FY 15: Tougher Trading Environment Than We Anticipated
Amidst a tough domestic economy and a management transition, ARB Holdings reported flat FY 15 results with a small decline in the Electrical Division being offset by growth in the Lighting and Corporates Divisions.
The Group reported revenue of R2.1bn (FY 14: R2.2bn), strong cash generation and flat HEPS of 50.0cps (FY 14: 50.3cps).
These results were driven by an unexpected drop in activity and spending by Eskom (particularly in their rural electrification programme) and infrastructure-related work in a slowing, troubled domestic economy.
The Group’s finances remain robust and management has declared a normal and a special dividend of 20.1cps (FY 14: 20.1cps) and 10cps (FY 14: 10cps) respectively, implying that the Group’s share is trading on a Dividend Yield (DY) of c.5.0%.
Given the tough environment, we see ARB Holdings’ good FY 15 results as indicative of the Group’s underlying quality.
The macro-environment will be the biggest challenge for the Group’s short-term organic growth ambitions, but the long-term strategy of expanding the Group’s product lines, geographies and markets (both organically and acquisitively) should yield upside.
In the short- to medium-term, though, it is likely that any major growth will be driven by acquisitive actions taken by the Group. While this is hard to forecast (and we do not even try), management have reasserted their intentions to conclude strategic and meaningful acquisitions in due course.
We revise our fair value to 613cps (previously 715cps) putting the share on a Price Earnings (PE) of 12.3x. This arrives at a 12m TP of 712cps (previously 836cps) on an Exit PE of 12.9x implying a 12m return of c.20% with acquisitive upside risk to these numbers
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.
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.