1. Introduction to investing in Small Caps Shaun van den Berg PSG Online

2. Definition How do we define small cap shares? –In the US, the generally accepted definition is a share who has a market capitalization between $250-million to $1-billion. –At PSG Online, we consider any share that is NOT in the top 100 as a small cap share.

3. Definition

4. Definition

5. Popularity (or lack of) Unfortunately, those definitions do not explain why small cap shares are so popular. –For the novice trader, or someone with a small portfolio, small cap shares can appear to be the perfect investment. –Small cap or “Penny shares” have a bad name because most people who "play the pennies" are nothing more than speculators & gamblers, hoping to strike it rich with that one share that skyrockets.

6. Sophisticated Investors Sophisticated investors should maintain a majority of their share portfolio in large caps –Looking for companies who are able to continually raise their dividend payouts. A small part, possibly as high as 10%, would be allocated for small cap shares. This gives a balanced approach for your portfolio. –Should you come across a small cap share which returns 100%, it is going to contribute nicely to your all round share portfolio. –On the other hand, if some small cap shares go lower, your whole share portfolio would not experience a significant hit.

7. Capitec R10 000 = 5000 shares @180c = R9 000 5000 shares @13350c = R667 500 7 317% R667 500 capital gain + R33 625 dividends = R701 125 Founded in 1999 Listed on 18/2/2002 Issued 84 122 113 shares Market Capitalisation: R151-million (R11-billion) 18/02/2002 Closing price 180c 03/09/2010 Closing price 13350c

8. Grindrod R10 000 = 31 000 shares @0.315c = R9 765 26/03/1987 Closing price 0.315c 31 000 shares @1569c = R486 390 capital gain Founded in 1966 Listed on 1986 Issued 463 681 980 shares Market Capitalisation: R146-million (R7.1-billion) 4 880% 03/09/2010 Closing price 1569c

9. Cashbuild 2500 shares @ 6925c = R173 125 capital gain 22/05/1987 Closing price 380c Founded in 1978 Listed on 1986 Issued shares Issued 25 805 347 shares Market Capitalisation: R98-million (R1.7-billion) 1 722% R10 000 = 2500 shares @380c = R9 500 03/09/2010 Closing price 6925c

10. Why Small Caps? JSE Small Caps Index Earnings fell on average 77% last yearEarnings fell on average 77% last year Up about 48.49% since its three year lows last MarchUp about 48.49% since its three year lows last March JSE Top 40 Index Stemmed earnings losses to 22% -26% Increased by 55.77% PE ratio of 13.86 timesPE ratio of 13.86 times DY of 3.26%DY of 3.26% PE ratio of 17.12 timesPE ratio of 17.12 times DY of 2.14%DY of 2.14%

11. JSE Top 40 & JSE Small Cap Index

13. JSE Small Cap Index Relative

14. Why Small Caps? Smaller & more nimble to exploit new opportunities/ changes in the market Better position to generate earnings growth Hold relatively more upside potential on a valuation basis Institutional funds are limited from owning them –Few analysts follow them –News flow is poor - information less likely to be reflected in share prices Easier to analyse –Financial statements & business models –Operate in one line of business –Have fewer competitors –Have a few major customers Cash generative Not detracted by Rand Domestic focus Natural diversification

15. Company Analysis Growth & Health & Valuation

16. Performance

17. Fundamental Analysis Checklist Undervalued Risk Management Profitable P/E < 17 PEG < 75% PRICE/NAV < 2 ROE % > 15% Interest Cover > 3 times

18. Value PEG = P/E Ratio / Forecast average growth over next 5 years (Earnings growth rate must be higher than the P/E ratio at time of investing)

19. Quality

20. OneLogix Group

22. AdaptIT

23. AdaptIT

24. ARB Holdings

26. EsorFranki Ltd

28. Protech Khuthele Holdings

30. Summary Small Cap shares (Any share that is NOT in the top 100) –PE ratio of 13.86 times –Dividend Yield of 3.26% Huge potential gains Smaller & more nimble Natural diversification for a portfolio Easier to analyse & understand Better position to generate earnings growth

31. Conclusion Do some homework firstDo some homework first Takes one takeover / one big investmentTakes one takeover / one big investment Remember:Remember: –Capitec –Cashbuild –Grindrod Management Comments …Management Comments …

32. Thank You shaunvdb@psgonline.co.za (011) 996 5200

33. PSG Online Technical Analysis & Research Information Disclaimer This publication has been issued by PSG Online. It is confidential and issued for the information of clients only. It shall not be reproduced in whole or in part without our permission. The information contained herein has been obtained from sources which and persons whom we believe to be reliable but is not guaranteed for accuracy, completeness or otherwise. Opinions and estimates constitute our judgement as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This report is provided for informational purposes only. No information contained herein, no opinion expressed and no recommendation made constitutes a representation by us or a solicitation for the purchase of any of the securities mentioned herein and we have no responsibility whatsoever arising here from or in consequence hereof. Securities, financial instruments or strategies mention herein may not be suitable for all investors and investors must make their own investment decisions using their own independent advisers as they believe necessary and based upon their specific financial situations and investment objectives. The employees of PSG Online may from time to time own securities mentioned herein.