Shawn Stockigt: Small Caps Commentator

MONEYWEB, BY BRUCE WHITFIELD, 21 SEPTEMBER 2001

BROADCAST TRANSCRIPT. Probably safer now to try and forecast the weather than predict where small caps are going to from here. But Shawn Stockigt, our regular Friday night small cap specialist. He’s a brave man. You feel a little bruised and battered at the end of this week, Shawn?

SHAWN STOCKIGT: I think it has been a tough week. I think all around … if you look at those small caps on the week, they’re down just over 5%. The larger cap guys have had a tougher time. They’re down almost 9%. So I think the liquidity has probably saved us a little bit there.

MONEYWEB: The fact that there are so few shares, small cap shares, in issue … you’re saying that is why the small caps have actually done a lot better than the large caps?

SHAWN STOCKIGT: I think what’s happened is people have tried to get out the ones that are the most liquid in order to move either into cash or into other shares that have fallen the furthest. And we have seen a lot of small caps knocked. Mainly the liquid ones, but there’s far too many that aren’t liquid. But looking internationally … if you look as the Russell 2000, which is the small cap measure in the US. That’s down almost 15% over the last five trading days, and the FTSE small cap is down almost 15% on the last five trading days as well. So we’ve done relatively well compared to that.

MONEYWEB: Lets look at a couple of good news stories. Just for a change on this programme. The past two weeks have been so full of doom and gloom. Wilson Bayly Homes. Great results earlier this week. You still a fan of the company?

SHAWN STOCKIGT: Oh yes, definitely. I mean that was a strong set of results. The results were better than consensus by almost 8%. So we were quite comfortable with them. And it’s also nice to see that the company’s operating margins are still well above its peers. Cash flow remains strong. But what I like going forward is the strong order book of almost R2bn, and the company will continue to grow in the roads and civils division. So on a historical PE of 6.1 times compared to its peers of 9.2, I think there’s still good investment opportunity here.

MONEYWEB: Piet Viljoen from Investec picked Wilson Bayly Homes as one of his five shares for a bear market earlier this week, saying it could go up another 50% before it levels off. Would you be as bullish as that?

SHAWN STOCKIGT: We’ve got a target price of round about R8.

MONEYWEB: That would put it around another almost 30% up?

SHAWN STOCKIGT: Yes.

MONEYWEB: Wilson Bayly an example of a good one that even in horrendous markets like we’ve got at the moment … good companies can still make investors money?

SHAWN STOCKIGT: Yes, definitely. I think it’s just strong management in that company, and I think also most of its investments are local, so it’s not hit by any offshore exposure. But, yes, strong management and also good cost cutting in the company.

MONEYWEB: Another good news story for the market was the Richway Vestacor deal yesterday .

SHAWN STOCKIGT: Yes, we saw the share price run up on the back of the Vestacor deal. I think Richway is at a new high now, and we saw almost R700 worth of shares trading, considering that only about 1m trades on a month – that’s quite a good bit of trade. But I think that’s really the reason. With Vestacor doing the deal with Primegro, whereby they will acquire Richway for around about R1bn.

MONEYWEB: Netcare a little bit all over the place in the last week or so, but now seems to be holding its value. I think it closed today at R1.92, R1.93?

SHAWN STOCKIGT: A good company. And healthcare stocks are generally defensive by nature and that’s what we’ve said. We’ve said try and move into the defensive stocks. Healthcare is one of those and Netcare is one of those well-run companies. If you look at the stock, it’s lost 6% in a week and, as I said earlier, this is against the small cap index … from last Tuesday it’s lost 8.5%. So the beauty about Netcare as a small cap is there’s good tradeability with around about R56m trading a month. The stock also trades at a discount to the healthcare sector as a whole. So I think this is definitely one to be looking at.

MONEYWEB: We have seen it over R2.20 recently as well. So there must be some upside there too?

SHAWN STOCKIGT: We did switch it earlier on into Sun International. It hasn’t proved a good move for us in that portfolio. We weren’t expecting the last week’s disaster and healthcare, being a defensive counter, would have been the one to be preferred in, and I think there is still quite a bit of upside in this company.

MONEYWEB: Spur Corporation. That’s another one that’s had good results recently. But it’s quite hard to get the shares. That at a new high today?

SHAWN STOCKIGT: Yes, the results were out earlier in the month and were fairly good, with good operating margins … growth and earnings per share up on headline level at 17%, and also positive cash flows as well. Generally defensive in nature and again, as you said, there’s a liquidity issue. I know management did buy back about 1m shares last year, and they do have a share buyback programme at the moment. There is institutional demand for that stock, but I think what could be keeping it up at the moment is also management saying, well, here’s a good opportunity for us to buy back our own stock. It normally pays out a good dividend, and relative to the hotel beverage and leisure sector, historical PE of 10 times compared to Steers’ 7 times, this could be a good defensive counter to hold in these turbulent times as well.

MONEYWEB: Plenty of negative things to talk about, but two that have caught my eye have been Busby and Homechoice. Both of those have been smacked quite a lot?

SHAWN STOCKIGT: The share price has had a torrid time and is off, I think, over 40% since last week.

MONEYWEB: Which one are we talking about?

SHAWN STOCKIGT: This is Busby.

MONEYWEB: Busby?

SHAWN STOCKIGT: Yes, not quite sure what’s going on there. It hasn’t been on big volumes. The market is punishing the stock and it’s currently on a PE of 3 times compared to the sector of 10. So all I can say is either there is something seriously wrong with the company, or there’s a good opportunity here. I think I’m going to wait until I can get some light before I actually look at the stock.

MONEYWEB: And Homechoice? They don’t like to talk to the media, so we haven’t really got their side of the story, but we certainly do believe that Coronation, for example, which owned a whole line of those shares has sold them, and they have had another listed company, CFC, come in and invest, but in the last month that share price has plummeted as well.

SHAWN STOCKIGT: I know. I don’t really follow the company, mainly because of that reason of not being very open. They have had to raise about R157m to keep the company going in the past, so that concerns me. Especially after the shocking results last year which they called consolidation results. I guess the prudent thing would be to see how the relationship with a commercial finance company pans out and get some direction from the next set of results. There’s so much value elsewhere in the market to be looking at this one at the moment. I think I’ll rather wait until the results come.

MONEYWEB: Thought for the week ahead in terms of the small cap investments. Stay out, stay hiding in the cupboard?

SHAWN STOCKIGT: I think there’s going to be opportunities. I think one must wait. If you’re not in there, just wait – there will be opportunities coming through. If you’re wanting to go into those stocks, go in the defensive ones at this time, but don’t be a seller. I think there’s too wide a gap between the buy and the sell side. Just sit back. A lot of these companies will come back again. Just hang in there and go defensive.

MONEYWEB: And basic rules again – just look for good underlying valuations, look for good cash flow. Make sure you’re happy with the integrity of the management and a prayer or two probably won’t hurt either?.

SHAWN STOCKIGT: I think that’s probably the way to go this week, yes.

MONEYWEB: Shaw Stockigt from Gryphon Asset Management, as always on a Friday night. Thank you very much for joining us. Interesting point he made there, Arthur Buchner, from BOE. The small cap sector down 5% on the week compared to the all-share index, down 9%. The fact that derivatives players wouldn’t have been that interested, or interested at all, in the small cap sector, must have helped that one?

ARTHUR BUCHNER: Well, they’re not in the index, so they’re not going to be sold by the derivatives traders. It exactly shows you that the curve traders are dominating this market and pushing them down. Just on a value play, as aside, if you take Implats where they are at the moment, and you take the dividend stream that Implats is paying, it’s almost better to buy Implats and take the dividend – you’ll earn more than putting your money in the bank.

MONEYWEB: But that is happening more and more JSE-listed companies, isn’t it? The dividends are well worth considering.

ARTHUR BUCHNER: Exactly. The dividends are almost paying as much as what you get in the bank.

MONEYWEB: And there’s a chance that you could make a lot of money if you buy at the right time.

ARTHUR BUCHNER: Correct.

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