Three South African Ideas: Combined Motor Holdings, Sabvest, and Telkom

Adrian Saville of Cannon Asset Managers presented his investment theses on Combined Motor Holdings (South Africa: CMH), Sabvest (South Africa: SBV, SVN), and Telkom (South Africa: TKG) at Best Ideas 2019.

Thesis summaries:

Combined Motor Holdings is a holding company in the retail motor market. The group holds the franchise for the sale of products of automobile brands. CMH also consists of franchises in the transportation and finance industries with a South African presence. Over the past ten years, CMH has generated an average return on equity of 22% and has returned 100% of original investment to shareholders in the form of dividends and buybacks. CMH carries no long-term debt, has surplus cash on balance sheet, and trades on a trailing P/E multiple of 6.6x, with a dividend yield of 8.0%. Notwithstanding the sluggish domestic economic conditions, the company represents an exceptional long-term opportunity and is a top idea for 2019.

Sabvest is an investment holding company founded by Christopher Seabrooke in 1987. Sabvest has investments in domestic and offshore assets, the bulk of which are represented by interests in unlisted industrial groups, including SA Bias Industries, Sunspray Food Ingredients, Flexo Line Products, Mandarin Holdings, Classic Food Brands, and Mandarin Industries. Sabvest has generated a return to shareholders of 54x capital over its 30-year history, equivalent to a return on invested capital of ~22% per annum since 1988. Despite this prodigious long-term result, Sabvest is generally unknown. The shares have been tightly held and thinly traded for most of Sabvest’s history. Recently, the company has undergone a capital and shareholder rearrangement that improves the free float. This liquidity improvement and wider ownership should translate into near-term benefits for investors, including a narrowing of the discount to net asset value, which Adrian estimates at ZAR 56 per share, as compared to a market price of ZAR 40 per share.

Telkom is a leading information and communications technology services provider in South Africa, offering fixed-line, mobile, data, and information technology services. The company trades on 10.5x earnings with a 5.6% dividend yield, displaying utility-like attributes in terms of performance with a return on assets of 9.2% per annum and return on equity of 11.7% per annum. Telkom’s underlying property portfolio has a market value of ZAR 24 billion, equal to three-quarters of Telkom’s market cap of ZAR 32 billion. Adrian expects this portfolio to be separately listed, representing a recognition of capital for shareholders.

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About the instructor:

Adrian Saville’s qualifications include a Bachelor of Arts (Honours) (cum laude), M.Com (cum laude) and PhD (Economics), which he completed at the University of Natal in 1997 and for which he was awarded the Economics Society of South Africa’s Founders Medal. He is a UNESCO laureate and a matriculant of Linacre College (Oxford). He has completed programmes in investing and competitive strategy at New York’s Columbia University and Harvard Business School in Boston. In 1994, while completing his doctorate in economics, Adrian formed an investment vehicle that became the forerunner to Cannon Asset Managers, which he founded in 1998. In 2017 Bidvest Financial Services acquired Cannon Asset Managers. Today Adrian serves as Chief Executive at Cannon Asset Managers. Adrian has experience in managing all the major asset classes and has successfully combined teaching and business. He has held a Professorship of Economics, Finance & Strategy at the Gordon Institute of Business Science (GIBS) since 2003, where he teaches in the fields of macroeconomics, investment finance and strategy. Adrian has received the Excellence in Teaching Award at GIBS on ten occasions since 2007. In 2012, he was nominated for the Economist Intelligence Unit’s Business Professor of the Year Award and in 2014 he received the Central and East European Management Development Association award in teaching excellence. Adrian has presented to global audiences in many destinations, including Botswana, Brazil, Chile, Estonia, France, Germany, Ghana, India, Japan, Kenya, the Netherlands, Nigeria, Rwanda, Singapore, the United Kington, the United States, Zambia and Zimbabwe. He has looked after Cannon Asset Managers’ Deep Value Portfolio since 1998. That portfolio has grown initial capital by 45 times over 20 years, equal to a 19.8% per annum, versus the market return of 15 times start money, equal to 14.0% per annum. In 2013, Adrian launched the Hummingbird Fund, which is a concentrated mid-, small- and micro-cap portfolio that has delivered 23.7% per year since inception.