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

January 12, 2019 in Africa, Audio, Best Ideas 2019, Consumer Discretionary, Equities, Financials, Ideas, Micro Cap, Mid Cap

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.

QAD: Value-Accretive Business Model Transition Gains Momentum

January 12, 2019 in Audio, Best Ideas 2019, Equities, Ideas, Information Technology, North America, Small Cap

Michael Morosi of MAPFRE AM presented his in-depth investment thesis on QAD Inc. (US: CADA) at Best Ideas 2019.

Thesis summary:

QAD’s value-accretive business model transition continues to gain momentum. The attractive financial attributes of the new model are increasingly evident in margin expansion and cash flow generation. Meanwhile, the organization maintains its customer-centric focus to retain existing customers and acquire new ones. 

Michael’s valuation of $950 million has multiple levers for upside, offers a 15-20% margin of safety, and should increase over time with continued growth in the subscription business.

Read Michael’s write-up on QAD.

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About the instructor:

Michael Morosi is an Equity Portfolio Manager at MAPFRE AM. He previously worked at Jetstream Capital, a global equity hedge fund, as an Equity Analyst and at Avondale Partners, an investment bank acquired by Hilliard Lyons, as a Senior Equity Research Analyst. Michael holds a Bachelor’s degree in Economics and Business from Kalamazoo College (USA) and is an Executive MBA candidate at IE Business School (Spain). Michael’s investment research has been cited in a variety of international media, including CNBC, The Wall Street Journal, Bloomberg, and The Financial Times. He has also served as a lecturer on financial markets and renewable energy at Vanderbilt University. In addition to his focus on global public equities, Michael has experience sourcing and executing investments in private equity and venture capital.

Cartrack: South Africa-based Global Provider of Telematics Solutions

January 12, 2019 in Africa, Audio, Best Ideas 2019, Equities, Ideas, Small Cap

Rudi van Niekerk of Desert Lion Capital presented his in-depth investment thesis on Cartrack (South Africa: CTK) at Best Ideas 2019.

Thesis summary:

Cartrack is a leading global provider of telematics solutions delivered as Software-as-a-Service with best-in-industry returns on capital, strong growth trajectory operating in a large and growing addressable market, and high insider ownership — trading at a below-average valuation.

The company is listed in South Africa on the Johannesburg Stock Exchange, which is fairly inefficient in price discovery outside the universe of the largest stocks.

Cartrack has a footprint in 24 countries and with 850,000+ subscribers it is positioned as a top ten global player. The company has been investing aggressively in R&D and capacity for growth ahead of the curve and is about to break through and capitalize on economies of scale in many markets.

Excellent financial characteristics: 93% annuity/recurring revenue with earnings clarity, 34% ROCE, 44% ROE, 100+% cash conversion.

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About the instructor:

Rudi van Niekerk manages the Desert Lion Capital Fund. He is South African and resides in Cape Town. Desert Lion Capital specializes in small- and mid-cap opportunities in overlooked segments of the South African market. The investment strategy is opportunistic and follows a fundamental, value-oriented approach. The fund is US domiciled and formed specifically to serve US and other non-South African investors. Rudi is also the manager of Guscora Investments, a permanent capital vehicle incorporated for South African investors with a similar investment approach. Previously he founded and managed Magnum Opus, an investment partnership for mostly family and friends which delivered impressive returns during its lifetime. He has extensive experience in private equity and serves on the boards of several unlisted companies. Rudi holds a Bachelor of Commerce and MBA degrees from the University of Stellenbosch and is a CFA Charterholder.

Yatra: #1 Corporate and #2 Consumer Online Travel Agency in India

January 12, 2019 in Asia, Audio, Best Ideas 2019, Equities, Ideas, Micro Cap

Thomas Bushey of Sunderland Capital Partners presented his in-depth investment thesis on Yatra (US: YTRA) at Best Ideas 2019.

Thesis summary:

Yatra, headquartered in India, is an online travel agency catering to the evolving travel industry in India. Yatra is the largest corporate online travel agency and the second-largest consumer online travel agency in its market. It is well-positioned for the coming growth in travel in India. The company is well-run, as evidenced by revenue growth of 30+% and the acquisition of leading corporate travel agency Air Travel Bureau.

The vehicle through which YTRA went public has not been conducive to garnering a long-term shareholder base. Since the founding in 2006, $200+ million has been invested in the company, exceeding recent enterprise value.

In essence, we are buying the business for about half the investment it took to build it over the last twelve years. Yatra trades at a major discount to peers on the basis of sales (and a reasonable multiple of the profitable corporate travel earning stream). The attractive corporate business has strong growth, 15-25% margins, and has been subsidizing the leisure business.

The company has sufficient cash to operate until it reaches cash flow breakeven on a combined basis. Yatra’s future profile of 20-30% top-line growth justifies a higher multiple, as suggested by the discount to peers.

Idiosyncratic trading events and turnover in the shareholder base notwithstanding, the quality of the business is underappreciated as the online travel market in India has a long runway of growth ahead.

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About the instructor:

Thomas Bushey has over fifteen years of experience managing and investing capital. Prior to founding Sunderland, he was a portfolio manager at Blackrock. Prior to Blackrock, Mr. Bushey was a Senior Analyst for Mayo Capital Partners from 2010 to 2012. Before that, he served a Senior Analyst at Millennium Partners from 2008 to 2009, where he was part of a global industrial investment team. Mr. Bushey began his career as an analyst for Credit Suisse First Boston (“CSFB”) and later moved to HCI Equity Partners (Thayer Capital). At CSFB, he executed and analyzed mergers, acquisitions, leveraged buyouts, divestitures, takeover defenses, restructurings and debt and equity financing for corporate clients and financial sponsors. At HCI, he was a member of the investment team responsible for private equity funds focused on industrial products and services. Mr. Bushey has a BS in Economics from the Wharton School of the University of Pennsylvania.

Tidewater Midstream: Opportunistic Company Run by Incentivized CEO

January 12, 2019 in Audio, Best Ideas 2019, Best Ideas 2019 Featured, Energy, Equities, Ideas, North America, Small Cap

Curtis Jensen of Robotti & Company Advisors presented his in-depth investment thesis on Tidewater Midstream & Infrastructure (Canada: TWM) at Best Ideas 2019.

Thesis summary:

Tidewater Midstream & Infrastructure, headquartered in Calgary, Alberta, provides oil and gas midstream services, including gathering, processing, and transportation and NGL marketing and extraction as well as storage services. The company receives fees under long-term contracts for its services.

Management started the company by opportunistically buying up distressed assets during the energy downturn of 2015-16.

Commodity prices in Canada remain depressed, owing to a lack of takeaway and egress options such as those provided by the company. The shares trade at a meaningful discount to any reasonable assessment of economic value, likely owing to poor sector sentiment and the company’s small size and perceived quality. Two large projects slated for completion in 2019 should improve the company’s scale, cash flows, counterparty risk, and asset quality.

Birch Hill Equity, a Toronto-based private equity firm, recently acquired 22% of the shares. Tidewater’s CEO is paid C$1 per year and has committed to purchasing stock in the open market every year (he owns more than five million shares).

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About the instructor:

Curtis Jensen is the portfolio manager of the Ossia Partners Fund. Ossia Partners employs a fundamentals-based strategy, grounded in primary research, to identify securities whose public market prices diverge significantly from a conservative estimate of intrinsic or economic value. Prior to joining Robotti & Company Advisors in 2016, Curtis was employed by Third Avenue Management in various roles from 1995 to 2014. Curtis oversaw that firm’s Small-Cap strategy and, from 2003 until 2009, he also served as Co-Chief Investment Officer, along with the firm’s founder, Martin Whitman, until being named sole CIO in January of 2010. Curtis was a member of the firm’s management and risk committees and oversaw the recruiting and mentoring of the firm’s research team. During his tenure at Third Avenue Curtis was a member of the nominating committee of the Board of Directors at Investor AB, Sweden’s leading industrial holding company. Curtis holds a BA in Economics from Williams College and an MBA from Yale University School of Management.

BlueLinx: Building Products Distributor with Strong FCF

January 12, 2019 in Audio, Best Ideas 2019, Consumer Discretionary, Equities, Ideas, Micro Cap, North America

Kyle Mowery of GrizzlyRock Capital presented his in-depth investment thesis on BlueLinx Holdings (US: BXC) at Best Ideas 2019.

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About the instructor:

Kyle Mowery is the founder and managing partner of GrizzlyRock Capital. Kyle holds an MBA from the University of Chicago Booth School of Business and a BA in Economics from UCLA. GrizzlyRock Capital is an alternative asset management firm seeking to deliver risk-managed returns to investors via opportunities across equity markets. The firm takes a value-investing approach to security selection, relying on rigorous fundamental analysis to identify dramatically mispriced corporate securities from the entire capital spectrum. GrizzlyRock Capital is headquartered in Chicago, Illinois.

Star Bulk Carriers: Well-Run, Well-Capitalized Dry Bulk Shipper

January 12, 2019 in Audio, Best Ideas 2019, Equities, Europe, Ideas, Small Cap, Transportation

Harsha Gowda of BlueShore Capital Management presented his in-depth investment thesis on Star Bulk Carriers (US: SBLK) at Best Ideas 2019.

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About the instructor:

After working for several years in both the investment banking and the hedge fund industries in New York City, Harsha Gowda saw the need for a different type of investment company that focused on generating long-term returns for investors. Indeed, Harsha’s friends and family members continually sought his investment advice and expertise for their own savings. And therefore, Harsha founded BlueShore Capital Management in late-2006. Harsha has continued to grow BlueShore both organically as well as through referrals from his current investors.

AB InBev: Headwinds Offset by Structural Advantages

January 12, 2019 in Audio, Best Ideas 2019, Best Ideas 2019 Featured, Consumer Staples, Equities, Europe, Ideas, Large Cap

William Brewster of Sullimar Capital Group presented his in-depth investment thesis on Anheuser-Busch InBev (US: BUD) at Best Ideas 2019.

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About the instructor:

William Brewster graduated with a double major in accounting and finance from Auburn University. He attended law school at Loyola University in Chicago. He then worked as a credit analyst at BMO Harris Bank for five years. For the first four years, Bill focused on food and agricultural production companies. Then he worked on middle-market leveraged loans. Two years ago he left to become an analyst at Sullimar Capital Group, a small family office.

Short Credit ETFs: Expectations Unrealistic, Asset-Liability Mismatch

January 12, 2019 in Audio, Best Ideas 2019, Best Ideas 2019 Featured, Equities, Ideas

Adam J. Schwartz of Black Bear Value Partners presented his short investment thesis on credit ETFs at Best Ideas 2019.

Thesis summary:

Investors have unrealistic expectations of their credit ETF holdings. Bond illiquidity underlies an assumption of daily ETF liquidity.

Asset-liability mismatches can lead to painful endings. These structures were not created for illiquid bonds in the event of a large selloff. It is hard to predict how things play out if the market makers lose confidence in the liquidity of the underlying bonds. Indexing illiquid junk bonds or near-junk investment grade bonds with limited legal protections is asking for trouble if the waters start to get rocky.

The “high yield” bonds have a current ~6% annual yield with a loss-adjusted yield closer to ~3-4% and possibly 0-2%. When high-yield prices inevitably decline and there is a need for liquidity, those structures may fall apart.

The same argument largely holds true with investment-grade ETFs. One-half of the holdings are BBB, barely above junk status.

The payoff could be asymmetric and provides a unique way to profit outside the norms of typical long investing.

Listen to this session:

slide presentation audio recording

About the instructor:

Black Bear Value Partners is managed by Adam J. Schwartz who has 16 years of buy-side investment experience in a variety of themes including equities, structured products, corporate credit and capital structure arbitrage. Prior to founding the Investment Manager, Adam served as a Director and senior member of the investment team at Fir Tree Partners, a $13BB peak-AUM multi-strategy investment manager (2007-2015). Prior to joining Fir Tree, Adam was an Investment Analyst at LibertyView Capital Management, a multi-strategy investment fund within Lehman Brothers, as well as at Kore Advisors, an investment fund seeded by Paloma Partners. Adam received his BS and MS with a concentration in Accounting from Washington University in St. Louis.

Crossroads: Post-Bankruptcy NOL Shell Merged with Specialty Finance Firm

January 12, 2019 in Audio, Best Ideas 2019, Equities, Ideas, Information Technology, Micro Cap, North America

Rimmy Malhotra of Nicoya Capital presented his in-depth investment thesis on Crossroads Systems (US: CRSS) at Best Ideas 2019.

Thesis summary:

Crossroads is a post-bankruptcy NOL shell merged with a profitable specialty finance company traded on the Pink Sheets. Information disclosure and liquidity is limited, but Rimmy believes the shares could be worth materially more than the recent $7 share price, with downside protection.

Insiders own 77% of the shares and are astute long-term business builders.

Crossroads builds and finances affordable housing focused on the Hispanic market. The homes, sales and financing processes are tailored to this demographic. Crossroads refurbishes blighted homes it sells and finances with a traditional 30-year qualifying mortgage.

The company finances the homes using funds obtained through U.S. government-sponsored programs designed to promote home ownership in low- and moderate-income census tracts. Over the last two decades, Crossroads has originated and profitably held $250 million of mortgages.

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About the instructor:

Rimmy Malhotra is Portfolio Manager at Nicoya Capital. The Nicoya Fund is an investment partnership with limited investing constraints. Coupled with a stable of very long-term oriented partners we invest in a concentrated and deliberate fashion across a wide variety of industries, and company sizes. Currently, Rimmy serves on the board of Command Center International (ticker: CCNI), and previously served on the board of Peerless Systems. Rimmy served for three years as a United States Peace Corps Volunteer in Central America. He earned an MBA in Finance from The Wharton School and a master’s degree in International Affairs from The School of Arts & Sciences at the University of Pennsylvania where he is a Lauder Fellow. Mr. Malhotra holds undergraduate degrees in Computer Science and Economics from Johns Hopkins University.

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