JSE Small-Cap up over 180% trading at a low PE ratio

Financial statement analysis of JSE small-cap stock up over 180% in the last 5 years

Santova recently published their preliminary audited financial results for the year-ended 28 February 2023. In this post I will be analyzing the financial statements of the company, calculating relevant financial ratios and adding my thoughts as I go along.

Before we stuck into just to provide some brief background for readers that are not familiar with the company, Santova is a fourth party logistics company listed on the JSE under the ticker symbol SNV and with a market capitalisation of R1.28 billion. Fourth Party Logistics, known as 4PL in the industry, is a model of logistics where manufacturers outsource all of the organisation and oversight of their supply chain and logistics to one external provider.

This partner will be responsible for all of the supply chain management, for assessing, designing, building, running, and measuring solutions for the client. On behalf of the client, the single partner controls and manages the supply chain by overseeing the combination of warehouses, shipping companies, freight and agents. 

The management of the company have listed some key financial highlights in the results announced which do a good job of highlighting the positive achievements of the company in the most recent financial period:

• Net profit has increased by 23.8% to R210.7 million
• Headline earnings per share has increased by 22.1% to R1.55 per share
• Net asset value per share has increased 34.4% to R7.51 per share
• Net cash generated from operating activities has increased by 140% to R275.1 million
• Capital and reserves have increased by 30.9% to R1 billion
• Operating margin has improved by 6% to 43%

The above provides a good high-level overview of the strong financial performance of the company and their ability to continue to grow earnings per share and net asset value per share. Lets now take a more detailed look into the financial statements of Santova. 

Statement of Financial Position

When looking at the statement of financial position we can see that the total asset of the entity exceeds the total liabilities of the entity by roughly R1 billion and the entity has a strong solvency position. The net asset value of the entity is up from R765.8m in the prior period to R1 billion in the current period resulting in a growth in NAV of a 30.95% over the past period. Over the past year the share price is up 33.70% showing some correlation between the NAV of the company and the share price.

Given that the company currently trades at a market capitalisation of R1.28 billion the stock is trading a premium to its net asset value of 27.74%. The price to book of the stock is currently at 1.277 which is above its 5-year average of 0.90. 

Looking at the liquidity position of the entity we can see that the entity has current assets of R1.36b and current liabilities of R0.75 billion and the current assets thus exceed the current liabilities. The current ratio of the entity is 1.81 (2022: 1.52) and is up from the prior period. 

The company has very little interesting bearing long-term debt on the balance sheet which is very advantageous in times of high-interest rates when debt financing is very expensive and finance costs can erode net profit margins. 

The entity does make use of an overdraft facility to meet working capital requirements. This overdraft facility of R232m is however well covered by cash on the balance sheet R491.97m. The entities cash position is up significantly from the prior period. Cash and cash equivalents on the balance sheet has increased by 81.66%. 

The entity currently has an impressive 38.4% of their market cap in cash alone. However, bear in mind that if you want to assess net debt of the entity then the overdraft and interesting debt should be subtracted from the cash balance. 

Looking at the equity portion of the balance sheet we can note that the foreign currency translation reserve of the entity has increased substantially from R43.8m in the prior period to R112m.48m in the current period. This movement is consistent with our expectation given that Santova earns majority of its revenue outside of South Africa and thus the deterioration of the rand has led to substantially foreign currency gains for the company.

Statement of Profit and Loss

Santova has generated revenue of R654.38m (2022: R611.02) in the current period up 7.09% compared to the prior period. The entity has thus done well to grow revenue in a tough operating environment where shipping and freight rates have seen a substantial drop compared to the highs of 2021.

Operating profits were R287.03m (2022: R229.14m) up 25.26%. The rise in operating profits above revenue (positive JAWS) was due to administrative expenses as a percentage of revenue decreasing and lower, depreciation, amortisation and impairment losses.

Profit after tax for the year was R210.66m while total comprehensive income for the year was R279.37m the difference being attributable to foreign exchange gains. This highlights the importance of holding JSE shares that earn in foreign currency and they are able to capitalize on the weakening rand. We can see overall from the results that while the company has grown headline earnings per share significantly period over period a large portion of this increase is due to foreign currency gains and not operational improvements. Thus, should the rand strengthen in the next period results may not be as favourable.

The effective tax of the entity in the current period was 24.92% (2022: 24.2%) which is below the statutory rate of 27%.

Conclusion

Overall Santova have performed incredibly well in the 2023 financial period. The balance sheet is healthy with a strong cash position. The entity has high profit margins and have been able to capitalize on the weak rand given its global earnings base. Revenue growth of 7.09% is keeping up with inflation and the entitys ability to control costs has allowed them to grow profits far above the revenue growth rate.