Santova - A Quick View
The Santova Group is a supply chain solutions specialist that offers customers cloud-based technological trade solutions. The group is represented in 11 countries namely South Africa, Mauritius, Germany, Netherlands, United Kingdom, United States, Australia, Hong Kong, Singapore, Thailand, and Vietnam.
The company is non-asset based and utilises the intellectual capital and technology of the group, together with the resources and capabilities of specialised logistics service providers, to design, develop and execute end-to-end supply chain solutions for clients.
Group strategy
Santova's strategy is to continually develop and invest in key differentiators, predominantly technology and intellectual capital, that sets it apart from its competitors. The company continues to drive expansion in the Asia Pacific region and recently acquired a business in the US, A-Link Freight Inc. The US has been a focus area for Santova for numerous years, with several existing clients importing from and exporting to the region. The acquisition was concluded at a reasonable valuation and was quite small in the context of the broader group (not categorised).
Recent financial results
Annual results are due next week (18 May). For the six months ended 31 August 2022:
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Revenue and net interest income grew 13.5% y/y to R319.6 million as gross billings increased 15.9% to R3.4 billion. The billing margin fell by 20bps to 9.4%.
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Headline earnings grew 58.7% and headline earnings per share increased 62.4% y/y, with the difference due to share repurchases.
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The operating margin expanded from 32.4% in 1H22 and 26.9% in FY22 to 45.7%.
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Cash generated from operations grew 45.5% y/y.
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The cash position improved by 49.1% to R339.5 million and the debt-to-equity ratio increased by 80bps to 5.3%.
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The ROE increased to 28.2% from 21.0% in 1H22 and 24.6% for FY22.
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At the time of the release, management noted that the 2H23 period would remain characterised by market volatility and high-cost inflation.
On 5 May, the company released a trading statement for the year ended 28 February 2023:
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HEPS are expected to increase between 19.1% and 24.1% - indicating a substantial slowdown in 2H23. Our calculations suggest that 2H23 earnings were flat at the mid-point relative to 2H22.
What we like
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The global logistics industry enjoys strong thematic support and is expected to grow at a compounded annual growth rate of 5.7% in the next five years.
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Freight rates have been coming down - this is positive for working capital and the company's ability to acquire new clients.
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Strong management team with a track record of successfully bedding down acquisitions and driving organic growth. Very low gearing and high cash generation provides ample room for the company to make smaller bolt-on acquisitions or invest in organic growth opportunities and new technologies.
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Well-diversified across geographies, industries, and clients. Multiple revenue streams reduce overall business risk.
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Asset-light business model - easy to adjust and react to changing market conditions, technologies, and requirements.
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The company uses excess cash resources to buy back shares. In the first half of the year the company bought back shares totalling 1.1% of shares in issue. Since then, the company has bought back ~2% of shares in issue.
What we don't like
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Skills retention and attracting of new skills is a challenge and employing the right people may come at an additional cost due to competition for talent.
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Working capital is sensitive to global shipping rates. When requirements are high (as in when shipping rates are elevated) it becomes more difficult to take on new clients and further scale its operations.
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The company has benefited from a strong rebound in global trade post Covid-19 - growth rates are expected to slow from here - particularly as global macro-economic conditions remain difficult.
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A broader localisation/deglobalisation theme has emerged post Covid-19. While local logistics requirements will likely increase, there is a risk that cross-border trade falters.
Valuation
Based on its historic PE of 5.4 times, Santova does not look expensive currently, but it is approaching fair value relative to its own history. The company trades at a substantial discount to its global peers although its relative size and liquidity will play a role in this regard.
