Two sets of good results you might have missed

Given the number of public holidays over this period, you would be forgiven for not trawling through the JSE’s dwindling news feed and may have missed two sets of rather exceptional results.

Both were published last Wednesday (27 March) and neither seems to have garnered much airtime as yet.

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Read: JSE finally sees its IPO crisis easing

CA Sales Holdings (CAA)

CA Sales’s customers are predominantly the global consumer product companies that want their products to reach into every major retail chain and every corner café.

CA Sales disclosed clients. Source: CA Sales FY 23 results presentation

The group offers warehousing and distribution services, but the real margin lies in its Retail Services segment where it offers a range of immensely valuable services around improving a product’s procurement, positioning, and placement.

For example, Nestlé may be the world’s largest branded foods group and it may sell Kit Kat chocolate all over the world, but Nestlé does not actually distribute it nor place it on every single shelf in every single retailer. Nor does it deal with every single retailer that ends up selling its products.

Rather, the ‘last mile’ of retail – particularly in far-flung third-world economies like southern and eastern Africa – is outsourced to fast-moving consumer goods (FMCG) companies like CA Sales that execute this service for them.

I have previously viewed this as low-margin work with low barriers to entry, but CA Sales is proving me wrong.

A look at its results for the year to 31 December 2023 shows that CA Sales grew revenue by 19.4%, margins expanded, and headline earnings per share (Heps) rose 28%.

While some working capital needed to be invested to fund this growth, about half of its profit converted into cash flow and its balance sheet held net cash.

The group remains dominated by its Botswanan exposure (50% of sales in the period), but its regional mix is growing as it focuses on the southern and East Africa regions. (Probably a good thing as the further flung the place, the less a global consumer goods business is likely to want to deal with it and the more it will pay to an FMCG business to manage the nuance of getting its products onto shelves there.)

Read/listen: FMCG retailer CA Sales lists on the JSE [Jun 2022]

Furthermore, the good results were achieved despite all the challenges in our local and regional economies, supply chain problems around the world, pressure on the average consumer and CA Sales having grown by double-digits in the prior year.

Read: Fears over Pick n Pay ripple through JSE Reits after Hyprop warning

This is a great result by CA Sales and is forcing me to revisit my view of the business model as higher quality than I previously thought. It is fine to be wrong, but it is not fine to remain wrong when you realise it.

How much are shares in CA Sales worth? With a 28% historic growth rate in the bag, is the stock worth a multiple of 28 times? Or 20, or 15, or the current 13 times?

Momentum Metropolitan (MTM)

I have previously written about Momentum Metropolitan (There’s life in the life insurers) and the group’s results for the six months to 31 December 2023 only really had one major blemish.

Value of new business (VNB) dropped 38%, with the VNB margin under pressure at 0.5% (H1:23: 1%).

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Management notes that this is largely due to VNB being calculated on a more prudent basis than previously. Why? Well, assumptions must change with time but Momentum Metropolitan and all other life insurers have just been subjected to an International Financial Reporting Standards (IFRS) change with the implementation of IFRS 17. For now, let’s entirely ignore this fact as it actually has no impact on the economics of the business.

Beyond the VNB blemish, the H1:24 results were really strong.

New business was up 18%, the insurer’s claims experience is moving in its favour, and normalised Heps grew a whopping 48%. Diluted embedded value per share grew 12%.

The best indication that management has grown cash flow at the centre is that it has hiked the group’s dividend 20% to 60 cents per share (cps) and has committed a further R500 million to share buybacks (an equivalent dividend of around 35cps).

Read: More Momentum Metropolitan share buybacks

Why the buybacks and not more dividends?

Well, a life insurer’s ‘Embedded Value’ (EV) measure is kind of like it has fairly valued itself, and Momentum Metropolitan’s EV per share is now R35 versus a share price languishing in the R20 range.

If history is anything to go by (see below), this is outside of a one-standard-deviation opportunity to buy into the group.

Momentum Metropolitan discount to embedded value per share over time

Sources: Momentum Metropolitan (various reports), with Integral Asset Management workings and assumptions

Could Momentum Metropolitan’s EV be overstated?

The fact that it achieved a reasonable 12% return on EV during this period (H1:23: 15%) points to the reasonableness of this measure (much the way a low return on equity for a company may indicate a poor operating performance and/or an inflated balance sheet).

Much like CA Sales, I’ll end by asking what Momentum Metropolitan should be worth – 100% of its embedded value, 90%, 80%, or the current 58%?

Keith McLachlan is chief investment officer at Integral Asset Management.

* Portfolios managed by Keith McLachlan may hold Momentum Metropolitan shares.

William Murphy

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