Tuesday, April 15, 2014

Why I Bought Putprop

PriceZAR $ 7.00
Market CapZAR $ 201.60 M
($ 19 M USD)
P/E TTM *7.7 x
Div yield5.1 %
ROE7.7 %
While searching the world for cheap stocks, I typically choose a country and then do my research and run a screener looking for anything that strikes my interest. Last week, I decided to look at South Africa, which is a country I have never previously paid attention to.

South Africa a country with 50 million people. Its unemployment rate is high at about 25%. It has a 5.8% inflation rate, and it has about $50 bil USD in gold and foreign exchange reserves. In the last several years the South African Rand (ZAR) has dropped by a third. Today 1 ZAR is worth $0.095 USD. I guess this was in part due to the general decline of emerging markets all over the world. Interestingly, South Africa ranks quite high in corporate governance. Its corporate governance is higher than Singapore, Hong Kong and Germany.

So I looked at South Africa stocks and I was lucky enough to find a cheap smallcap that suits my style. The company is Putprop. Putprop is in the real estate rental business. It is not a REIT as far as I can see. I like the company because it has little debt, is very profitable, and sells for less than book.

So far it is all great news. But as with every great stock story, there usually are some skeletons there also lying in the closet.

Putprop gets 85% of its rental business by renting bus terminals and garages to Putco. Putco is South Africa's largest bus service that serves many disadvantaged areas. I am not an expert on South Africa, but for me cheap buses conjures up images of an integral segregation tool. The poor black population can work in areas where whites run businesses. But after work, they are forced to leave on crowded, rundown and dangerous buses. And Putco has a long history going back to the heyday of Apartheid. At that time it was run by Albino Carleos. At some point Albino Carleo also created Putprop.

Today Putco is still a rundown bus service. But it has less ridership than during the Apartheid days. Taxis and better shuttle services have cut into Putco's business. Putco has also changed ownership. I believe it is now mostly owned by blacks. Albino Carleo is no longer the CEO. And it has delisted eleven years ago. But Putprop still remains in the family. It is run by Bruno Carleo which I presume is related to Albino Carleo's, possibly his son, although I cannot confirm that.

Putco is obviously important to Putprop's well-being. But I think Putco's image also depresses Putprop's stock price. And I think the image portrays a bleaker picture than the reality. Therefore, Putprop is my kind of contrarian stock. The Putprop management says it wants to diversify its customer base. But considering that Putco is 85% of revenue, either management isn't trying very hard or management is very conservative. Still, I would want the company to err on the side of being too conservative rather than rush into reckless expansion. I also think Putco ridership can improve, no matter how bad the buses, South Africans are desperate for jobs, when the jobs come they will put up with the buses.

Putprop is a company with only a $19M USD marketcap. However, the South African Rand is cheap compared to the USD. Therefore, Putprop can be considered a much bigger company than a company with similar marketcap in the US. The company has great earnings power. However, they account for it strangely. The company assesses the value of its properties annually, and counts the unrealized gains or losses in the income statement. I am not used to seeing gains treated this way. I always used to see it as part of comprehensive income, but not regular income. This treatment has greatly exaggerated their reported income. The stock is 4x their 2013 income! For my purposes, I backed out the unrealized gains, and the caption box shows their adjusted earning and numbers.

In addition to the great earnings, the company pays a high dividend. And the company can easily keep this up as it trades at half of book, with no long-term debt.

A final issue to consider is the value of the Rand. South Africa has a slight trade deficit but the country is not desperate for foreign cash. So the currency is not at risk of devaluation. However, the Rand has depreciated by about a third compared to just five years ago. The Rand is at almost the all time lows. Of course, the flip side is that the Rand is low and can only go up.

That is about all I know about this company now, if I find any more info I will update.

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