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Whenever I think of a diamond miner, the image of a typical Wild West film always comes to mind. I see a miner with a large sieve scooping up gravel from a riverbed and searching through it meticulously to find the ultimate reward, a diamond.
In my finweek article titled Build your portfolio like a pro, I discussed a similar sifting process I followed to determine what shares the top 10 SA General Equity Unit Trusts currently regard as their top choices in shares. Since then, however, I have received enquiries regarding shares that are not quite as well-known as those listed in my article, along with requests to focus specifically on FTSE/JSE Small Market Capitalisation stocks.
Small-cap stocks are shares that fall outside the size of the Top40 largest shares, as well as the Medium Market Capitalisation Indexes (the following 60 largest shares). All successful companies had to start small and it’s always an investor’s dream to buy into the next PSG, Naspers* or Remgro while it’s still young.
When sifting through the same funds that I used in my 9 June article, only five small companies stood out as shares that each appeared in more than two of these 10 funds. They are:
1. Afrimat
Afrimat supplies building materials to the building and construction industries. The company’s products include aggregate stone products, ready-mix concrete and bricks, as well as moulded concrete products. Afrimat listed on the JSE in 2006 and has since achieved a total return in excess of 191% to shareholders. In the latest set of results, the company managed to increase its headline earnings by 15.5% and its dividend by 11% amid tough trading conditions. Afrimat is trading on a historic price-to-earnings ratio (P/E) of 12.09 and dividend yield of 3.06%. The group has a healthy balance sheet and the recent acquisition of Cape Lime should be earnings accretive.
2. Brimstone
Brimstone is a black-controlled and -managed investment company with a track record of delivery to stakeholders over a 20-year period, supported by an experienced team. Its investment portfolio consists of listed investments in Oceana, Life Healthcare, Grindrod and Equities Property Fund, which forms the bulk of its intrinsic net asset value (INAV) while its unlisted investments include the likes of Sea Harvest, Phuthuma Nathi (MultiChoice) and MTN Zakhele. Brimstone is currently trading at an attractive discount to its INAV and provides investors with some diversification.
3. Cashbuild
Cashbuild is Southern Africa’s largest retail building materials distributor. The company retails its products under the Cashbuild, U-build, Buy and Build, and Homecentre trade names. The first store opened in 1978 and the company now has more than 233 stores across Africa. We have seen Cashbuild deliver a constant return on equity (ROE) since 2011 in excess of 20%. The company is highly cash generative and has very little debt on its balance sheet. At this stage the company is trading at demanding multiples but one should keep an eye on this stock at lower levels.
4. Choppies
Choppies is a grocery and merchandise retailer that was founded in 1986. As at the end of December 2015, Choppies had 78 stores in Botswana, 40 stores in South Africa and 28 stores in Zimbabwe. The group established its first store in Zambia last year and plans to open a further 10 stores across the country during 2016. The group recently acquired 10 existing retail outlets in Kenya and 21 Jwayelani stores in KwaZulu-Natal and the Eastern Cape. The group listed on the JSE last year and has a market capitalisation of R6.78bn, which is relatively small compared to, for example, Shoprite’s market capitalisation of R95bn. Although the group is trading on a demanding valuation, we believe that Choppies could significantly benefit from an ever-increasing African consumer market.
5. Pan African Resources
Pan African Resources is a mid-tier mining company that predominately produces gold through its Barberton and Evander gold mines in Mpumalanga. Headline earnings per share (HEPS) for the interim period ending 31 December 2015 increased by 121% compared to the prior period, and the share is currently trading on an attractive dividend yield of 3.35%. At the time of writing, the average rand/gold price climbed by more than 20% since the start of the year. If we don’t see any material declines in production volumes, we believe Pan African Resources could produce a stellar set of year-end results. We would like to point out that the performance of Pan African Resources is directly linked to the rand/gold price and due to volatility one can experience large movements in the share price.
*finweek is a publication of Media24, a subsidiary of Naspers.
Schalk Louw is a portfolio manager at PSG Wealth.
This article originally appeared in the 7 July edition of finweek. Buy and download the magazine here.
