The Finance Ghost: The market lowdown on Afrimat, Nu-World and Sanlam

17 Apr 2024

When it comes to a mix of organic and inorganic growth, Afrimat makes no secret of the fact that acquisitions have played a huge role in its successful journey. Its track record for dealmaking is enviable. Of course, a company is only as good as its last deal.

Afrimat knows this, which is why CFO Pieter de Wit has been appointed as full-time integration manager for the acquisition of Lafarge South Africa.

You can’t generate outsized returns by buying successful assets at full price. Sometimes, you have to wade into the swamp and fix things to get a memorable outcome.

With the Competition Tribunal having now approved this deal, all eyes will be on Afrimat’s strategic move to increase its construction materials business significantly.

It would be brave to bet against Afrimat here. It is a serious operator.

Nu-World, same challenges

With a market cap of about R600-million, there’s a lot more liquidity at your local bar than in this stock, often ignored on the JSE, but there are still things to learn from it. Also, as small caps go, it’s not that illiquid.

The company is an importer and distributor of branded consumer goods and has significant exposure to South African consumer spending on durable items, which is an unfortunate place to be right now. With a net asset value per share of over R72 and a share price of about R26, the market already holds that negative view.

Results for the six months to February show a 6.6% decline in sales in South Africa.

The offshore business did far better, with sales up 6.6%. It contributes only 31.5% of revenue, but the kicker is that it contributes over 60% of operating income. It’s little wonder that geographical diversification is a major strategic push for the group.

The biggest problem sits in working capital, where inventory increased by a whopping 16.4% despite the drop in sales. This is because of the supply chain delays caused by inefficiencies in ports and railways.

This is still in the too-hard bucket for me, but the offshore push is interesting. If you’re looking for catalysts for improvement in the SA business that might trigger the share price moving closer to net asset value, an uptick in consumer spending and improvements at Transnet would do the trick.

Thank you, India

Alanis Morissette wrote Thank U after a trip to India that apparently taught her about meditation and self-awareness, among other things. We can’t be sure that Sanlam will learn about any of that stuff, but hopefully it will find growth and higher dividends during its adventures there.

India isn’t new exposure for Sanlam. It has been working with Shriram since 2005, which harks back to an era when South Africa had an exciting economy. Today, it’s a lot harder to find pockets of growth locally, especially at sufficient scale to make a difference to a group the size of Sanlam. India offers familiar emerging market opportunities for Sanlam and I think it is doing the right thing by investing further.

I also like the approach of minimising the capital required to get to the next level in this strategic stake. By selling down the stake in Shriram Finance from 10.19% to 9.54%, it’s unlocked capital to help pay for major moves in Shriram General Insurance, from 40.25% to 50.99%, and in Shriram Life Insurance from 42.38% to 54.40%. Moving above the 50% mark is important.

To give you an idea of how big Sanlam really is, even these deals are expected to be only marginally positive for earnings and marginally negative for dividends in the short term. A long-term lens on this deal is favourable, though, given the sheer size of the opportunity in India. DM

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R29.

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Nu-World, same challenges

Thank you, India