Should You Be Adding Southern Sun (JSE:SSU) To Your Watchlist Today?
Investors are often guided by the idea of discovering 'the next big thing', even if that means buying 'story stocks' without any revenue, let alone profit. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.' While a well funded company may sustain losses for years, it will need to generate a profit eventually, or else investors will move on and the company will wither away.
Despite being in the age of tech-stock blue-sky investing, many investors still adopt a more traditional strategy; buying shares in profitable companies like Southern Sun (JSE:SSU). Now this is not to say that the company presents the best investment opportunity around, but profitability is a key component to success in business.
Check out our latest analysis for Southern Sun
How Fast Is Southern Sun Growing Its Earnings Per Share?
Over the last three years, Southern Sun has grown earnings per share (EPS) at as impressive rate from a relatively low point, resulting in a three year percentage growth rate that isn't particularly indicative of expected future performance. Thus, it makes sense to focus on more recent growth rates, instead. Southern Sun's EPS skyrocketed from R0.50 to R0.64, in just one year; a result that's bound to bring a smile to shareholders. That's a commendable gain of 28%.
Careful consideration of revenue growth and earnings before interest and taxation (EBIT) margins can help inform a view on the sustainability of the recent profit growth. It's noted that Southern Sun's revenue from operations was lower than its revenue in the last twelve months, so that could distort our analysis of its margins. The music to the ears of Southern Sun shareholders is that EBIT margins have grown from 18% to 22% in the last 12 months and revenues are on an upwards trend as well. That's great to see, on both counts.
In the chart below, you can see how the company has grown earnings and revenue, over time. Click on the chart to see the exact numbers.
While profitability drives the upside, prudent investors always check the balance sheet, too.
Are Southern Sun Insiders Aligned With All Shareholders?
Investors are always searching for a vote of confidence in the companies they hold and insider buying is one of the key indicators for optimism on the market. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. Of course, we can never be sure what insiders are thinking, we can only judge their actions.
It's nice to see that there have been no reports of any insiders selling shares in Southern Sun in the previous 12 months. So it's definitely nice that CEO & Director Marcel von Aulock bought R464k worth of shares at an average price of around R4.17. Decent buying like this could be a sign for shareholders here; management sees the company as undervalued.
It's commendable to see that insiders have been buying shares in Southern Sun, but there is more evidence of shareholder friendly management. Namely, Southern Sun has a very reasonable level of CEO pay. For companies with market capitalisations between R3.6b and R15b, like Southern Sun, the median CEO pay is around R17m.
The Southern Sun CEO received R10.0m in compensation for the year ending March 2023. That seems pretty reasonable, especially given it's below the median for similar sized companies. While the level of CEO compensation shouldn't be the biggest factor in how the company is viewed, modest remuneration is a positive, because it suggests that the board keeps shareholder interests in mind. It can also be a sign of good governance, more generally.
Is Southern Sun Worth Keeping An Eye On?
If you believe that share price follows earnings per share you should definitely be delving further into Southern Sun's strong EPS growth. To add to the positives, Southern Sun has recorded instances of insider buying and a modest executive pay to boot. All in all, this stock is worth the time to delve deeper into the details. Of course, identifying quality businesses is only half the battle; investors need to know whether the stock is undervalued. So you might want to consider this free discounted cashflow valuation of Southern Sun.
The good news is that Southern Sun is not the only stock with insider buying. Here's a list of small cap, undervalued companies in ZA with insider buying in the last three months!
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com