In the past two years I've seen many JSE listed small cap companies become acquisition targets, and eventually get delisted from the JSE…
Think of Rolfes Holdings, Pioneer Foods, DAWN, Torre Industries, Indequity and more…
As we speak Value Group and Adapt IT are in the crosshairs of larger suitors looking to buy out, and delist the companies.
Even Distell is an acquisition target by Heineken.
The common thread - the SA market is undervaluing these businesses. They are priced for bankruptcy, amidst often record profits…
And right now, I predict there's another company that'll become a target you can profit from…
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The next acquisition target on the JSE
On 18 May 2021 Santova Limited announced results for the year ended 28 February 2021.
Now before I go into the specifics – you need to remember one thing… This is the financial year that started 1 March 2020. It includes the ENTIRE hard lockdown, and the past years’ worth of Covid-19 woes…
So here goes.
Santova saw revenue increase 6.9%, with profit up 7.3% to R69.7 million for the year.
Perhaps the most important part – earnings per share is up 14.1% to 46.51cps.
The company’s share price is currently 290c. That means with these earnings it trades at a PE ratio of only 6.23.
Its net asset value per share sits at 439.43cps – meaning a discount of 34%.
The company’s current market cap is R440 million.
But here’s the thing – it sits on a bank balance of R190 million in CASH!
So a foreign suitor could buy it at say R250 million using only debt at say 3.5% interest (which is high compared to what companies are paying in the US and Europe right now).
The interest payments per year would be R8.75 million – compared to the company’s R69.7 million profit.
So they’d be able to repay R60.95 million in capital in year one, PLUS pay the interest of R8.75 million with profits flowing in.
If the company’s profit remained flat – the suitor would be able to pay off the loan in less than five years!
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With companies this cheap – there are profits to be made
Simply put, if a company’s stocks are selling as cheap as those of Santova are selling for – there are profits to be made.
The company is definitely a possible acquisition target for a foreign business looking at establishing a foothold in Africa. And these kinds of acquisitions usually end up by the company offering a premium to the current market price of the share.
There are many other businesses like this one that have little debt, big profits, with highly attractive share prices ready for acquisition.
Think of Afrocentric Health, Bowler Metcalf, DRD Gold, and even Alaris Holdings…
And the best part is – these are quality businesses. Even if a buyout doesn’t materialise – there’s likely great upside in the share prices anyway!
Here’s to unleashing real value
Editor, Red Hot Penny Shares