Three South African growth stories hiding in a low-growth economy

Amid a low growth economy, there are some growth stories that have been building for years and, as far as I can see, can continue growing for many more.

Founded in 1978, Advtech (code: ADH) was once a small private-school operator with an alternative tertiary segment.

Not just has capital been steadily deployed into building out further capacity (through classrooms, schools, campuses, brands and tertiary offerings), but the steady decay of the public education sector has driven more demand towards Advtech than it can handle.

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Advtech’s ‘university’ division leads group’s growth
Higher student numbers see Advtech hit the R2bn profit mark

The South African government’s decision to allow for private universities closes the final differentiator between public and private education at tertiary level.

When the registration process is announced, this will further stimulate demand for the group’s newly-formed Emeris (soon-to-be university) brand and its growing cohort of South African campuses.

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Add to this a small but fast-growing and profitable expansion into Africa, and Advtech’s prospects have never looked brighter.

Similar to Advtech winning market share from a collapsing public-sector incumbent, Grindrod (code: GND) has steadily gained private market share with its Port and Terminals business.

Starting life in 1910 as a small shipping company (which it subsequently exited), Grindrod has evolved into a modern, integrated logistics provider spanning rail, ports, terminals, intermodal services, clearing and forwarding, cross-border logistics and shipping agency services.

All of these have become increasingly entrenched in the SADC economy as Transnet’s reliability and capacity has steadily decayed.

While Transnet is attempting to fix its well-known (but difficult) problems, instead of Grindrod standing to lose from this turnaround, the group is actually part of this solution as Transnet turns to the private sector to fix what the public sector broke.

Read:

Grindrod earnings surge as record port volumes drive growth
Grindrod, Minrail secure access to Transnet’s rail lines

Unbundled from Transaction Capital (now called Nutun), We Buy Cars Holdings (code: WBC) initially caught the market’s attention and rallied from its teens listing price to a high of nearly 6 000 cents per share.

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Fast-forward a year, and the share price has basically halved. At around 3 000 cents per share, WeBuyCars is now a far cry from a market darling.

In the last reported set of its results, the hyper-efficient national used-car sales platform was hurt by the relentless onslaught of cheap Asian vehicles, pushing consumers to buy new cars instead of used (western) brands on its platform.

This forced a necessary inventory reset (the company dropped prices to clear existing stock and then replenished its inventory with cheaper, smaller and different vehicles to suit consumer appetites).

Naturally, this margin pressure hurt its latest (and probably coming) set of results. But is it permanent?

Not helping things (in the short term, at least), WeBuyCars also allocated large capital expenditure to building out more capacity, which also ate into its cash flows and added debt to its balance sheet. This worried the market at a time when its valuation was elevated.

But where are all the competing platforms that were going to challenge WeBuyCars? Where is the public transport that nullifies our need for private vehicles? Nowhere.

Read:

WeBuyCars squeezed by Asian car boom as margins narrow
Vehicle giant resilient despite price adjustments and market compression

Meanwhile, South Africa’s used-car parc is now materially bigger as each new car bought a year or three ago starts to cycle back into the market and, probably, one in four or five will be sold through WeBuyCars, which conveniently now has more capacity …

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All three of these businesses stand to gain from large, multi-year macro trends while each of their management teams have invested capital into both building out their respective capacities for growth and internal efficiencies for scale.

With Advtech trading on a price-earnings multiple of about 19 times – but a lower cash flow multiple – and Grindrod and WeBuyCars on about 13 times earnings, these compounding stories appear to have plenty of space to still run in the market.

* Keith McLachlan is CEO of Element Investment Managers.

* Some portfolios managed by McLachlan may hold shares in Advtech and WeBuyCars.

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