If there is one company that was at risk of collapse during the post-2008 recession it was Super Group. But a remarkable remake of the company is now showing very solid results.
Thanks to the efforts of key institutional shareholders the company has been through a turnaround including an overhaul of management, disposal of businesses and improving profitability. Super Group is now back on its feet and fighting fit, commanding a near-on R10bn market cap.
The group is now focused on supply chain management, the newfangled term for transport, logistics and storage. It also has significant operations in vehicle dealerships, fleet management and various related services businesses. That makes it geared to general economic activity, so strike action and weak economic growth certainly hurts. But this is a company that has managed to deliver great returns by streamlining and improving its business even as its broader environment remains tough.
An interesting corporate step was taken earlier this year when SG Fleet, its Australian fleet management business, listed on the Australian exchange. It holds a controlling stake in the business, but a private equity firm holding most of the balance of the company exited via the initial public offering. It now trades with a market capitalisation of AU$436m, which implies that Super Group’s 51% interest is worth R2.2bn. SG Fleet last year accounted for 44% of operating profit but just 14% of operating assets. It is interesting that Super Group did not buy out the minorities, preferring presumably to have a listing to get transparent valuations and to incentivise local management.
This is not because of a lack of resources. The company last year launched a domestic medium-term note programme that allows it to raise debt of R2bn, so it could have supplemented that should it have wanted increased Australian exposure. The facility has supported smaller acquisitions of businesses that can be bolted on to its logistics operations. The company has a stated intention of picking up similar acquisitions where synergies can be immediately earnings enhancing.
The business is trading on a trailing 12-month PE of 13. Interim results for the six months to December showed headline earnings per share up 27%. Assuming similar growth in the second half and that PE could fall to about 10. But that rate of growth is challenging considering the platinum strike that blighted the first few months of the year and the subsequent strikes in other sectors. We think, though, that it will be able to deliver close to it.
Strike action will affect its South African-based supply chain activities most, which makes up about 35% of top-line revenue. Its SG Bulk and Safika Oosthuizens businesses are geared to mining-related transport. However, the majority of its 3,750 trucks are moving consumer goods such as fresh produce to more than 18,000 shops and to border clearing posts for export, where its businesses manage clearing. Last year it completed a massive 18,000m² warehousing facility in Johannesburg to help it optimise supply chains for clients. Another recent acquisition, Digistics, distributes food for a variety of major fast-food chain operators.
All that adds significant diversity to its revenue sources, so it should be somewhat resilient as labour unrest continues to reverberate around the economy. Sanral’s eTolls are also a threat as they add a significant layer of costs to the business.
Dealerships account for the next biggest slice of revenue with about 34%, though it makes for just 9% of operating profits. That is a clear indication of the pressure that vehicle sales have been under since 2008 when sales fell off a cliff. Figures from the National Association of Automobile Manufacturers of SA show sales have been recovering steadily, and Super Group looks to be gaining market share and the ability to push up margins. Last year it delivered a margin of 2.6%, up from 2.3% the year before. While Naamsa is forecasting vehicle sales growth of 5%, Super Group is intending to beat that, so the division’s contribution to bottom-line profits could swell positively.
Fleet management outside of Australia has been a challenging area because it depends on large government contracts. With the fiscal pressure government is facing, these are not going too easily so we expect little to come from those activities.Overall, though, Super Group is looking very solid. We think a 10 forward PE for this year is attractive in a market that is averaging about 18. The business is continuing to get its act together and there could be many years of strong growth ahead. While it has not been a dividend payer since its disaster years, it is now looking in shape to resume a dividend soon. For all these reasons, we think it’s a strong contender for our pick of the month.