Tag Archives: JSE

ARB Holdings – FY 17 Results – Resilient Group

Share Code: ARH – Market Cap: R1.4bn – PE: 9.5x – DY: 3.4%

Download the full FY 17 results note here

FY 17 – Meeting Our Expectations Despite Recession

  • ARB Holdings maintained its revenue during a tough period that included political upheaval in South Africa, SOE paralysis, sour consumer sentiment, a sovereign downgrade and a technical recession (not officially over at the date of publishing).
  • The Group reported +4% y/y growth in HEPS to 61.9cps (FY 16: 59.7cps), beating our previous forecast of 61.4cps.
  • The Group continued to generate strong cash flow with well-managed working capital whilst adding to its store and product footprint.
  • Management remains committed to the organic and acquisitive growth of existing operations.

Our Thoughts: Resilience & Upside

  • Solid results year-after-year continue to build the Group’s track record for resilience while management put in place longer-term initiatives for growth that looks
  • We do note the various changing dynamics in the cabling supply market as a risk while the currently exercisable put option by Eurolux is actually a good opportunity (in our opinion).

Forecast, Valuation & Implied Return: Still Undervalued

  • We raise our estimated fair value for ARH to 687ps (previously: 664cps), which puts the stock on an implied Price Earnings (PE) of 11.1x.
  • In our opinion, this PE does not appear unreasonable against either ARH’s own history or the various comparatives in the market.
  • Rolling our fair value forward at our CoE we arrive at a 12m TP of 809cps (previous 12m TP: 779cps).
  • A 12m TP of 809cps places the share on a comfortable Exit PE of 12.9x.
  • Our 12m TP implies a return of c.37%.

Download the full FY 17 results note here

See our methodology here and note our disclaimer here.

ARB Holdings – FY 15 Results – Results Indicative of Quality

FY 15 Results Note – Share Code: ARH – Market Cap: R1.4bn – PE: 12.0x – DY: 5.0%

Download the ARB Holdings FY 15 Results Note

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%.

Our Thoughts: Quality Business, Tough Market, Acquisitive Intentions

  • 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.

Forecast, Valuation & Implied Return: Comfortably Priced

  • 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.

Download the ARB Holdings FY 15 Results Note

See our disclaimer.

ARB Holdings – FY 14 – Growth Despite the Odds

FY 14 Results Note – Share Code: ARH – Market Cap: R1.8bn – PE: 15.5x – DY: 3.8%

 

FY 14: In Line With Our Expectations

  • ARB Holdings reported their FY 14 results with revenue growing by 14% to R2,2bn (FY 13: R1,9bn) versus our forecasts of R2,3bn.
  • The Group achieved better margins than we had expected due to both a rising contribution from the higher margin Lighting segment and from the Group driving purchasing savings across its business in H2:14, which saw HEPS rising nicely by 27% to 50.3cps (FY 13: 39.6cps) versus our expectation of 52.1cps.
  • The Group remains highly cash generative and declared both a dividend of 20.1cps (FY 13: 16.2cps) and a special dividend of 10cps (FY 13: 10cps), yet remained ungeared (R197m net cash).
  • While cognisant of the tough trading environment, management remain focussed on both organic growth and, potentially, adding the elusive “third pillar” (acquisition) to the Group.

Our Thoughts: High Quality Group, High Quality Share

  • ARB has proven itself a remarkably high quality group in some very tough trading conditions as it successfully executes on its communicated strategies of expanding product lines, geographies and markets (both organically and acquisitively).
  • While our valuation metrics indicate the share is fully valued, the “quality” quotient is a hard one to quantify and likely to prove very valuable for the long-term investor.

Forecast, Valuation and Implied Return: Attractively Priced

  • Our fair value for ARH is 715cps on a PE of 14.2x (previously 622cps). Rolling this forward at our Cost of Equity (CoE), we arrive at a 12m TP of 836cps (previous 12m TP: 727cps) on an Exit PE of 14.7x implying a total return of c.7%.
  • The key risks stated in this report remain the same from our Initiation of Coverage on the Group. Also note the newly added risk relating to the phasing out of incandescent lamps in South Africa and the uncertainty it creates in the Lighting segment.

See our disclaimer.

ARB Holdings – Good Story in a Tough Market

Initiation of Coverage – Share Code: ARH – Market Cap: R1.4bn – PE: 12.7x – DY: 2.2%

Download the full ARB Holdings Initiation of Coverage Report Here

Business Overview: Market, Store and Product Expansion

  • ARB has built a scalable electrical products distribution and wholesaling business off the back of a core cable product supply with key growth drivers being the expansion in product lines, movement into new territories, markets and industries and selected strategic bolt-on acquisitions.
  • The Electrical Division is predominantly a wholesaler of cables, overhead lines and related electrical components in Southern Africa.
  • In mid-FY 12 ARB Holdings acquired a 60%-stake in Eurolux (Pty) Ltd, a fast growing importer and distributor of light fittings, lamps and ancillary electrical products.
  • The Group Services segment includes the strategic and operational activities as well as holding the underlying property portfolio of the Group with a book value of R163m.

Key Issues: Macro-economic Variables Worrying

  • With many frothy indicators, the construction, building and related market in South Africa has many short-term downside risks including the current labour environment, the rising interest rate cycle and the upcoming elections.
  • Despite this, South Africa’s infrastructure needs are significant as encapsulated in the National Development Plan (budgeted c.R827bn spend) and the building materials market stands to benefit handsomely from this (eventual) roll-out.

Forecast, Valuation and Implied Return: Attractively Priced

  • Our fair value for ARH is 622cps on a PE of 13.5x. Rolling this forward at our Cost of Equity (CoE), we arrive at a 12 month Target Price (TP) of 727cps on an Exit PE of 12.7x implying a return of 21% from the current levels.
  • The two key risks to our above valuation methodologies are (1) the major macro-economic variables in South Africa (noted above), and (2) the timing and successful implementation of ARB’s product, store and market expansion drive (including any potential future acquisitions).

Download the full ARB Holdings Initiation of Coverage Report Here

What do you think of ARB Holding? Let us know…

See our methodology here and note our disclaimer here.

Accéntuate Ltd: Ground Floor and Positioned for Upside

Initiation of Coverage – Share Code: ACE – Market Cap: R94m – PE: 9.5x – DY: 0.0%

Download Accentuate Initiation of Coverage Here

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.

Download Accentuate Initiation of Coverage Here

What do you think of Accéntuate? Let us know…

See our methodology here and note our disclaimer here.

About Blue Gem Research (Pty) Ltd

Blue Gem Research is built upon the belief that we can make the market work better.

A structural bottleneck in the South African equity market is the reality that sell-side analysts are incentivized via allocation, trade volumes and related brokerage to cover large, liquid stocks. While this can add value to the market, the law of marginal diminishing returns implies that it adds less and less value as more and more analysts cover the same finite number of stocks (i.e. the Top 40 index on the JSE).

Even the few analysts covering stocks outside this Top 40 index are inadvertently pushed to cover the more liquid counters in this universe in order to effectively monetize their research through the related, generated and allocated trade.

The irony is that the very stocks that would benefit the most from being professionally researched are the very stocks that are also marginalized by these sell-side economics: the dynamic, growing, exciting small cap counters that fall just off this radar.

And so Blue Gem Research was founded to address this critical need in the local market and, by doing so, make our market work better for all participants.

The logic is simple. Research on the under covered small caps cannot really be monetized by brokerage. But the benefit of professional coverage is felt directly by the small cap itself. Hence why not charge the company being covered directly for the coverage and provide the research to the rest of the market for free?

This solves numerous challenges: (1) Investors and the general market can benefit from freely available professional research on these under-covered stocks, (2) the small caps can feel the benefit of professional coverage, and (3) the research is sufficiently monetized to justify the time, effort and expense in building and maintaining it.

Essentially, this is Blue Gem Research’s rationale.

Besides this public-facing research, Blue Gem Research also provides exclusive independent research to certain, invite-only buy-side and related houses. Our client list is limited to a maximum of only five houses. The reality is that the illiquidity of the local small cap market does not lend itself to mass sell-side research and our choice to provide exclusive independent research is based predominantly on the liquidity constraints and alignment of methodologies of the buy-side houses we have allowed onto our subscription list.

Please spend some time familiarising yourself with our approach, ethics and the various channels you can follow, like and subscribe to us and our research.

Firstly, in our Methodology page we go into quite a bit of detail regarding our research approach, valuation techniques and unique insights into the local small cap market. To best understand our research reports, you need to understand our approach to investing. There are links to videos and webinars we have presented and this page also includes some key terminology we use as shorthand in our research reports. The odds are that if anything you read in our research confuses you, you will better understand it after referring to this page as background.

Secondly, in our Frequently Asked Questions page we answer some of the most common questions thrown at us regarding Blue Gem Research, prepaid research and various other details. Perhaps just browse through this page if you have any questions relating specifically to Blue Gem Research.

Thirdly, Blue Gem Research has some firm convictions regarding ethical conduct in the stock market. Besides all the standard ethics applied in the research environment in South Africa (which we strictly apply!), we would like to emphasise three key (and in some sense, unique) ethical principles we also believe in. Read about them in our Ethics page.

Fourthly, our Disclaimer page discloses some of the finer legal details of our research. While it may be a boring read, it is quite important that you understand our global disclaimer. By browsing this website and its research, you are assumed to have read, understood and agreed to this disclaimer.

It must be noted, though, that Blue Gem Research operates with the feel-good intentions of trying to make the market work better. It is our belief that quality research should, as far as possible, be freely available. Please do not distort our good intentions, but take them, interpret them and use them with this in mind. The only people who get rich when “the lawyers” get involved are “the lawyers” and we, personally, would prefer to live in a world filled with poor lawyers.

Finally, besides simply browsing this website and regularly visiting it to see updates, Blue Gem Research can be followed on Twitter and liked on Facebook. We also strongly suggest subscribing to Blue Gem Research by entering your email address into the box below in order to get email updates the moment we publish anything new.

Enter your email to subscribe for Blue Gem Research:

 

Thank you for all your support in our attempt to make the market work better!

 

Kind regards,

Keith McLachlan