Best of Ghost Mail - warning signs, high yielding value and growth stocks!

In this edition of Best of Ghost Mail, we take a look at

• The warning signs at Murray & Roberts and City Lodge.
• Clientele as an example of a high yielding value stock.
• Bidcorp, a growth stock that has been on a charge.

Murray & Roberts: the warning signs are there

When news of a balance sheet collapse and rights offer hits the market, there’s always great pain for whoever is holding shares at that time. The inevitable shock and anger is met by confusion as to how this could possibly have happened.

In practice, the signs are usually there well in advance. When a company gets itself into serious trouble and needs to fix the balance sheet because of too much debt, the risks are particularly severe during a period of high interest rates (like the one we are in right now).

At time of writing, the market is reacting to very concerning commentary from Murray & Roberts about the state of the balance sheet. It took an entire day for the market to wake up, as the updated trading statement didn’t cause much of a stir on the day it was released.

Murray & Roberts has two problems: the continuing operations (i.e. excluding Australia) are loss-making and the balance sheet is in trouble. When a company talks about needing to achieve a sustainable long-term capital structure, you need to know that the risks of a rights offer are high.

At time of writing, the price was down 14.3% in the aftermath of this news. The market finally digested the warning signs and reacted accordingly.

Murray & Roberts (JSE: MUR)

Can City Lodge get its pricing up?

Murray & Roberts may be heading towards a crisis, but City Lodge is emerging from one. After the pandemic ripped the business model apart, City Lodge managed to survive by implementing a huge rights offer during the depths of COVID. After a lot of pain (including substantial salary sacrifices by staff), the company is profitable again.

Of course, just being profitable doesn’t make something a great investment. Return on capital is the key measure, as investors need to earn an attractive rate of return on the money tied up in the business.

The trouble for City Lodge is that a recovery in occupancies has been achieved through really aggressive pricing. In fact, given the current pressure on electricity costs and municipal expenses, it’s simply not a sustainable approach. Average room rates are only 1% higher than in 2019 and we know what inflation has been doing over this period.

The insured replacement value of the hotel footprint works out to R10.60 per share. The share price is around R4.30 at time of writing. That discount sounds like a bargain, except the interim HEPS number was only 14 cents per share. 

What can we conclude from this confusing set of numbers? Simply, the hotels aren’t generating a remotely attractive return on insured value. You wouldn’t pay to rebuild something unless it can give you a solid return on that capital, so why invest based on that insured value?

The market should be focusing on HEPS in my view, not insured replacement value.

City Lodge Hotels Limited (JSE: CLH)

Clientele is a classic value stock

If you like off-the-rader opportunities, then Clientele just might be worth a look. If you aren’t sure what the company does, you clearly weren’t subjected to much daytime television with Desmond Dube doing his best to sell funeral and other policies.

With a trailing dividend yield of roughly 10.5%, Clientele is already giving a solid return just with the dividend. That still wouldn’t be enough, as you can get a similar return on South African government bonds. Investors need to see growth on top of a yield like that, something that Clientele delivered in its latest numbers.

In the six months ended December, HEPS increased by 14%. This makes the next annual dividend a potentially juicy prospect!

As always, there are risks. The share price has historically been a disappointment, which is why it trades on such a high yield. The company has warned that policyholder withdrawals are an issue as its customers come under pressure.
Still, that’s quite the yield-and-growth combo.

 Clientele (JSE: CLI)

Can Bidcorp keep catching a bid?

If you had Bidcorp in your portfolio on 1 January and you’ve held it until now, you’re smiling with a gain of 20% in the value of your investment. That’s not bad for barely two months!

Jokes aside, this is obviously a mega return that looks even better if you go back to September 2022. As winter was looming in Europe and investors lost sleep over a potential energy crisis, Bidcorp languished at roughly R280 per share. Now trading at over R400 per share, fortune certainly favoured the brave.

There’s no debate that this is a terrific business model, with a huge range of clients who depend on Bidcorp to literally keep their restaurant, hotel and fast-food doors open. Another global food service company that you could look at is Sysco, the North American giant operating in this industry. 

In the six months ended December, revenue jumped by 28.1% and HEPS was 45.5% higher. Cash generated from operations was up 35.6%, so the cash has mostly followed the earnings growth.

Of course, there’s a base effect here as lockdowns were a feature of 2021. Lockdowns in China still hurt the business in 2022, but China is a relatively small contributor to overall group revenue. Speaking of small contributors, South Africa contributes just 5% of group revenue.

If you’re looking to give your money a passport, Bidcorp is one way to do it.

 Bid Corporation Limited (JSE: BID)

New to investing

and want to know more about our other stock picks?

Read: EU and UK Energy Rush: Rolls-Royce and Paladin in the Race

Sources – EasyResearch, Finance Ghost 

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