PSG Fund Manager, Justin Floor
We have long argued that certain domestic companies offer exceptional value, with valuations having been decimated by overly negative market sentiment. Imperial Logistics is one such company trading far below its intrinsic worth. We, therefore, see the offer by DP World to buy a 100% stake in Imperial as one early sign that foreign buyers are being attracted to the South African market, drawn by the prospects of investing in good quality companies trading at depressed prices. South Africa is in dire need of more foreign direct investment, and the move by DP World is, therefore, a positive one. In our view, the offer in its current form is too low and does not reflect the fair value or recovery potential we believe the company offers.
PSG Asset Management has a significant stake in Imperial
Many of the opportunities we identify in the small and mid-cap space are not easily accessible to large investment managers as their funds are too big to take meaningful positions in these counters. PSG Asset Management has been an exception, due to our differentiated approach and smaller size and we currently own a number of attractive domestic shares on behalf of our clients. Imperial is an important holding for us and our clients currently own 7.5% of the shares outstanding.
Why we believe current valuations understate the value on offer
The current offer doesn’t adequately reflect the scarce nature of Imperial’s assets, in particular those in the rest of Africa. Notably, comparable global assets are valued by public and private markets at significantly higher valuations, including some of Imperial’s own recent purchases such as Palletways in the UK. Recent asset disposals have also created excess capital, which is only now being deployed into attractive areas, after the offer was made. This means the current offer does not take these developments into account, and that shareholders won’t be adequately compensated for the potential on offer, if the vote carries. Finally, current earnings are below our assessment of normal and we see encouraging signs of normalisation and improvement over coming years.
We believe patient investors can be better rewarded
The past few years have been challenging for investors in smaller domestic companies. Shares that had been cheap to begin with due to a struggling local economy and tremendously negative sentiment, proceeded to get even cheaper during the Covid-19 induced market collapse. Despite the rally in domestic shares over the past year and a half, many still trade below all-time highs. Imperial is no exception, and – at R63 (close on 8 September) is still trading materially below levels a few years ago (adjusted for the Motus unbundling). While it is true that South African companies continue to face significant challenges and uncertainties, we should also not lose sight of the fact that DP Logistics is a global company operating in 61 countries. Despite the uncertainty, they have seen enough potential in South Africa to take the leap and invest. We think the transaction will be a positive one and a welcome validation of our country and private sector.
Imperial is a good business with an improved composition of businesses and a right-sized cost base, offering significant potential to patient investors. Unfortunately, the current offer is not a fair representation of the company’s true worth. Our responsibility as responsible and patient custodians of our client’s investments require us to exercise our duty in the upcoming vote with the above considerations in mind.