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2 undervalued JSE small-caps we are eyeing right now

Feb. 29, 2024
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FinMeUp
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FinMeUp

One resource company and one holding company that we really like.


What does undervalued mean? It basically means the stock is trading at a lower price than what it is actually worth. Eventually, stock prices tend to converge to their intrinsic (or true) values over time. In this article, we discuss the basics of two undervalued JSE companies, with full stock analysis to be posted on the app next week.

 

Merafe Resources

KEY FINANCIALS:

  • Market cap: R3.50B
  • P/E ratio: 2.10
  • Dividend yield: 20.71%
  • Share price: 140c
  • 1-year return: +45.83%
  • 5-year return: +7.69%

ABOUT:

Merafe and Glencore pooled together their resources in 2004 with the objective of becoming the largest ferrochrome producer in the world. The Merafe-Glencore joint venture generates revenue through mining and the beneficiation of chrome ore into ferrochrome. Beneficiation is a process that removes unwanted minerals from ore to improve the quality and economic value of the product. 

Over 80% of the world's ferrochrome is utilised in the production of stainless steel. Stainless steel depends on chromium for its appearance and resistance to corrosion. The average chrome content in stainless steel is approximately 18%. 

So, 80% of all the ferrochrome is used in stainless steel. We know that stainless steel isnt going anywhere, which means were in the right place. China is currently the biggest producer of stainless steel in the world, accounting for roughly 57% of world production. 

VALUATION OUTLOOK:

Operating expenses remain constant, whilst revenue and EBITDA have shown strong growth. The company operates on low debt levels, which is always pivotal in small-cap businesses. With a P/E ratio of only 2.47, we believe Merafe still has a lot of room to grow. 

 

Sabvest Capital  

KEY FINANCIALS:

  • Market cap: R2.85B
  • P/E ratio: 4.26
  • Dividend yield: 0.1.04%
  • Share price: 7200c
  • 1-year return: +50.02%
  • 5-year return: +105.74%

ABOUT

Sabvest is a small-cap investment holding company. As the name suggests, investment holding companies invest in a portfolio of assets/businesses, both listed and unlisted. Sabvests portfolio consists of 10 unlisted companies (roughly 85% of portfolio) and 3 listed companies (Corero, Metrofile, and Transaction Capital, roughly 15% of portfolio).

VALUATION OUTLOOK:

The challenge in valuing an investment holding company is that theres often not enough public information available on what the underlying unlisted businesses do, and how they are doing. And thus, its difficult to determine the different ways in which they may make or lose money, information which is of crucial investment importance.

When it comes to Sabvest, however, they have proven to be brilliant capital allocators. Much like Warren Buffett, they consistently get it right over a long period of time. 

Thus, Sabvest offers a unique opportunity for investors who want exposure to unlisted companies but does not have the knowledge to invest in the sphere. 

 

Full stock picks are to be posted on the app next week.

This is not financial advice. Always do your own research before taking a position. This is for informational and educational purposes only  

 


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