Sabvest Capital Deep Dive

Should you invest in this JSE small-cap holding company?

I recently recorded an interview for a new FinMeUp podcast series where I did a deep dive Sabvest Capital. I thought I would turn my notes I used to prepared for the interview into a post as a gives a good overview of the business, how they make money, the bull and bear cases and the valuation.

1. What does the company do?

• Sabvest Capital Limited (Sabcap for short) is an investment holding company listed on the JSE
• Essentially what an investment holding company is, is an allocator of capital
• Think of Berkshire Hathaway for example. They are an investment holding company. When you invest in Berkshire Hathaway you are essentially entrusting management (Warren Buffet) to allocate your capital accordingly
• In the case of Sabvest you are making a bet on Chris Seabrooke to allocate your capital accordingly.
• Chris Seabrooke is the CEO Sabvest has an excellent track record
•  He sits on the Board of Directors of various SA entities including Brait, Massmart and Transaction Capital
• Chris Seabrooke is the majority of shareholder of Sabvest and holds a 40.5% stake in the company through the Seabrooke Family Trust
• Essentially when you invest in Sabvest you are investing alongside the family wealth office of Chris Seabrooke
• Sabvest hold investments in both listed and unlisted businesses (portfolio is mostly listed) 
• It trades under the ticker symbol SBP and has a market capitalisation of just under R3 billion
• Sabvest listed on the JSE in May 2020
• Per the investment mandate of the business, growth targets of the company over a three-year rolling period are NAV growth of CPI + 10% per annum 
• The company currently has 10 unlisted investments and 3 listed investments 
• Sabcaps primary focus is on investing in industrial and service businesses, usually unlisted and co-invested with family and key management. They therefore want to invest in business where management have skin in the game.
• Sabvest Portfolio
  • Three largest positions in the portfolio make up 58% of the portfolio
  • Ill touch briefly on these however it is important to note when investing in a HoldCo management may buy or sell and investment at any point in time and thus it more important to focus on how management have allocated capital than to get stuck into the underlying economics of every company within the group especially when it is largely diversified
  • SA Bias Industries 21%
    • HoldCo for two groups
      • Narrowtex Group: A South African-based manufacturer and exporter of a range of narrow fabric products including webbings, strapping, tapes and braids
      • Flowmax Group: A United Kingdom-based industrial holding company
  • DNI 4PL Contracts 21%
    • DNI provides technology, logistics and distribution services to the telecoms and related industries and all network operators in RSA, including sim card starter packs, airtime and handset distribution and technology and value-added platforms and services
  • ITL Holdings 16%
    • ITL Group (Intelligent Labelling Solutions) is a market-leading international designer, manufacturer and distributor of apparel labelling and identification products and supply chain management solutions including RFID

1. How do Sabvest make money?

• An investment holding company makes money in one of three ways
  • The first being dividends received from companies they are invested into
  • The second being interest income on cash they investment in the bank, bonds or other fixed income instruments
  • Lastly and most importantly the business makes money on fair value adjustments on its investments
• An investment holding typically does not have controlling stakes in the companies they are invested and thus the underlying profits and losses of the companies they are invested into are not consolidated in Sabvests results
• Instead, the performance of these companies is tracked through fair value in the investments 
• How this works is that management will perform a valuation over each of the investments in the portfolio and the resulting movement in the value year on year results in profit or loss 
• In the case of the listed investments the value is straight forward as there is a quoted market price for these investments 
• In respect of the unlisted investments these are typically valued using either an EBITDA multiple or the NAV of the underlying business 
• It is important to note when you are investing in a holding company you are trusting management to perform accurate valuations
• If a holding company has mainly unlisted investments and you do not believe managements valuations to be prudent or reasonable then it is best to not invest in that company.

1. Bullish and Bearish Cases

• Bullish
  • Strong alignment between management and shareholders, the CEOs net worth and family trust are on the line
  • Excellent NAV growth on both a 5-year 10 year and 15 years
    • 5 years = 16.7%
    • 10 years = 19.5%
    • 15 years = 17.00%
  • This is well above inflation and would have beaten most indexes and funds
  • Share price of a HoldCo closely tracks NAV
  • There has been a short term sell off and the discount to NAV has widened making it an attractive point to accumulate shares

• Bearish
• Small cap stock that is highly illiquid
• Very small volume of shares is traded each day
• Enhanced by the fact that the Seabrooke family trust owns 40.5% of the shares and thus given the low volume of trades spreads may be high when looking to enter or exit a position

1. Valuation

• When looking at the valuation of Sabvest there are two important things to consider
  • First what NAV growth can we expect going forward 
    • Based on past data this is 17% per annum
    • So, if I buy shares today and management can continue to deliver, I can expect NAV to grow at 17% a year and the share price should follow this
  • Second what is the current discount to NAV and what is an appropriate discount to NAV
    • I wont go into detail about how to determine what an appropriate discount to NAV is, but Keith McLachlan explains this eloquently in his recently webinar with Simon Brown
    • For Sabvest I will assume an appropriate discount to NAV to be in the region of 15% to 20%
    • The discount the share trades to NAV will fluctuate sometimes the gap might shrink below and appropriate range and sometimes it may widen
    • The best time to buy a HoldCo is when you think that gap is too wide
    • For example, if Sabvest trades at a 30% discount to NAV and an appropriate discount is 15% should that gap close you will make a 15% return before considering your return from the growth in NAV
    • From 2022 results Sabvest has a NAV per share of R110.17
    • The share currently trades at a price of R75 and the discount to NAV is thus 32%