Net-Net Stocks on the JSE: Kicking Off with Merafe Resources
A Deep Dive into JSE’s Net-Net Bargains
Môre, Goeie Suid-Afrika(anse belggers),
Today, I want to share the start of an exciting deep dive into “Net-Net” stocks on the JSE—those elusive bargains trading below their Net Current Asset Value. If you’re into undervalued opportunities, this series will be right up your alley.
How This All Started
I recently stumbled upon an insightful piece called “My Net-Net Strategy” on Dirtcheapstocks’ Substack. It was a fascinating read, so I ran a screener for Net-Net opportunities on the JSE. Here’s the kicker: Nine stocks made the list!
Here they are:
Merafe Resources
Hulamin
Trencor
Mustek
Calgro M3
Nu-World
South Ocean
Ayo
Sebata Holdings
Not exactly the JSE’s household names—and let’s be honest, a some of these are better known for the wrong reasons. Still, that’s where Net-Net opportunities thrive. But not every cheap stock is a winner, so I used my AI-powered workflow to comb through their annual reports, interim results, and SENS announcements.
First on the List: Merafe Resources
Download the report generated by my AI Workflow on Moats, Business Quality and Capital Allocation here.
Download the report generated by my AI Workflow on the Warren Buffett Tenets here.
I’ve held Merafe in my portfolio for about a year now, so I decided to start the journey there. Here’s a quick recap of Merafe and what I found through my latest deep dive:
Why Merafe Deserves a Spot on Your Watchlist
1. Strong Fundamentals with Undervalued Metrics:
Market Cap: ZAR 3.67 billion (as of Fri 11 Oct 2024)
P/E Ratio: 3.17 – much lower than peers, pointing to undervaluation
Net Current Asset Value (NCAV) > Market Cap
2. Cash-Generating Machine with Robust Returns:
ROIC: 23.78% vs. WACC of 13.05% – clear sign of value creation
Net Cash Flow: Grew from R111 million to R1.2 billion over the past four years
Dividend Yield: Growing dividends
3. Operational Advantage in the Ferrochrome Space:
Lowest-cost ferrochrome producer in South Africa, with energy-efficient technology
20.5% stake in the Glencore-Merafe Chrome Venture, offering economies of scale
Challenges on the Horizon
Merafe’s strengths are clear, but it’s not without its risks.
Commodity Price Risk: Ferrochrome prices remain volatile, and margins are sensitive to fluctuations.
Rising Costs: Higher production and energy costs are squeezing profitability.
Dividend Sustainability: Generous payouts are great for now but could limit reinvestment potential if margins shrink.
Why I Like Merafe as a Buy
Even with some challenges, Merafe is trading at a significant discount to intrinsic value. My (very very very simple) valuation models suggest a fair value of around R6.6 Billion —almost double its current market cap. The company also aligns with several Warren Buffett-style principles, such as a focus on high ROIC, shareholder returns, and manageable debt.
With a 44% margin of safety and strong cash flow, Merafe offers both upside potential and income through dividends.
Next Steps in This Series
This was just the first of the nine Net-Net stocks I’ll be exploring. Over the next week(s), I’ll dive into the rest of the list. Expect the next report soon—it could feature another hidden gem.
If you want to follow along or ask questions about any of the companies I cover, hit reply! I’d love to hear your thoughts or discuss ideas further.
Disclaimer: This newsletter is for informational purposes only and does not constitute financial advice. Do your own research or consult with a financial advisor before making any investment decisions.
Until next time,
James