By Chantal Marx, Pritu Makan, Sithembile Bopela, Zimele Mbanjwa, Motheo Tlhagale, Khumbulani Kunene
Capital Appreciation (CTA)
Capital Appreciation is a key player in the South African FinTech sector. The company provides payment infrastructure and solutions
to financial institutions, emerging payment service providers, the hospitality industry, and the retail sector, as well as a transacting
platform and transaction processing services primarily focused on business-to-business (B2B) commercial and payment activity.
The group operates through three main segments, namely Payments and Payment Infrastructure and Services (~55% of group
revenue), Software and Services (~44%) and a newly incorporated International segment (~1% of sales).
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The business has a strong position as a leading FinTech group in South Africa, with solid partnerships with blue-chip clients
across retail, telecoms and financial institutions.
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It operates a diversified business model, reducing reliance on a single product or service. This diversification, along with new
product introductions, services partnerships and expansion into international regions has enhanced the group's resilience.
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Capital Appreciation has recently seen a shift towards annuity-type rental income versus more lumpy sales, particularly in Point
of Sale (POS) devices. This high annuity provides stable and predictable earnings
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Despite being a growth company, the group remains unleveraged; and thanks to the group's strong balance sheet and cash
position, the business has maintained an unbroken streak of y/y growth in dividends for eight consecutive years, demonstrating
a commitment to returning value to shareholders.
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The South African government's plan to decommission 2G and 3G networks by December 2027 will have a significant impact
on the POS ecosystem, necessitating a nationwide upgrade to 4G/5G-compatible terminals - a notable near-term tailwind for
this business.
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The company boasts a well-known and highly regarded leadership team with extensive experience in finance, technology, and
M&A. The team is "hungry to disrupt" with a demonstrated track record of execution. The group's robust financial metrics have
highlighted leaderships ability to grow existing businesses and successfully integrate acquisitions.
Downside risks to our view include the highly competitive environment and exposure to changes in the economic cycle.
Macroeconomic challenges can temporarily impact client capital allocation towards major projects, leading to project delays and
lower-than-expected revenue growth. While beneficial, strong reliance on key partners could pose a risk if those relationships were
to deteriorate or if the partners themselves faced significant challenges. High staff costs in attracting and retaining scarce IT talent
in a competitive market may be an ongoing challenge.
Using multiple valuation models we estimate a target price of R2.23, suggesting ~22% upside from current levels. This puts CTA on
an exit PE multiple of ~10.5 times, which still seems undemanding relative to its long-term average, given robust potential growth
to come. While there is no fixed dividend policy, the group has maintained an average payout ratio of 65% over the past five years.
This puts our expected forward dividend yield at an attractive 7.6%
RFG Holdings (RFG)
RFG Holdings is a food producer and marketer, specialising in convenience meal solutions. The company manufactures and sells
a wide range of products, including fresh and frozen ready meals, canned goods, jams, fruit juices, and various other food items.
Headquartered in Cape Town, RFG has a significant presence in South Africa and sub-Saharan Africa and exports a selection of
products to various global markets.
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RFG Holdings has a well-diversified product portfolio with a solid brand presence. Brands such as Rhodes, Bull Brand Squish and
Hinds have become household names over years.
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The company supplies private label products to retailing giants such as Pick n Pay, Shoprite and Woolworths, reducing
dependency on single brands.
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The business has a robust exposure to international and local markets, which bodes well for growth given its well-located
production facilities.
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Operational efficiency has assisted the company in optimising production to counter rising input costs such as fuel, electricity,
and raw materials, resulting in improved margins.
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RFG Foods delivered a mixed but generally solid performance for 1H25 to the end of March, marked by operational resilience
and strong financial discipline, despite pressure on profitability.
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Group revenue grew steadily, supported by a strong volume recovery in the core regional market, even amid subdued consumer
spending and mild price deflation. HEPS declined by 11.9%, with margin pressure largely stemming from underperformance in
the international segment. Here, several canned deciduous fruit contracts with Far East customers were not honoured, forcing
the group to redirect product to alternative markets at reduced prices.
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On the plus side, RFG significantly improved cash generation and reduced net debt by nearly 30%, underscoring its prudent
capital management approach. We would anticipate lower finance costs to benefit the bottom-line medium term.
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Management's outlook at the time reflected a clear strategic focus on navigating external uncertainties through disciplined
execution and targeted growth initiatives.
Regionally, improving macroeconomic conditions helped by lower interest rates and subdued inflation are expected to assist
in driving increased volumes and ultimately a recovery in revenue. Ongoing product innovation and robust category growth is
expected to help the top-line. Cash flows have been solid, and we expect the company to continue paying dividends in line with
policy. RFG is trading on an attractive forward dividend yield of 6.5%.
The main risk for RFG is the variability of its international business, which induces substantial forecast risk. Additionally, the
company is exposed to macroeconomic conditions and in South Africa that will have an impact should we see a further
deterioration in this regard as well as growing and sustained competition from private label in this jurisdiction.
RFG is trading on a forward PE of 6.5 times, a sizable discount to its peers and undemanding relative to its own average rating
longer term.
Spear REIT (SEA)
Spear is the only regionally-focused real estate investment trust (REIT) listed on the JSE. It predominantly invests in high-quality
income-generating assets across all sectors in the Western Cape, obtaining its diversification through gaining exposure to assets
that generate strong and sustainable cash flows within the industrial, convenience retail, commercial and mixed-use sectors.
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The company provides a unique opportunity for investors looking for pure exposure to high-quality Western Cape assets that
generate strong and sustainable cash flows within the high-quality industrial, convenience retail, commercial and mixed-use
sectors.
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The strong property fundamentals of the Western Cape in conjunction with Spear's high-quality assets in sought-after
locations, strong tenant covenants and active asset management approach have consistently empowered the business to
deliver outcomes of value creation and profitability.
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Management's in-depth knowledge and proximity to its assets provides a more proactive approach, and together with an acute
understanding of the Western Cape real estate environment, makes the company a true regional specialist priding itself on its
hands-on asset management approach.
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In line with the group's mission statement, Spear has maintained its reputation as a consistent dividend-paying income fund,
focused on operating with a strong balance sheet and delivering on its income statement objectives despite tough trading
conditions.
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Generating sustainable cash flows from the group's high-quality real estate assets has always been at the centre of Spear's
strategic objectives, even in tough market conditions.
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When compared to industry peers, the core portfolio demonstrates attractive valuations across various sub-sectors, supported
by robust and defensible metrics.
Based on the recent 1Q26 results, the core portfolio continued to deliver robust operating metrics in line with management's
strategy despite some additional vacancies, with the overall portfolio occupancy for the quarter being 95%. Given the constraint
in supply within the region, emphasis has been placed on securing longer lease terms and higher escalation rates during renewal
negotiations. These efforts are yielding positive outcomes, with consistently improving escalation rates being achieved - reversions
remained positive at 2.68%, with in-force escalations coming in at 7.3%. Overall dividend growth over the quarter came in at 5.8%
y/y, tracking ahead of the midpoint of management's guided range (+4% to +6%) for FY26.
The fund is trading on a forward distribution yield of ~8.5% and a ~18% discount to net asset value (NAV), which appears
attractive. The portfolio remains well placed to deliver on its strategic initiatives with the group continuing to benefit from the
strong return-to-office, which has supported letting momentum, semigration, localisation and the commencement of an interest
rate tapering cycle in South Africa, all of which will have cascading benefits to landlords and tenants alike as overhead cost
pressures start to show signs of relief.
Omnia (OMN)
Omnia is a multi-disciplinary operator offering products and services used in the mining, agriculture, and the chemicals sectors.
The company has a presence in 26 countries, where it manages 62 distribution centres and 46 blending and packaging facilities.
Omnia's wide reach enables it to streamline its supply chain and ensure the efficient delivery of products across key sectors
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The group's Agriculture segment is centred around its Nutriology® model, which integrates soil health and crop performance
with sustainable practices. The company is leveraging agtech innovations like AI and precision farming, alongside its expanding
biostimulant offerings. Geographic diversification into high-growth regions such as Africa, Brazil, and China support long-term
potential, especially given the low advanced fertiliser usage in emerging markets
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The high margin Mining segment is underpinned by its advanced digital blasting technologies and sustainable solutions. The
company is capitalising on rising demand for critical minerals like copper and cobalt, essential for the global energy transition.
It's wide geographic presence, coupled with new contracts and operational scale, enhances its market presence. Omnia's
integrated supply chain and focus on surface mining position it well for continued success.
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Omnia is doing away with its loss-making Chemicals business in response to prolonged challenges including weak domestic
demand and global price pressures. As such, non-core assets and underperforming operations are being disposed of, while
product lines and sites are being rationalised to improve efficiency. The restructure is expected to unlock margin expansion,
reduce complexity, and allow management to concentrate on core growth areas, being Agriculture and Mining.
Overall, Omnia's diversified portfolio, disciplined capital management, and innovation-driven approach position it well for longterm growth and value creation.
We value the stock at around R94.40, which is >20% above current levels. Over time, Omnia has shown a trend of increasing
dividends (although there has been some volatility), which have been accompanied by special dividends and more recently
buybacks. The strong cash position and lack of long-term debt support shareholder cash return continuity.
Afrimat (AFT)
Since its inception, Afrimat has applied a diversification strategy that has seen it grow through acquisitions and evolve into a multicommodity, mid-tier mining and materials company.
The group produces and supplies construction materials, iron ore, anthracite
and other minerals. The company's Contract Mining Services also offers full pit-through-port solutions to mining, construction
and quarry industries throughout South Africa. The company is a serial acquirer, with the latest acquisition of building materials
company, Lafarge South Africa, being the largest in the company's history.
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Afrimat boasts an exceptionally experienced executive and operational management team that has a superb track record in
acquiring, assimilating, and then growing businesses.
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The company is exposed to a good blend of locally and internationally priced commodities, along with exposure to different
currencies. Additionally, its operational diversification (construction materials and bulk commodities) makes the company more
defensive.
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In FY25 the company faced several severe headwinds including a slower-than-anticipated integration of Larfarge. The iron
ore segment was also hit by a 13% drop in prices, a 7.5% rise in freight costs, railway disruptions, reduced demand from a key
client, and a major maintenance shutdown. Additionally, the Anthracite (Nkomati) business incurred losses, exacerbated by
Mozambique border closures in the latter half of the year.
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Afrimat has the best asset turnover in the sector despite being the serial acquirer. Asset turnover measures how efficiently
a company uses its assets to generate sales revenue. The improvement of Afrimat's asset turnover in FY25 despite the
acquisition of Lafarge in the financial year is testament of management's capital allocation skill and underlying value in the
acquisition.
We have confidence that the company can stage a solid earnings recovery off a very compromised base. After taking on debt to
purchase Lafarge, we forecast that the company should be in a net cash position in the next three years. Moreover, in the long term,
Afrimat presents a lot of optionality, particularly in its Future Facing metals business, not currently included in our forecasts.
We anticipate strong earnings momentum for the business driven by the Lafarge integration, the non-repeat of issues faced by
the Iron Ore business in the last financial year, and the stabilisation of the Anthracite business. Based on our analysis and using
conservative estimates (see below), we see significant upside in the Afrimat share price over the medium term.
