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WEBCAST | Six small caps to watch

The JSE has shone the spotlight on the small-caps sector with a webcast featuring some of the hot shares in this sector.

CEOs and senior executives from Afrimat, Stadio Holdings, Balwin Properties, Trellidor, Master Drilling and Trematon Capital Investments shed light on their business fundamentals, their plans for expansion, and investment opportunities.

Small caps often outperform large caps as they offer higher growth prospects and, from a valuation perspective, they trade at a lower price-to-earnings multiple.

An added benefit of small caps is easy access to their management, so watch the clips below to hear how these companies see the road ahead.

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Trematon invests in UK real estate market

Investment holding company Trematon Capital has ventured beyond its Western Cape roots and invested in the UK real estate market via ASK Partners, a boutique real estate private equity start up, based in London.

Unlike other SA property firms that have invested directly in UK property, Trematon will enter the market indirectly. ASK operates in the private equity and lending space and specialises in sourcing funding solutions for residential and commercial developers in London.

“We think there is a particular window of opportunity in the UK market for disintermediation, in other words for non-bank primary and secondary lending to developers with excellent risk-adjusted returns,” says Trematon CEO Arnold Shapiro.

Trematon has made an initial equity contribution of £4.3 million. This represents a 40% shareholding in the Investment company and an effective 20% shareholding in the management company. Trematon has board and investment committee representation in both companies.

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Source: Moneyweb – Sasha Planting, 21 July 2017

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Small Caps: Little treasures

AFTER a truly horrible 2015 in the equity market, there is some satisfaction that the Financial Mail can report a 40%-plus gain in our “small cap” portfolio.

Our two “dogs” — Cadiz and Digicore — were subject to buyouts before the close of the calendar year.

Perhaps this is fortunate: cashing in a premium price (or Stellar scrip in Cadiz’s case) instead of enduring a prolonged turnaround. Logistics specialist Value Group was the drag on the portfolio gains, though more than offset by the surges in revitalised Conduit Capital and the overlooked technology group, Silverbridge.

Looking ahead to 2016, the Financial Mail offers a new format in that we have picked a dozen shares.

The change stems from sniping criticism (you know who you are!) that a five-share selection is not a portfolio, but also from the fact that the JSE currently offers an abundance of “interestingly” priced small cap opportunities.

The selection criteria are consequently altered to accommodate the larger selection — and this year we will limit the universe of stocks to companies with a market capitalisation of less than R2bn.

The Financial Mail’s small cap picks for 2016 are:

15_01_16 01 01fm1501FinancialMail_AL_19Bowler Metcalf. This plastics packaging specialist initially spooked the market when it walked away from a major client when the pricing levels were no longer viable. It has since found an abundance of new business at acceptable margins, and appears to be making its investment in technology pay off handsomely. The share is fundamentally cheap, and there could be a medium-term bonus when it lists its soft-drink investment, SoftBev.

Sabvest. This small investment company is the JSE’s secret rand hedge with a controlling stake in cash spinning industrial textile maker SA Bias Industries — which has production plants scattered around the world. Sabvest also holds a portfolio of global blue chip stocks as well as strategic positions in various local and offshore enterprises.

Amalgamated Electronics Corp. As a maker and distributor of security technology, Amecor occupies a niche where trade tends to be brisk no matter the economic situation. The company is well managed with strong cash flows and a fairly generous dividend policy.

15_01_16 01 01fm1501FinancialMail_AL_19Huge Group. This is a gut-feel call. Operationally things have started to ring for this small telecoms specialist, but we suspect there might be a good chance of value unlocking via corporate action.

Indequity. This small insurance specialist has delivered profit growth year after year. Management might be a tad too conservative, but then again there’s no reason to take strategic risks if the product pitch is churning reassuring premium growth.

Metrofile. Solid, dependable, cash-flow generative and unlikely to undergo any significant slackening in its document storage niche.

Distribution & Warehousing Network. Management at this building supplies conglomerate are working hard at restoring some respectability to margins. If they keep succeeding — and business levels don’t fall off a cliff — the Dawn share price should finish this year markedly higher.

Sovereign Foods. Ignoring some ill-founded performance bonus payments, this Uitenhage poultry group is a superb operation. But Sovereign persists in trading at a discount to tangible net asset value — which might well lead to a raid on the henhouse. This, we reckon, will mean management will have to be on their toes and work hard to extract efficiencies to boost investor sentiment. Not much downside.

Trematon Capital Partners. The investment in Club Mykonos Langebaan is starting to pay off and the company has an ace up its sleeve with an influential stake in the Mykonos casino (especially if the cards fall into place for a second casino licence in Cape Town). But investor focus this year will be on a new private school venture — which could be a game changer.

African Media Entertainment. There is still a clear profit signal from this largely overlooked niche broadcasting group.

15_01_16 01 01fm1501FinancialMail_AL_19Prescient. This asset manager has not caught the market’s fancy in spite of the rush to back newer listings in the sector. But Prescient’s low equity model might be an advantage in jittery market conditions in the year ahead. Did we mention that CEO Herman Steyn does not draw a salary, but opted for remuneration in the form of a scrip holding?

Cullinan Holdings. Activity for this tourism and travel conglomerate was hindered in the past financial year by visa regulations, xenophobia and Ebola. The year ahead, especially with the weaker rand, should bring brisker levels. Cullinan’s fledgling financial services division shows promise too.


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Trematon: Earning from learning

Cape Town based Investment Company; Trematon Capital Investments appears to be gaining traction with its unexpected venture into the burgeoning private school market.

The company, which is best known as a property investment company with a key asset in Club Mykonos Langebaan, holds a 75% stake in Generation Education, a Montessori-based private education venture.

Trematon has already overseen the construction of Generation Education’s first school in Sunningdale on the West Coast for R18m. Trematon describes the school as a state-of-the-art school offering a high standard of education to children aged six months to 12 years.

Trematon CEO Arnold Shapiro reported that initial demand had exceeded expectations and that plans were under way to increase the capacity of the school. He added that initial indications were that the model employed by Generation Education is viable and Trematon was currently focusing on expanding its private school offering.

Trematon, which is fortunate to be able to call on significant real estate expertise, is in the process of looking at various school sites and projects to expand the Generation business. On paper, it seems possible to set-up generation schools on housing estates or in partnership with real estate developers which offers a great degree of developmental flexibility.

Durbanville-based private education specialist Curro Holdings has already confirmed the appetite for an affordable private school offering. Curro has eight schools in operation in the Western Cape – mostly away from traditional school belts in areas like Brackenfell, Century City, Durbanville, Hermanus, Langebaan, Mossel Bay, Sitari and Pinehurst.

It’s early days for Trematon’s Generation, but there appears to be scope for the school offering to find enough under-serviced nodes to build a private school offering with sufficient scale to generate sustainable profits.

In Trematon’s financial results to end February, Generation had only been in operation for two months. But it had already chipped in R2, 3m in revenue – which, based on a back of cigarette box calculation, makes for a single school that is capable of generating more than R30m in annual revenues without incurring the costs associated of running a large school.

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Trematon tests water in private school sector

LOW-KEY investment company Trematon has made a promising first pitch into the vibrant private school market.

Year to end-August results released at the weekend confirmed Trematon’s new private education subsidiary, Generation, would next year open its first school in Sunningdale, a fast-growing residential area in Cape Town.

The private school market has become a favourite niche for investors on the JSE, with large listings such as Curro Holdings and Advtech generating strong returns. Trematon is not widely followed by institutional investors, but market watchers canvassed about the school venture were mostly intrigued, as Trematon has considerable property development and management expertise.

Vunani Securities small-to mid-cap analyst Anthony Clark, who specialises in private education investments, said the sector was in vogue at the moment, with offshore players also looking to enter the local market. “You do need a significant amount of capital to drive new school developments. Maybe Trematon will be able to leverage off their property assets.”

Trematon owns 75% of Generation, with the balance held by education organisation The Children’s Campaign.

Trematon CEO Arnie Shapiro said demand had easily outstripped initial expectations. “We were only budgeting for half the number of applications we got … we had to eventually stop taking more applications.”

The Sunningdale school, which caters for school children up to the age of 12, has capacity for 280 pupils and already has 240 enrolment applications. School fees average R3,000 per month, with the teaching premised on the Montessori philosophy.

Mr Shapiro said Generation was a small initiative for Trematon, whose biggest investments are leisure property Club Mykonos Langebaan and a 30% stake in the Mykonos casino. But he confirmed further school developments were planned.

Trematon’s results showed intrinsic net asset value — the best measure of value for investors — up 15% at 362c per share.

Total profit attributable to shareholders was R95m, more than double last year’s R43m, and a record level of profit since the current management took control of what was a bombed-out technology business 10 years ago.

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