Renergen – Initiation of Coverage – Lighter-than-Air Falling to the Bottom-Line

Share Code: REN – Market Cap: R2.3bn – PE: -34.9x – DY: 0.0%

Business Overview: Near-term Helium & LNG Producer

  • Renergen owns an onshore petroleum production right to the “Virginia Gas Project” that is rich in methane (LNG) and helium and the Group is developing in a two-phased approach.
  • Renergen is in a formidable position to move up the value-curve as Phase One nears first-production.
  • Importantly, the Virginia’s Phase Two could be multiples the size of Phase One and unlock staggering value in the Group.

LNG & Helium Markets: Attractive Prospects

  • South Africa is an energy-scarce economic region with both a good potential LNG demand and a potential supply deficit of the gas in its near-future as some existing assets come offline.
  • The global helium market is opaquer, but the recent drop-off in USA supply and uncertainty around Russia’s planned supply growth combine to imply tight(er) helium supplies post-pandemic. Finally, the major consumers of helium (aerospace, semiconductors & MRIs) are all above-average growth vectors and cannot substitute helium for anything else.

Forecast, Valuation and Implied Return: Upside Apparent

  • Our DCF-driven sum-of-the-parts (SOTP) valuation for Renergen implies Phase One & Two—offset by central costs, debt and (potential) dilution—are worth 3539cps. After options for Evander and Cryo-Vacc are added, we see Renergen’s share as potentially worth c.4247cps.
  • Rolled-forward by CoE, our 12m TP is 4977cps.

Key Up- & Downside Risks: Lots of Moving Parts

  • Running a sensitivity analysis on our model highlights that Renergen’s valuation is more sensitive to helium than LNG, but both prices are ultimately sensitive to the USD/ZAR rate.
  • Inflation, production, and resource risks also exist here.

ARB Holdings – H1:21 – Emerged Stronger

Share Code: ARH – Market Cap: R1.0bn – PE: 6.4x – DY: 0.0%

H1:21 – Strong Beat

  • ARB Holdings published an excellent H1:21 result showing good revenue growth and particularly strong profit growth from key cost-savings measures annualizing across the period.
  • Revenue rose +5% y/y, Operating Profit shot up +59% y/y (thoroughly beating our expectations), & HEPS grew +26% to 41.1cps (H1:20 – 32.6cps).
  • For a Group that typically generates strong cash flows, cash generation was particularly strong over this period and the Group’s balance sheet remains very much ungeared.

Our Thoughts: Emerged Stronger

  • Management has built a superb Group over the years and, over the current pandemic, reacted swiftly in reigning back expenditure. Following from our previous results note, we believe that H1:21 has demonstrated that the Group has emerged stronger with more market share than at the beginning of this period. In the long-term, this can only be a good thing.
  • We expect dividends to resume with the full-year results and have maintained our revenue expectations while adjusting our margin assumptions to reflect the fantastic gains made by the Group in H1:21 annualizing even further into H2:21E.

Forecast, Valuation & Implied Return: EV/EBIDTA lining up with DCF

  • We see fair value as 631cps (previously: 464cps) on a Price Earnings (PE) of c.9.2x.
  • Interestingly, we have built a new EV/EBITDA Model for ARB against a hand-selected peer set and this model arrives at a fair value of 624cps, thus lending weight to our DCF fair value.
  • Our implied 12m TP of 737cps (previous 12m TP: 546cps) places the share on an Exit PE of 12.9x & implies a potential return of c.71%, albeit with typical macro-risks remaining present.
  • While “cheap” is not a defining characteristic of the current domestic small cap market, the combination of it with the high-quality of ARB’s track record and prospects makes it unique.

Refer to our original Initiation of Coverage for more background.

ARB Holdings – FY 20 – Battening Down the Hatches

Share Code: ARH – Market Cap: R0.8bn – PE: 10.7x – DY: 0.0%

FY 20 – Winning Amidst A Pandemic

  • During a period deeply marked by the COVID-19-induced lockdown and a global recession, ARB’s FY 20 numbers are not particularly reflective of much other than its environment.
  • Revenue contracted -13%, margins improved as deep cost-cutting, rationalization of operations, retrenchments and management salary sacrifices all protected the Group, & a range of IFRS entries flowed through results distorting comparisons.
  • The Group ended up seeing HEPS rise +3.0% y/y to 59.96cps (FY 19 – 58.2cps), but, above all else, the Group appears to have protected its balance sheet (cash on hand of R152m), bolstered by operations generating R135m (FY 19 – R226m) cashflow.

Our Thoughts: Emerging Stronger

  • Near-term numbers (both historic & forecast) are somewhat meaningless in an environment of heightened chaos & uncertainty with major global variables playing out.
  • Despite this, ARB management has done all the right things and the Group is likely to emerge from this period stronger, if not absolutely then at least relatively speaking.
  • Key variables remain, though, from the global (pandemic & geopolitics) to domestic (infrastructure spend, public sector finances & Eskom) that imply both up- & downside risks.

Forecast, Valuation & Implied Return: Still Underrated

  • We see fair value as 464cps (previously: 562cps) on a Price Earnings (PE) of c.7.4x. This appears reasonable against the various comparatives in the market (average: 10.3x) despite the reliability of PE as a metric declining due to the abnormality of this period and the raft of IFRS non-operational entries flowing through both ARB’s & the rest of the market’s financial results.
  • Our implied 12m TP of 546cps (previous 12m TP: 659cps) places the share on an Exit PE of 8.8x & implying a return of c.56%.
  • While “cheap” is not a unique domestic small cap characteristic, the profitability, cash generation & robust balance sheet of ARB make it one of the higher-quality stocks in this universe.

Refer to our original Initiation of Coverage for more background.

ARB Holdings – H1:20 – Lean & Efficient

Share Code: ARH – Market Cap: R0.9bn – PE: 5.9x – DY: 6.3%

H1:20 – Great cost-control despite headwinds

  • While ARB missed out topline expectations, management’s extraction of efficiencies across the Group saw a resilient profit performance.
  • The disappointments were all in sales, as Eskom/contractor volumes remained weak in the Electrical Division and retailer/consumer markets stagnated.
  • The victories were all won in costs as the Radiant acquisition begins to bed-down, an underperforming Electrical store was closed and the Lord’s View DC began operations.
  • Slight “pre-Chinese New Year” overstocking across the Group negatively impacted on cash flows but should serve the Group well given the current Covid-19 (i.e. “Coronavirus”) disruption to global supply chains and the coming likely stock shortages across global and domestic markets.

Our Thoughts: H2 to remain tough, but long-term positive

  • The Group remains ungeared, has positive cost-savings that should annualize nicely going forward and is well-positioned to weather the current macro-headwinds and capture any growth that may appear going forward.
  • Unfortunately, H2 in South Africa and with growing global risks is likely to remain a tight trading environment and one with a lot of forecast risk (either upside or downside).

Forecast, Valuation & Implied Return: Still underrated

  • Our fair value for ARH is 562cps (previously: 576cps) on an implied Price Earnings (PE) of 8.3x, indicating that the stock is c.39% undervalued at its current share price.
  • Rolling our fair value forward at our CoE, we arrive at a 12m TP of 659cps (previous 12m TP: 670cps) on an Exit PE of 13.2x.
  • Key risks to the Group are unchanged from our Initiation of Coverage.

ARB Holdings – FY 19 – (Still) Awaiting Macro-Tailwinds

Share Code: ARH – Market Cap: R0.9bn – PE: 7.0x – DY: 6.2%

FY 19 – Macro-headwinds Remain Strong

  • ARB Holdings grew revenue +4.5% y/y, partially bolstered by Radiant, GMC and CraigCor acquisitions.
  • An anaemic domestic economy and construction sector, supply chain disruptions, competitor activity & a volatile currency all combined to put downward pressure on Group results, while the Group also began accounting for Radiant with restructuring once-offs costs, relocated operations in Gauteng and suffered some non-cash impairments and Put Option revaluations due to subsidiary results.
  • IFRS HEPS slipped -19% y/y to 58.2cps (FY 18: 71.7cps), but this materially beat our conservative expectations of 50.1cps. We see our calculated ‘Normalized’ earnings figure as c.-21% y/y.
  • The Group maintained its dividend at 25cps (FY 18: 25cps + 10cps special dividend) as cash flows remained strong.

Our Thoughts: Domestic versus Global – Eskom versus Trump

  • Globally, a red-flags are flashing as the US-China Trade War escalates and the global economy suffers.
  • Domestically, Brexit (as the UK is a large South African trading partner) and Eskom continue directly hurting our economy.
  • While these global and domestic risks are well-known, any positive resolutions to them would create macro-upside that should bolster prospects going forward.
  • Given the depth of discount the valuation of the domestic small cap sector currently trades at, we would argue that no positives anywhere have been priced in and therein lies the opportunity.

Forecast, Valuation & Implied Return: Still Quality & Still Value

  • Our fair value for ARH is 576cps (previously: 636cps) on an implied Price Earnings (PE) of 9.9x, indicating that the stock is c.42% undervalued at its current share price.
  • Rolling our fair value forward at our CoE, we arrive at a 12m TP of 670cps (previous 12m TP: 744cps) on an Exit PE of 12.6x.

See our methodology here and note our disclaimer here.

ARB Holdings – H1:19 – Awaiting Macro-Tailwinds

Share Code: ARH – Market Cap: R1.0bn – PE: 7.6x – DY: 4.6%

H1:19 – Macro-headwinds Remain Strong

  • ARB Holdings had a disappointing H1:19 period with results coming in lower than our expectations due to macro-headwinds.
  • South Africa’s political-drag and Eskom challenges continue to negatively affect business confidence with direct knock-on effects in the construction and infrastructure markets.
  • The Group reported flat revenue (+1.1% y/y) and—ignoring the IFRS-adjustments relating to Put Options—the Group’s normalized earnings slipped -6.1% y/y.
  • The Electrical segment saw the most pressure while the Lighting segment managed mild growth from market share gains.

Our Thoughts: Eskom & Radiant (Still) Two Key Variables

  • The Group is making all the right moves: It has concluded the acquisition of Radiant that bolsters its Lighting segment while the store roll-out continues in the Electrical Division.
  • Superb cash generation, margin management and operational control remains firmly in place with the Group positioning itself for above-average future growth.
  • Despite this, Eskom’s turnaround and related spend remain a major (upside & downside) variable in the Group’s prospects.

Forecast, Valuation & Implied Return: Still Quality & Still Value

  • Our fair value for ARH is 636cps (previously: 714cps) on an implied Price Earnings (PE) of 11.1x, indicating that the stock is c.48% undervalued at its current share price.
  • Rolling our fair value forward at our CoE, we arrive at a 12m TP of 744cps (previous 12m TP: 838cps) on an Exit PE of 12.2x.
  • While this exit multiple may be higher than normal, we see the Group as having an embedded option on South Africa and Eskom’s turnaround (currently a good thing, in our opinion).
  • Key risks to the Group are unchanged from our Initiation of Coverage, though Radiant has been consolidated from H2:19E.

See our methodology here and note our disclaimer here.

ARB Holdings – FY 18 Results – Still Quality & Still Value

Share Code: ARH – Market Cap: R1.4bn – PE: 8.7x – DY: 3.2%

Download the full FY 18 results note here.

FY 18 – Tougher H2 Than Expected

  • ARB Holdings reported growth in FY 18 revenues and stable profits with consistently strong cash generation, generous dividends, and an opportunistic post-year-end acquisition.
  • FY 18 revenue came in per our expectations at R2.6bn (FY 17: R2.4bn), & HEPS rose +16% to 71.7cps (FY 17: 61.9cps), which is materially higher than our forecast of 65.6cps.
  • The Lighting segment disappointed but was actually slightly better than our downwardly-adjusted forecasts at H1:18. Inversely, the Electrical segment performed well but slightly below our half-year expectations.

Our Thoughts: Eskom & Radiant Key Variables

  • Post-year end, the Group concluded a conditional acquisition of the Radiant Group. This move consolidates the Group’s position in the lighting market while materially transforming the Group’s segmental exposures; post-consolidation of Radiant, Lighting may become similar in size to the Group’s cable exposure.
  • A slowdown in Eskom spending has prolonged the domestic malaise. Top-level Board and management changes in the utility have been positive, and supply chain audits and related reorganization (in an attempt to both eliminate corruption in the SOE and stabilize it) are likely to blame for this drop in spending.
  • Logically, the spending from Eskom should materially pick up after this internal process is completed (while Eskom will come out of it stronger for having gone through this period).
  • Thus, we remain positive on South Africa and the sector.

Forecast, Valuation & Implied Return: Still Quality & Still Value

  • We update our fair value for ARH to 714cps (previously: 777cps), implying a reasonable Price Earnings (PE) of 10.0x.
  • Rolling our fair value forward at our CoE, we arrive at a 12m TP of 838cps (previous 12m TP: 911cps), placing the share on a comfortable Exit PE of 11.4x, and implying a return of c.34%.
  • Key risks to the Group are unchanged from our original Initiation of Coverage, though note that we have not taken the Radiant acquisition into account in our forecasts or valuation.

Download the full FY 18 results note here.

See our methodology here and note our disclaimer here.

ARB Holdings – H1:18 Results – Improving Prospects

Share Code: ARH – Market Cap: R1.3bn – PE: 7.6x – DY: 3.65%

Download the full H1:18 results note here

H1:18 – Operationally Robust

  • ARB Holdings reported revenue +5% for H1:18 and operating profit growing +3%.
  • The mark-to-market fair value changes in the Put Option for Eurolux distorted the IFRS numbers by 5.9cps, but excluding this effect, the Group’s HEPS would have been +13% y/y to 31.72cps (H1:17 – 28.07cps). This is materially better than our bottom-line expectations for FY 18E.
  • One sore point in the Group’s results was its Lighting segment where revenue slipped and profits felt pressure as consumer destocking, technology and delays combined.
  • Post-reporting period, the Group acquired a 60% interest in Craigcor for a maximum consideration of R30m. The business is a process automation distributor for Rockwell Automation products.

Our Thoughts: Well-positioned for an ‘SA Inc’ Recovery

  • While risks remain and ‘big ticket’ infrastructure spend roll-out is always lagging, ARB Holdings is extremely well to benefit from the de-risking of South Africa, the recovering sentiment and the potential recovering domestic economic activity.

Forecast, Valuation & Implied Return: Getting Exciting…

  • We raise our estimated fair value for ARH to 777cps (previously: 687cps), which puts the stock on an implied Price Earnings (PE) of 10.0x and implies that it is currently c.44% undervalued.
  • In our opinion, this 10.9x PE is reasonable when measured against either itself or comparatives.
  • Rolling our fair value forward at our Cost of Equity (CoE) we arrive at a 12m TP of 911cps (previous 12m TP: 809cps).
  • A 12m TP of 911cps places the share on a fair Exit PE of 14.5x, though we note a number of timing and environmental risks to our view.
  • Our 12m TP implies a return of c.69%.
  • Despite improving domestic sentiment, key risks to the Group are unchanged from our original Initiation of Coverage.

Download the full H1:18 results note here

See our methodology here and note our disclaimer here.

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 – H1:17 Results – Quietly Growing

Share Code: ARH – Market Cap: R1.5bn – PE: 10.6x – DY: 3.0%

Download the full ARB Holdings_H1:17_Results Note

H1:17 – Steady Does It…

  • ARB Holding’s revenue rose by 3% to R1.27bn (H1:16 – R1.23bn) with Lighting leading the growth while soft municipal spend dampening Electrical’s contribution during the period.
  • HEPS rose 1% to 28.07cps (H1:16 – 27.79cps) while cash flow generation remained good and the balance sheet ungeared with R175m of net cash on hand.
  • Although in the ARB’s results are a bit below our expectations, the Group continues to steadfastly execute their strategy of geographic, product and customer expansion with cabling dropping from >50% of the Group’s turnover seven years ago to c.37% of it in these results.

Our Thoughts: Stagnation in the Base, Upside in the Future

  • While we may be premature in this call, we believe that we are currently in the trough in both South Africa (2016/17) and in ARB’s market (FY 17E and, perhaps, FY 18E).
  • SA’s Leading Indicator and as well as many global indicators everywhere are, at worst, not falling anymore and, at best, starting to rise.
  • That said, we do not expect a sudden recovery and would not be surprised if this trough stretched out (i.e. flat growth) into 2018.

Forecast, Valuation & Implied Return: Attractive Valuation

  • We lift our fair value for ARH to 664ps (previously: 650cps) on an implied Price Earnings (PE) of 11.1x. This PE does not appear unreasonable against either ARH’s own history or the various comparatives in the market.
  • Rolling this fair value forward at our CoE we arrive at a 12m TP of 779cps (previous 12m TP: 762cps), which places the share on a comfortable Exit PE of 11.4x.
    This 12m TP also implies a reasonably attractive return of c.23%.

Download the full ARB Holdings_H1:17_Results Note

See our methodology here and note our disclaimer here.