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JSE’s small caps are little acorns that can grow into mighty oaks

07 October 2021 - 12:33 By Samuel Mokorosi
"The JSE has spearheaded an initiative to cast the spotlight on the small-cap sector," says the writer.
"The JSE has spearheaded an initiative to cast the spotlight on the small-cap sector," says the writer.

There are precious gems hidden in the JSE’s small-cap sector waiting to be discovered by investors.

The Small Cap Index has rallied nearly 30% this year after ending last year in the red due to the Covid-19 pandemic, which led to massive job losses and business closures, dragging down global markets in tandem with the SA economy. Throughout the pandemic, our institutions and companies have shown incredible resilience and have held their own in the midst of the worst health crisis in living memory.

Despite the strong performance recorded by the Small Cap Index this year, small caps remain under the radar of many investors and research analysts, who prefer to deploy cash in large caps, particularly the Top 40 shares. Investors should also explore relatively unknown stocks, some of which are undervalued and trade at lower price-to-earnings multiples.

Small caps are overlooked notwithstanding the fact that they often outperform their larger counterparts. In some instances, the lack of interest in small caps results in lower market valuations and potential delistings from equity markets as these companies are driven to the arms of private equity investors, who see small caps as viable investment vehicles for long-term capital growth and wealth creation.

The JSE has spearheaded an initiative to cast the spotlight on the small-cap sector. We recently hosted a Small Caps Investment Forum webinar, where six of the stock exchange’s bright sparks were showcased to investors and analysts. For those who missed this eye-opening webcast, the recording of the event is available on YouTube:

Small Cap Webinar

The event featured insightful presentations by top executives from Trematon Capital Investments, Afrimat, Stadio Holdings, Balwin Properties, Master Drilling, and Trellidor. These companies are making an impact in a wide range of sectors spanning mining, property, education, and manufacturing. It is also inspiring to hear how they have grown their businesses organically and through acquisitions, diversifying their footprints to participate in both First World markets (Europe, North America, Australia) and emerging markets (Rest of Africa, South America, Middle East and Asia).

The forum provides insights for retail investors and analysts interested in local gems. I have no doubt that this forum will go a long way towards increasing the visibility for small cap issuers. The forum provides them the opportunity to share their business story with market participants and potentially improve their tradability.

The forum could act as a catalyst that addresses two persistent challenges faced by small caps — lack of research and conservative risk appetite among investors.

It is encouraging that there are local fund managers that are taking an interest in the small caps sector and have recorded stellar gains in their investment portfolios.

It is encouraging that there are local fund managers that are taking an interest in the small-caps sector and have recorded stellar gains in their investment portfolios. The ones that come to mind are Coronation’s Smaller Companies Fund and Momentum’s Small Cap Fund, which have recorded more than 20% growth in their funds in the 12 months to February 2021.

Small caps deserve to get attention as they are creating value for their shareholders on the back of good old-fashioned hard work, entrepreneurial guile, financial and operational discipline, well-thought-through expansion strategies. And to top it all, some of these companies are growing their global footprints, a trend that bodes for future capital growth.

These companies are also making valuable contributions in an important area of capital markets — ESG investing. This shows that they are not only immersed with generating dividends for their shareholders, they are also taking into consideration environment, social, and governance (ESG) imperatives in their investment decision-making.

They are spending money to train their employees and investing in developing communities in which they do business, and some have gone as far as installing solar energy in their operations to support the global effort to reverse climate change.

When our CEO, Leila Fourie, made introductory remarks at the Small Caps Investment Forum, she shared a historical reminder that some of today’s largest multinationals were once small companies. Once upon a time, Amazon, Facebook, and Google were minnows in a sea of legacy companies. Today, they are behemoths.

Closer to home, we also have examples of SA companies that started from humble beginnings and today are large corporates, employing thousands of people. Raymond Ackerman started Pick n Pay in 1966 with only four supermarkets and by 1999 he had built a retail business with 216 stores, 166 franchise outlets, employing 30,000 staff and turning over R1bn annually.

Dis-Chem founders Ivan and Lynette Saltzman started the retail pharmacy business in 1978 in Johannesburg with only one store and today the company is a household name listed on the JSE.

There is an upside in investing in small caps. This was also collaborated by one of the speakers at the forum, Anthony Clarke, a top rated analyst, who personally believes that fund managers should invest at least 10% of their portfolios in small caps. He has covered five of the companies that were featured at the forum including Afrimat, the best performing stock on the JSE over the last 10 years.

In his presentation, Anthony reminded us that when Afrimat listed on the JSE in 2006, the mining company had a valuation of a few hundred million rand and was making a R50m profit. Today, the company is worth R9bn and poised to make a R1bn profit this year.

The JSE intends to host the forum regularly to ensure that small-cap gems are discovered by investors and hopefully these little acorns can grow into mighty oaks.

  • Mokorosi is the Head of Deals and Origination at the JSE.