The sheer scale and long reputation of companies like Super Group and Unitrans/KAP would justify investors placing a "default option" on the shares when scanning the JSE's small transport fleet. But there are a couple of transportaligned listings that look capable of keeping a rewarding pace, despite travelling the back roads not usually monitored by mainstream investors.
Value Group and Cargo Carriers don't rank as popular shares, but both companies have attracted astute backers. Last year in March Brian Joffe's industrial conglomerate Bidvest upped its stake in Cargo from 9,29% to 14,4%, while toprated investment house Foord has recently pushed its stake in Value to close to 10% via various funds and related investment entities.
So what are these clever investors seeing in the respective companies?
In Cargo's case there can hardly be an argument that the share is cheap, trading at a p:e of 15 and yielding less than 2% on dividends.
Unfortunately joint CEOs Murray and Garth Bolton declined to comment, despite repeated requests. Fortunately Cargo already has its year to end-February annual report out, and it's clear that the company is building responsibly on profitable niches in its core industrial segment (representing three-quarters of the R594m annual turnover). The annual report notes that directors took a strategic decision to walk away from contracts that did not provide adequate returns, which might explain Cargo managing to hold its industrial margin at 11,5% (last year 12%) in tough trading conditions.
With Cargo's agricultural division (which generates revenue of more than R100m) still spinning losses, it's perhaps encouraging to see that the company is adding to the profitable industrial transport core with the acquisition of 55% of Zambian-based Buks Haulage Buks transports mainly commodities (such as copper concentrates, lime and sulphuric acid) in Zambia, Namibia and the DRC. It should strengthen and add geographic diversity to Cargo's industrial services in sugar, fuel, mining, powders and steel.
The determination to grow the quality and quantum of business in the industrial hub means Cargo will be well geared to improve the bottom line as economic conditions pick up.
On paper, Value - which has more of a specialist logistics bent than Cargo's haulier focus - probably offers more upfront value than Cargo. The share offers a compelling p:e of less than 8 and dividend yield close to 4%.
Like Cargo, Value is also doing its utmost to preserve margins in competitive trading conditions. Value CEO Steven Gottschalk believes the company can push its margins back over the 12% level in the short term.
"We saw unexpected volume decline in September 2011 and more so in January, which contributed to the reduced margin. We have embarked on a more focused sales strategy to materially grow the volumes in this segment. In addition, an upturn in the economy will ignite volume growth within the existing customer base which will contribute to margin growth."
What will be worth watching at Value, which is lightly geared, is whether it has any appetite to snag smaller logistics opportunities.
Naturally the temptation might be to rather completely degear, buy back shares and up distributions. And that may well be the case as Gottschalk notes that over the past five years there has been consolidation, especially among larger and unprofitable break bulk service providers rationalised into existing or similar group divisions. Others terminated services and closed up.
"There are opportunities for Value to acquire smaller operators utilising its strong balance sheet. However, after the recessionary environment and the consolidations cited earlier, the existence of profitable logistics businesses that are for sale has been reduced."
Though Cargo and Value are very different, both are capable of finding growth opportunities and clocking up decent dividends.
Source: Financial Mail
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