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Small-cap deep value situations …

Value investors will tell you that the secret to superior investing returns is buying stocks for less than they are worth. But how do you know what a stock is worth?

Well, there are fancy models for this – but in at least some cases we do not need these models.

In fact, I would argue that it is preferable when we find simple indications of a stock’s value.

Calgro M3 (CGR)

Take Calgro M3 as an example, the integrated housing developer in the lower-end of the market that has also built up and is growing a funeral business. Despite great recent results that put the stock on a 2.4x price-earnings (PE) ratio, the share price is down 38% over a 12-month period.

More subtly, as a property developer, Calgro M3 either owns outright or owns the rights to large tracts of undeveloped land that could be simply sold off (currently sitting in its ‘Inventory’ balance at the lower of cost or realisable value) and has partially developed units that could also be liquidated (in its ‘Construction Contracts’ balance).

Read: Cagro M3’s KZN exit due to construction mafia and other issues

In the first half of its 2023 financial year, ‘Inventory’ for Calgro M3 was R567 million, ‘Construction Contracts’ was R1.080 million and its cash was R59 million.

On the other hand, Calgro M3’s current debt totalled R812 million. If we assume current working capital unwinds neutrally, Calgro M3 gives up and liquidates all land and current units, and pays off all debt, the company could net nearly R900 million (and this is assuming that land being carried at cost has not appreciated).

This implies a price of over 600 cents per share (cps), backed up by Calgro M3’s stated net asset value (NAV) per share of 853cps.

This is more than double its R497 million market cap and 305cps share price!

Balwin Properties (BWN)

Likewise, higher-end property developer Balwin Properties is on a 3.3x PE and is underpinned by ‘Developments under construction’ on its balance sheet of R5.3 billion.

If we assume construction on these units is frozen and they are sold at cost (balance sheet value R5.3 billion), with net cash (R0.6 billion) off and with debt of around R2.7 billion, the group would realise around R3.2 billion of value or around 600cps (the group reports that NAV is actually 771cps).

Read: Semigration to the coast boosts Balwin Properties

This makes the current 295cps share price look silly.

Hulamin (HLM)

Shifting focus into industrials, Hulamin has been a long-suffering investment for its shareholders. So much so that the market has sunk the share price to a level where its market cap is currently only R976 million.

Based on its H1:22 financials, if Hulamin stopped its operations today and liquidated its inventory (mostly aluminium, and thus could be liquidated in a few minutes on the London Metal Exchange), the group would realise around R3.6 billion in cash.

Read: Hulamin back to profits, but still no dividends

If debtors (R1.5 billion) were collected, and creditors (R 1.8 billion) and loans (R1.3 billion) were fully paid off, the group would be sitting with liquid assets of around R2 billion – that’s around 600cps or just about double its current share price of 301cps!

Renergen (REN)

Finally, as a gas developer that is not yet producing, Renergen is a complex company to value – yet the Central Energy Fund has poured through its internal details and approved a deal to pay R1 billion for a 10% stake in the group’s key project.

This does not just mean that a sophisticated investor is happy to pay that price but that they are happy to pay that price after the due diligence was performed.

Read: CEF completes due diligence on R1bn Renergen Virginia Gas Project investment

If 10% is worth R1 billion, this implies that the remaining 90% of Renergen’s key project is worth around R9 billion or over 6 600 cents per Renergen share.

Renergen shares are only trading at around 2 700cps, with a R3.6 billion market cap.

All of the above companies have risk …

Sure. And this risk may materialise and the above calculated values may never be realised. This is also true.

Yet the evidence is that this value does currently exist.

And, importantly, we do not need fancy models and technical assumptions to calculate it.

Why don’t you comment below about what other deep value situations you are seeing on the JSE? What and why? Keep it simple. Keep it intuitive.

* Keith McLachlan is investment officer at Integral Asset Management.

McLachlan and some of Integral Asset Management’s clients may hold positions in Renergen.


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