Share Code: ARH – Market Cap: R1.2bn – PE: 10.0x – DY: 3.8%
H1:16 – Better Than Expected Results Despite Macro Pressure
- ARB produced excellent H1:16 results with revenue rising 12% to R1.2bn (H1:15 – R1.1bn), comfortably beating our FY 16E full year expectation of 4% y/y, though the Gross Profit (GP) margin slimmed to 22.4% (H1:15 – 22.5%).
- The Group’s Operating Profit followed revenue upwards by 11% as overheads were kept incrementally in line with revenues and resulting in HEPS growth of 12% to 27.8cps (H1:15 – 24.8cps).
- While all segments saw growth in revenues and profits, the Lighting Segment (Eurolux) produced the majority of the growth as market share, customer and product gains all lifted its Profits before Interest and Tax (PBIT) grew by 27% y/y in another excellent period’s performance.
- Cash generation remains exceptionally strong, the Group net ungeared and the underlying property portfolio’s valuation flat at R181m (FY 15: R181m).
Our Thoughts: Management Transition Complete
- An experienced Financial Director being appointed to ARB’s Board implies that the Group’s management transition is now complete.
- This period’s strong organic growth indicates the operational competency of the management team, but they are cognisant of their need to execute on the Group’s acquisitive intentions.
Forecast, Valuation & Implied Return: Overlooked by Market
- We view ARB as worth c.520cps (previously: 613cps) on an implied Price Earnings (PE) of 9.8x (previously: 12.3x). The de-rating in our fair value has to do with the rise in South Africa’s risk-free rate impacting on our Discounted Free Cash Flow (DCF) valuation, rather than any major variables relating to ARB itself.
- Rolling our fair value forward at our CoE we arrive at a 12m TP of 609cps (previous 12m TP: 712cps). A 12m TO of 609cps places the share on a comfortable Exit PE of 10.4x, implying a 12m return of c.15%.
- Key risks to the Group are unchanged from our original Initiation of Coverage. In fact, the macro risks remain even more pertinent in the current environment.