The Money Show | South African small caps show opportunities

Peter Brooke had an insightful conversation on the latest market trends with Bruce Whitfield on The Money Show yesterday. While Standard Bank holds strong, the real excitement lies in small caps. Companies like Oceana, Invicta and Zeda are making waves. Peter highlighted the potential in undervalued South African small caps with offshore assets. Despite economic challenges, these companies are showing resilience and offer exciting opportunities. 

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Transcript

Bruce: Peter Brooke, Portfolio Manager at the Old Mutual Investment Group. A mixed bag of trading updates and results and performances today, Peter Brooke. Standard Bank's trading updates this morning was actually things are slowing down a bit for them, but still very, very positive. 

Peter: That's right, standard bank has been a stunning performer amongst the banks. And you can see the strength of its African operation coming through quite strongly. But in terms of it's not really new news. And you can see that in a way, price action pretty much in line with the other banks, down nearly a percent. So not that exciting. What I did find super interesting was we had all these small caps. I know you're just speaking to Oceana, but we had Invicta, Zeda or Zeder, I don't know how to pronounce it. 

Bruce: There's Zeda and Zeder. Zeda is a car hire company and Zeder is an agricultural firm. Which one we talking about? 

Peter: We're talking about the car hire.

Bruce: Okay, that's either not Zeder, it's very infuriating, but that's branding for you. So the car hire company is doing very well. They've recovered smartly, but these smaller companies are flying. Are they getting recognized by the market, though, for the work that they're doing and the fact that they are performing well in a tough environment? 

Peter: That's exactly the point, Bruce. So, let's take data. Its turnover was up 12%, its operating profit was up 23%, and the share price jumped today. So, a nice gain of 4.3%. But the truth is, it's trading on 4.4 times earnings. And if I go through and we look at Invicta, so it's a classic small cap, it's gone nowhere for three years, but actually it's the same share price it was in 2010. It's trading on a PE of 5.6 times. These are historic PES because obviously nobody's forecasting what's going to happen next year because nobody covers them. The business has got a little bit better. It's taken its debt down, it's buying back some shares. And we see this pattern all over the place. Oceana, it's trading in line with where it was in 2012. And if you think about the fact that it's a lot of dollar base in it, if you look at a dollar price, you're going back to 2010. 

Bruce: We're just having a little bit of a glitch there. Peter Brooke, I'm hoping you're still with us, but, yeah, with that Oceana business, of course, 57% of it is dollar-based earnings at the moment, so it's a considerable rand hedge. 

Peter: Yeah. And I think that's in a way, the interesting thing is South Africans with our higher interest rates aren't keen to buy shares in South Africa and they're diversifying offshore, and particularly with the change in Regulation 28. But actually, a lot of these companies have got material offshore assets, so you're buying them cheap as chips. So, there's a really great opportunity in small cap shares in South Africa that are unloved, ignored and broadly, if they can survive the tough environment which we're in, are starting to offer some opportunities. 

Bruce: It's good to see. And commodity shares, I mean, just the horror show of looming job cuts is suddenly coming to the fore in a way that we've been anticipating for a while. But the reality is that it's here now when it's happening, and we can feel it. 

Peter: Yeah. I don't know if you followed that report from Ricardo Hausman. 

Bruce: Yes, absolutely. Just devastating choices of devastating policy choices. 

Peter: Yeah, exactly. So, you look at mining stopped growing ages ago. Now manufacturing is under pressure. The cost of doing business has a direct impact, and I don't think we can get away with that. Although at least today, both our platinum and our gold shares picked up a little bit. 

Bruce: All due to the currency, I would think, and some commodity price moves as well. Peter Brooke, portfolio manager at the Old Mutual Investment Group