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SIMON BROWN: I’m chatting now with Keith McLachlan from Element Investment Managers. Keith, appreciate the early morning time.
Santova is a stock that you and I have been talking about for, I don’t know, probably more than a decade in various forms. Some results out recently – on the surface modest. But if you drill in, they are [showing] client growth. They are also coming off a massive base in the previous year. Your take on the numbers that you saw on Santova because it’s certainly a stock that you hold in portfolios?
KEITH McLACHLAN: Good morning, Simon. Yes, I think we’ve been talking about Santova for about a decade. A quick Google search can probably check that. At face value year on year relatively flat results. But the moment you drill into the detail and you look at H1 versus H2, H2 grew really, really well. H1 was down on H2. Comparing against H2, last year was up really nicely, to recover for a flat year. And that’s very important, because don’t forget in H2 you don’t just switch off a business and switch it on in the next financial year and it’s got a different kind of cadence of trade. But H2 is the exit trade and the growth that’s going into the current financial year.
But all of that aside, the rand was stronger and Santova does earn the majority of its revenue, and the bottom line is in hard currency. The rand was stronger, but Santova reports in rands as a South African company, so there’s that headwind. There’s global trade slowing down and worries about tariffs and all sorts of things, and in fact the argument can be made in the long term that’s good for Santova. But we can circle back around to that.
The important thing and the fundamental part right in the centre of Santova is that they gained 11-12% new clients. Now, although transactions through their system as a logistics provider were only up about 1%, that is clients trading less, that’s a cyclical; you know transactions will be cyclical. But winning new clients and growing at 11%, that’s a significant number and that’s winning market share. And, as clients trade more and things swing up, that has a huge leveraged effect on the bottom line.
So at face value all right on the results. But in fact if you dig into the detail, really, really spectacular results and setting up a really, really strong year because we haven’t even touched on the major acquisition.
SIMON BROWN: Well, let’s go to that major acquisition, because there certainly are the tariffs out there and those tariff wars, and that’s going to create some volatility. That will settle down. I don’t know how it will, but at some point it does.
They did the Seabourne Group acquisition at £17 million. Santova does from time to time do little acquisitions that on the surface you think are small, but which a couple of years later you realise were really clever deals. Is this another one of those?
KEITH McLACHLAN: In my opinion, absolutely. One never knows until a couple of years have passed, and it has bedded down, et cetera. And there are some profit warranties here to earnout. But conceptually what is Seabourne? Seabourne really is a UK and European-based logistics company. They’ve got fulfilment centres, particularly strategically in the Netherlands, and those e-fulfilment centres – the best way to explain it is with the growth of e-commerce two parts of logistics are becoming very important. The first one [is] small, the ability to handle small packages, and the second is last-mile logistics. Those two things go hand-in-hand with e-commerce, and this is very, very strong in terms of that with their fulfilment centres. They really, really handle that.
But all of that aside, that adds to the capability of Santova, it adds to the critical mass in those regions. All of them are great, but if you have a look at the maths of the acquisition, it’s really spectacular.
So Santova, besides a little bit of debt they raised, have been growing their cash pile on their balance sheet for a while now. Their cash pile is earning next to nothing, and they’ve dropped it basically all into this acquisition. And this acquisition, the moment you take low-earning cash and you stick it on a five times multiple – which is roughly what they’re paying for this acquisition – there’s about a 27%, call it 30% uplift to the pro forma profits after tax. So a significantly accretive acquisition from the bottom line. And that’s pro forma, that’s looking backwards, that’s not looking forward. And we do expect with the client growth, transaction growth and with the bedding down of the acquisition – synergies is a dirty word –logically there is some ability to cross-sell trade, integrate tariffs and costs, et cetera. So it’s absolutely hugely accretive looking forward. And we should have a really, really spectacular year for Santova coming up.
SIMON BROWN: A quick last question. A lot of folks will say our trade is also around GDP, and that’s not wrong – except you mentioned this is sort of that last mile. This is the online. It’s more than just GDP, where they’re going to get growth. They’re going to get it from just adding clients, they’re going to get it from picking up more volume going through their books. In a low GDP environment they can still do very well.
KEITH McLACHLAN: One of the biggest markets and sectors in the world is global trade. Even if it’s in contraction, Santova is an absolute rounding error in terms of that. They can double, triple, quadruple their client bases, not move the needle in global trade, and in fact be a trillion-rand company.
So one of the great things to find is a long-tail compounding investment, fast-growing businesses in large addressable markets, and Santova can outgrow cycles just by gaining market share.
SIMON BROWN: Actually, you say their total addressable market, which is not a phrase I’m a big fan of, but in this case their total addressable market is trillions, trillions of dollars because it’s global trade.
We’ll leave it there. Keith McLachlan of Element Investment Managers, I appreciate the early morning.
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