Can CA&S diversify away from Botswana before the market loses patience?

There’s an old joke in investing circles: diversification vs diworsification. You always have to be nervous when companies are focusing on acquisitions and broadening the group. But in the case of CA Sales Holdings (known as CA&S), it’s a strategic necessity.

The group operates across 10 countries, so there are many flags it can plant on a map of Africa. It has nearly 19,000 employees. It services more than 169,000 retail doors with a variety of services aimed at FMCG (fast-moving consumer goods) customers. As vast as this distribution footprint sounds (and is), there’s one source of concentration risk that has spooked the market: Botswana.

This market is under siege from lab-grown diamonds. Botswana has historically been a market of stability in Africa, but that’s largely because De Beers convinced a few generations that they should spend a fortune on saying I love you. Lab-grown diamonds have made that same sentiment a whole lot cheaper, leaving space in the budget for a great honeymoon.

The destruction of the mined diamond industry is filtering through the economy in Botswana, both in terms of consumer spending and the depreciation of the Botswana pula. This has a double-whammy impact on the results that CA&S reports from that market.

CA&S sees decline in Botswana revenue, sagging share price

The 8.7% decline in revenue from Botswana is painful. The 11.9% decrease in Ebitda (earnings before interest, taxes, depreciation and amortisation) is even worse. But the real issue is that Botswana contributed 42% of group revenue in the six months to June, so the group’s largest market is the one posing the most difficult questions.

Despite every other major segment in the group growing strongly, the share price has lost nearly 24% of its value over the past year because of the pain in Botswana. The market doesn’t enjoy seeing management on a treadmill, with the major risk being that CA&S may have to accelerate the diversification journey and potentially execute sub-par deals in the process.

Thankfully, this is one of the most disciplined management teams around, so that creates a strong margin of safety for investors. But the risk is still there.

The good news is that CA&S has a demonstrated track record in broadening its platform, as the group calls it. Its strategic thinking now includes digital commerce as well, which requires completely different supply chains to physical commerce. And while data-driven insights are valuable in brick-and-mortar applications, they are literally the lifeblood of any digital business.

Together with a traditional service offering that ranges from warehousing and distribution through to retail execution and support services, CA&S boasts a wide moat and a client base that includes the biggest names in FMCG. The business isn’t built around helping mom-and-pop-shop brands reach a market. It counts the likes of Coca-Cola among its key clients, a company that is famous for its global distribution prowess. If Coke has gaps that CA&S can address, then you can imagine the value-add to other FMCG names.

This shows you that there is value in the retailer relationships and logistics networks built by CA&S, particularly in complex emerging and frontier markets. And where the group spots a weakness in its offering, it uses bolt-on acquisitions to plug the gap. It’s a bit like building a puzzle and looking for the missing piece, with CA&S quite happy to let those missing pieces continue operating under the original brands.

This is why the group is a smorgasbord of markets and FMCG-focused brands. It sounds like a recipe for trouble, yet it somehow manages to work. Despite Botswana being such a drag on performance in the latest period, group revenue was up by 2.2% and Heps (headline earnings per share) climbed 5.9%.

CA&S must get ahead of Botswana train

This is a decent set of numbers overall, but it’s not the growth that shareholders are used to. For management to get the share price back to double-digit price/earnings multiple territory, they will need to get ahead of the Botswana train. 

Perhaps the best chance is right here in South Africa. Through a combination of organic and acquisitive growth, South African revenue was up 9.9% and ebitda jumped by 18.1%. Although we have a hostile economy for consumer discretionary categories, the staples continue to do well. Our mix of formal and underdeveloped retail channels also creates opportunities for CA&S to add value and find more acquisition targets, just like the recent Sunpac deal. 

East Africa is another clear focus area, with ownership in the Tradco Group increased to 55% with effect from 1 July. The impact of that deal will come through in the second half of the year.

The diversification push isn’t just a nice-to-have. It’s very hard to build a bull case for mined diamonds, so the pressure in Botswana is likely to continue. CA&S simply has to deliver on its stated strategy, which includes a combination of geographical focus areas and product initiatives around omnichannel, private label and digitatisation.

If it can beat the Botswana treadmill without doing lower-quality deals than we’ve seen in the past, then the group should emerge as a far stronger business in years to come. Much of the share price performance along the way will be driven by Botswana sentiment rather than underlying group performance. Therein lies both the risk and the opportunity with share price dislocations. DM