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Poor appetite for new listings:
a contrarian view

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David Lerche

Chief Investment Officer

Four new potential listings have come to the JSE in the last month or so – usually a warning sign that the top of a bull market is close. However, two of these listings were abandoned, one was placed at the bottom of its price range and one was comfortably oversubscribed. What are we to make of this? On the surface, it points to unfavourable conditions in capital markets and may even be interpreted by some as being indicative of an approaching bear market. We believe this is a very one-dimensional view.

Historically, large numbers of new listings taking place at high valuations is an indicator of top-of-the-market activity, with capital easily available. However, the unbridled optimism traditionally associated with bull market peaks has been conspicuous by its absence from these new listings – in fact, the evident sense of caution among South African asset managers suggests they remain quite rational. We find this encouraging as it seems to indicate that the market is not yet topping out.

The overriding theme in global investing right now is ‘dancing near the door’ – asset managers remain invested in equities, but there’s a sense of concern that equity markets could be overvalued. Accordingly, the mood both in South Africa and globally is one of caution. Again, such caution is not typically associated with the top of the market. We’d be far more concerned if there was widespread euphoria and many new listings were being done at high prices.

The failed R50 billion Sagarmatha listing was an attempt to agglomerate a variety of B-grade South African media assets, many in the ‘old media’ space, and sell the concept as a ‘multisided platform’ that was all about technology and e-commerce. The market saw through this and chose not to participate, a clear sign that the South African market remains both rational and sceptical.

Consol Glass was the next to look for capital. This is a quality business with more than 75% of the South African glass bottle manufacturing industry. Despite a history of steady revenue growth and stable margins, the market wasn’t convinced about the timing of the exit of the private equity investors, given substantial capital investment requirements over the next two years. Had this been a euphoric point in the cycle, we suspect the listing would have proceeded at a high valuation.

Libstar is a food manufacturer with many individual businesses. It focuses on private-label ready meals for Woolworths and Checkers, but also has a number of food brands, including Lancewood cheese and Rialto pasta. The group has an enviable growth record from a combination of organic and acquisitive growth. Its relatively small market capitalisation of R7.5 billion kept investors cautious despite private-label food growing well ahead of the branded goods offered by Tiger Brands. The shares were placed at the bottom of the listing price range, a further sign of caution among South African asset managers.

Vivo Energy’s listing was more successful, likely aided by the fact that it will be listed on both the London Stock Exchange and the JSE, as well as its greater size. Vivo owns petrol stations across Africa, but not in South Africa, and is well placed to take advantage of the growth in sub-Saharan African economies.

We’re aware of two more companies that had originally planned to list in the first half of 2018, but which abandoned the idea due to the low appetite for new listings.

Contrarian logic suggests that if the general mood is one of fear, caution and rationality, now may be the time to be a little more optimistic. At Sanlam Private Wealth, we are therefore searching more actively for value among the JSE’s smaller and less-loved businesses. As Warren Buffett famously said, ‘Be fearful when others are greedy, and greedy when others are fearful.’

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