WHERE TO INVEST: Can CA&S diversify away from Botswana before the market loses patience?

CA Sales Holdings has a vast distribution footprint, but one source of concentration risk has spooked the market: Botswana. There the destruction of the diamond mining industry has filtered through the economy, both in terms of consumer spending and the depreciation of the Botswana pula. Diversification may be the group’s only option.

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.

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.