortium) in cash,” says CEO of Anchor Capital Peter Armitage. “There is no identified or disclosed acquisition and you have to believe in management’s ability to do good deals and create value.”
The appeal is that the SPAC boasts some South African business heavyweights on its board including co-founder of Netcare Motty Sacks, former SAB CEO Meyer Kahn, former Bidvest director Alan Solomon, and the CEO of the Public Investment Corporation Dan Matjila. The company can’t disclose what deals it may already have in the pipeline, but it has indicated that acquisitions are likely to be in the broader services sector.
“So do you invest?” asks Armitage. “This entity has it all – a collection of SA’s business legends, the PIC’s involvement, strong corporate governance and underwritten capital. The risks are poor investments and slow investment of capital.
“If you can stomach the incentive structure, this has a good chance of being a successful vehicle. However, investors must accept that the share may track sideways for some time (and possibly down), until there is some indication of the initial investment/s.”
Trellidor has been fitting security barriers in South Africa since 1976. It has an estimated market share in South Africa of between 35% and 50%. It intends to list on October 21.
However, while security is a booming industry in South Africa, Trellidor is not getting analysts excited as its growth prospects look fairly muted.
“You would imagine that most people who need a Trellidor already have one,” says Brown. “There is some space to grow in new housing and upgrades, but it’s not massive.”
He says this looks like a classic top-of-the-market listing, with the founding shareholders looking to divest 50% of their shareholding.
“If it’s such a great company, why are they looking to get out?” Brown asks.
Diversified equipment and industrial services business Waco International Holdings was delisted from the JSE in 2000 after being acquired by a private equity consortium. It is expected to re-list on October 23 having shown average revenue growth of 21% over the last three years.
However, Anchor’s Ashton says that it is difficult to get a good view on the company and it does not offer very compelling value.
“The risks associated with assessing the company are that only three years of financial information is available and therefore we do not have full visibility of the business’s performance during a down-cycle (eg 2009-2012); there may be limited upside from current capacity utilisation levels, which in several of their businesses is at optimal levels; the Australian operations (21% of Group revenue) may take longer to turnaround; the possible impact of low commodity prices on construction and infrastructure in South Africa and Australia; and a potential slowdown in global markets which could lead to lower fixed investment in their key geographies.”
Brown adds that the business operates in a sector that is currently very tough. Even though it is diversified across a number of geographies, it faces some heavy headwinds.
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