H1:14 Results: Tough Trading Period, Hampered by Weak Rand & December
Accéntuate reported disappointing H1:14 results that saw sales rise 7% to R157m (H1:13 – R146m), but margins compress and Operating Expenses rise by c.13%. The rise in opex was partly due to Suntups duplicate leasing costs (eventually this business will moved into existing Group premises) and distribution costs being passed onto the Group by the higher diesel price.
This culminated in profit attributable to shareholders falling c.49%, HEPS being reported below our expectations at 2.81cps (H1:14 – 6.01cps).
Two small acquisitions were made during the period, being Suntups (wooden flooring) and Degrachem (metal treatment chemicals).
Our Thoughts: Promising Start to H2:14E
Floorworx saw a particularly tough December 2013 that appears to have reversed during January 2014, but the volatile Rand has affected most its businesses units negatively in the short-term.
In the long-term, though, the weak Rand creates a massive competitive advantage for the Group’s East London manufacturing asset (key in Floorworx) that positions the business well for the (very) slow recovery in some key indicators in the local construction and infrastructure market continues.
The South African elections (coming early May) create some short-term downside risk, as we believe that public sector spend is likely to be interrupted before, during and after this period.
Forecast, Valuation and Implied Return: Underpinned by Tangible NAV of c.90cps
We lower our fair value to 86cps (previously: 122cps), which is underpinned by ACE’s current TNAV of c.90cps and arrive at a 12m TP of 100cps (previously: 142cps), on an Exit PE of 11.0 (which is arguably inflated due to the trough earnings the Group is trading through currently as well as the fact that Ion Exchange Safic adds to our DCF SOTP but doesn’t add to the Group’s profits at this point).
Our 12m TP of 100cps (previously: 142) implies an attractive 73% return, but note the risks to our view later in this report.
FY 13 Results: Inland Market Tough in H2:13; Acquisitions Made
Accéntuate experienced a much tougher H2:13 than we had expected. FY 13 revenue flattened to R284m (FY 12: R283m), c.4% shy of our expected turnover mark.
This soft performance during H2:13 comes from Floorworx where particularly the inland market struggled. Safic and Ion Exchange Safic performed in line with our expectations as the former grows its market exposures and the latter continues to build traction in the local market.
The Group’s FY 13 EPS rose 17% to 8.4cps (FY 12: 7.2cps), but critically the HEPS from Continuing Operations slipped 11% to 8.4cps (FY 12: 9.5cps).
Some of this balance sheet was employed post-results to cleverly acquire two small complementary businesses, both paid out in script and to be incorporated from 1 September 2013 (i.e. ten of the twelve months of FY 14E).
Our Thoughts: “When”, Not So Much “If”…
Disappointing results and acquisitions aside, Accéntuate still remains well positioned to benefit from the pent-up public sector infrastructure spend. That said, the 2014 elections potentially create downside risk regarding the timing thereof.
In the meantime, management has been driving growth initiatives into other markets and product lines, and seeking strategic acquisitions.
Forecast, Valuation and Implied Return: Small Upgrade
We raise our fair value for Accéntuate to 122cps (previously: 114cps), which implies a PE of 14.6x. This compares reasonably attractively to two listed comparatives, Distribution and Warehousing Network Ltd (Share code: DAW – PE of 15.3x) and Afrimat Ltd (Share code: AFT – PE of 14.8x).
Rolling our fair value forward by the Cost of Equity (CoE), we arrive at a 12m TP of 142cps (previously: 132cps), implying an Exit PE of 13.8x and an attractive implied return of 54%.
The key risks we see in our valuation of Accéntuate remain macro.
* Note that the Group remains under cautionary announcement pending the release of pro-forma financial results relating to the Suntups acquisition. This results note does not take into account any material information following the resolution of this cautionary announcement.
Business Overview: A Group of attractive businesses
Floorworx is the most significant player in the South African resilient flooring market and stands to gain from the National Healthcare Insurance (NHI) driving hospital refurbishments and expansion. In the long term it should benefit from the eventual roll-out of the pent-up infrastructure spend in South Africa.
Safic is an industrial chemical business in the fast-growing chemicals market with strong linkage into and synergies with Floorworx.
Ion Exchange Safic is 40%-held, early-stage (but extremely promising) water treatment solutions business with key backing by its large Indian-listed parent, Ion Exchange India Ltd.
Accéntuate has de-risked its balance sheet, streamlined its various businesses and now begun to focus on growth. NHI spend should help near-term revenues, public sector infrastructure roll-out should drive medium-term revenues and Ion Exchange Safic offers long-term blue sky optionality.
Key Issues: Macro-economic uncertainty
Despite the promising businesses in Accéntuate’s stable, the Group’s prospects rely very much on the activity, timing and quantum of a recovery in the local construction and infrastructure markets. While the long-term prospects of these sectors remain positive, there remains significant short-term macro-economic uncertainty.
Forecast, Valuation and Implied Return: Appears very inexpensive
We have pegged our valuation to our segmentally-driven SOTP DCF model, implying that ACE has a fair value of 114cps. This would put the share on a comfortable 10.6x PE and also implies that the current share price of 85cps undervalues Accéntuate by c.35%.
Rolling forward our fair value, we arrive at a 12m TP of 132cps with an Exit PE of 11.0x, which is slightly elevated due to Ion Exchange Safic adding to our valuation but its operations not yet adding to the Group’s profits.
Our 12m TP implies an attractive c.56% return.
Finally, even if Ion Exchange Safic is excluded from our valuation (assumed to be of nil value), the share’s fair value still appears between 90cps to 100cps, thus lending some comfort to our view that the share is currently undervalued.