Author Archives: Keith McLachlan

About Keith McLachlan

Keith McLachlan (CA (SA)) has long been an equities analyst focusing on the JSE-listed small and mid caps stocks. His history ranges from founding www.SmallCaps.co.za in 2006, time spent working in the stock market at Standard Bank and, most recently, a number of years spent as a Senior Research Analyst at Thebe Stockbroking servicing most of the buy-side institutional clients and their businesses in South Africa. His approach to analyzing stocks focuses on fundamental research backed up by robust valuations that necessitates a longer-term view of the stock market. While he tends to be style, industry and market agnostic, he does accept a strong value-bias in his preference for selecting attractive investments and believes that in the longer-term value investing out performs both growth and momentum investment strategies.

Metrofile Holdings – Initiation of Coverage – Boxing Clever

Share Code: MFL – Market Cap: R1.3bn – PE: 11.6x – DY: 4.9%

Business Overview: Dominant domestic document storage player

  • Metrofile has the largest share of the South African document storage market with a strong pan-African & Middle Eastern footprint enjoying good margins and attractive growth.
  • The Group has a long operating history with high returns, strong cash flows and a defendable track record against comparatives.

Document Storage + Digital Strategy = Evolving business

  • While the global paper sector appears to be slowly contracting by between -1.0~-2.0% y/y, the document storage market is still growing with net box growth and rising, compounding revenues.
  • Intuitively, while a piece of paper may only generate revenue once when sold, it appears to generate an average of between 14-to-15 years’ worth of revenue when it goes into storage.
  • Globally & domestically, strong regulatory tailwinds continue to drive the need for secure physical storage while economic activity continues to generate paper that requires this storage.
  • Metrofile is using this platform, its cash flows & position of trust with clients to grow its services and digital offerings.
  • Indeed—and likely key to Metrofile’s long-term growth rate—the Group’s management has specifically crafted a digital strategy that, while hard to quantify or value, may offer some exciting prospects as it is executed.

Forecast, Valuation and Implied Return: Undervalued share

  • Using a segmentally-driven DCF to build our SOTPs fair value, we see Metrofile shares as worth c.405cps on an implied EV/EBITDA of 6.8x (this is a 48% discount to Iron Mountain’s EV/EBITDA).
  • Rolling this fair value forward at our CoE, we arrive at a 12m TP of 468cps generating a large 52% implied return.
  • Given recent takeover approaches that were frustrated by COVID-19, adding a 15~30% control premium to our fair value implies a fair takeover price of between 465cps to 526cps. For this reason, we view MFL shares as holding a long-dated embedded takeover option, however hard to predict or value.

Trellidor Holdings – FY 21 – Secured a Good Result

Share Code: TRL – Market Cap: R323m – PE: 8.3x – DY: 6.2%

FY 21 Results: Sterling results, strong cash flows & good dividend

  • Trellidor released strong results, reflecting the Group’s healthy recovery with revenue rising +23% y/y, cost-savings, efficiencies & lower finance costs lifting headline earnings by +181% y/y and HEPS doubling (+195% y/y) to 40.8cps (FY 20 – 13.8cps).
  • Underpinning the results was strong cash generation; management declared a full-year dividend of 21cps (FY 20 – 8cps) putting the share on a juicy 6.2% Dividend Yield.
  • Management continued to grow the Group’s product range (four new products were successfully launched & a commercial product range expansion is planned in the coming year) while bringing underperforming Main Centre franchisees in-house to great effect (acquired franchises grew revenue +46% like-for-like!), yet the Group also managed to control its overheads and saw a mere +4.3% y/y rise in operating expenses.

Our Thoughts: Bottom-line momentum likely to continue

  • Given the Group’s tight cost control, the price increases that it will leak into the market and franchisee consolidation & growth uplift that we expect, Trellidor’s EBITDA, operating profits and, ultimate, bottom-line momentum appears likely to continue for FY 22E.
  • We have raised our expectations of share buy-backs from 1.0% pa to 1.5% pa, especially if the share price remains languishing at its current market price.
  • All these initiatives imply attractive upside to forward HEPS.

Forecast, Valuation and Implied Return: Undervalued & Yielding

  • Our DCF Models imply that Trellidor is worth c.548cps (previously: 442cps) on a c.13.5x PE and c.7.1x EV/EBITDA.
  • Rolling this fair value forward at our CoE, we arrive at a 12m TP of 656cps (previously: 532cps) implying a large 93% return from the current share price (including dividends).
  • Speaking of dividends, irrespective of fair values, Trellidor shares still trade on an attractive 6.2% Dividend Yield (&  Forward DY of > 7%) that looks to be comfortably sustainable.

Renergen – More Positive Developments

Share Code: REN – Market Cap: R2.2bn – PE: -50.5x – DY: 0.0

News: Helium and LNG offtakes lining up nicely

  • Phase 1: Renergen has signed a 5-year LNG offtake with a major glass manufacturer, Consul Glass. The supply of LNG is to begin in January 2022 and ramp-up to 14tons/day. The LNG will be priced off the floating South African LPG price.
  • Phase 2: A raft of supply agreements for a total of c.65% of the expected helium production of Phase 2 has been signed with a range of major players (Linde Inc., Messer LLC, Helium24 LLC) for between 10 to 15 years. The helium will be priced in US Dollars with annual escalations linked to the US CPI.

Spot Prices: Moving in Renergen’s favour

  • Most spot prices and currencies have gone in Renergen’s favour, thus leading to a strong uplift in the Group’s implied Sum-of-the-Parts (SOTP):
  • South African Diesel Whole Price (A1) has risen +7%, leading to a higher value for the Group’s LNG reserve that is priced at a 25% discount to this price,
  • Rand has weakened nearly 9% versus the US Dollar, both helping lift up the above-noted diesel price and boosting the USD-denominated helium price, &
  • The South African 10-year bond rate has dropped from 9.26% to 8.96%, lowering our WACC & boosting our NPV.

Valuation and Implied Return: Contrary to share price weakness…

  • Reflecting the above-changed input variables (amongst several other minor ones), we see REN’s fair value as 5603cps (previously: 4535cps) and its 12m TP as 6567cps (previously: 5330cps).
  • We find it strange that the share price has moved contrary to the positive movements in the variables driving up the implied fair value of Renergen.

Refer to our Initiation of Coverage for more background.

ARB Holdings – FY 21 – Shooting the Lights Out

Share Code: ARH – Market Cap: R1.3bn – PE: 6.8x – DY: 4.6%

FY 21 – Exceptionally strong results

  • ARB Holdings released exceptionally strong FY 21 results with revenue roaring ahead by +24% y/y (and +8% versus FY 19) to R2.9bn (FY 20: R2.3bn) driven by a recovery in both Electrical and Lighting that is likely to carry into FY 22E (at least).
  • Added to this top-line expansion, the Group’s cost-savings, efficiency gains & cash preservation all aided HEPS upwards by +38% y/y (and +41% versus FY 19) to 82.5cps (FY 20: 59.9cps) & making a mockery of our forecast FY 21 HEPS.
  • The Group resumed its dividend payments and declared a full-year dividend of 42.5cps that includes a 10cps special dividend.

Our Thoughts: CEO continuity in place

  • ARB’s results are even more impressive considering that they were produced during a period that saw a range of hard lockdown levels, multiple waves of COVID, Eskom loadshedding and a domestic recession.
  • Long-serving CEO, William Neasham, has announced his retirement and lined up Blayne Burke as his successor.
  • Burke has run the Group’s major Electrical Division for many years and, thus, provides deep institutional knowledge, expertise, and comfortable continuity at the executive level.

Forecast, Valuation & Implied Return: Margin of Safety

  • We see fair value as 654cps (previously: 631cps) on a Price Earnings (PE) of c.7.9x, which is hardly demanding given the quality of the underlying businesses.
  • Our EV/EBITDA-implied fair value of 740cps backs up this view, if not hinting at a degree of upside risk to our forecasts.
  • Using our DCF as a base, our implied 12m TP of 766cps (previous 12m TP: 737cps) places the share on an Exit PE of 8.0x & implies a potential return of c.37%.
  • Refer to our original Initiation of Coverage for more background.

Sabvest Capital – H1:21 – Delivering Growth & Offering Value

Share Code: SBP – Market Cap: R2.1bn – Dividend Yield: 0.45%

H1:21 Results: Businesses trading at-or-better than 2019 levels

  • Sabvest Capital’s Net Asset Value (NAV) per share grew by +24% y/y to 8240cps (H1:20 – 6624cps) to the end of 30 June 2021. We have updated this post-period and see NAV currently at closer to 8500cps (our estimate).
  • The Group doubled its interim dividend to 20cps (H1:21 – 10cps) as its balance sheet saw degearing and management has steadily continued buying back shares in the open market (which we consider value accretive at these levels).
  • Perhaps most importantly, management emphasises that at the date of publishing the results all the Group’s businesses are trading at-or-better than 2019 (and 2020) levels.

Thoughts: Upside to forward valuation, corporate actions

  • Multiples used to value the Group’s unlisted investments were flat or slightly lower than prior periods. This gives us comfort that NAV growth is earnings-based (i.e. good quality).
  • In Classic Foods (and, even Revix) case(s), it looks likely that valuations may be written upwards in the near-term. Added to this, the current trading of the underlying businesses implies higher forward valuations too, even if multiples remain flat.
  • Finally, management’s share buy-back & hints at a potential acquisition may drive further upside from here.

Valuation, 12m TP & Implied Return: Lots of value available

  • Updating the Group’s NAV for the latest market prices and taking out our fairly-valued “HoldCo discount” of 20% (previously: 19%), we arrive at defendable (post-discount) fair value for Sabvest Capital shares of 6826cps (previously: 6402cps) or +31% higher than the current share price. As noted, we see upside risk to this expression of fair value.
  • Rolling our fair value forward at our Cost of Equity, we see the Group’s 12m TP as 8000cps (previously: 7542cps) with an implied return of +54%.

Refer to our Initiation of Coverage for more background.

Renergen – Positive Developments

Share Code: REN – Market Cap: R2.4bn – PE: -55.6x – DY: 0.0%

Discovery of Helium at Evander & Other Wells; Pipeline Update

  • Renergen has found world-class helium concentrations at the MDR1 (3.15%) and P007 (4.38%) wells along with intersecting gas at R2D2. These wells all either point towards a better/larger resource and/or higher well density potential (i.e. lower capex/well) that incrementally adds upside to the Group’s existing Phase I and II of its Virginia Gas Project.
  • Helium has now also been found at the Group’s Evander Exploration Right prospect at 1.1% concentrations. While this is lower than Virginia, 1.1% is still a world-class concentration and adds a further 52,000 hectares of exploration rights to the Group’s already exciting gas resource.
  • Finally, the Virginia Gas Project’s pipeline has been completed and performance tested with very pleasing results (+7% higher than planned flow rate; 30% less power consumption) that should have positive operational and valuation impact.

Incremental Capital Raise Strongly Supported

  • Renergen has placed c.5.6m shares (c.4.8% dilution to c.117.5m shares in issue) at c.1910cps (c.9.5% discount to the 30-day VWAP) with two key considerations to this placement:
  • It was quickly and fully subscribed, adding 3 South African and 9 Australian institutional investors, and, somewhat, derisking the likely Phase II capital raise through the process, &
  • Funds will debottleneck the Group’s exploration of the Virginia Project, Feasibility Studies for Phase II & offer some working capital runway for existing operations.

Forecast, Valuation and Implied Return: Updated for Spot Changes

  • Leaving our model unchanged and only updating it to reflect current spot prices (ZAR, Diesel, & lower share price), we see REN’s fair value as 4535cps (previously: 4978cps) and its 12m TP as 5330cps (previously: 5850cps).

Renergen – FY 21 – Nearing Phase One & Derisking Phase Two

Share Code: REN – Market Cap: R2.7 – PE: -65.2x – DY: 0.0%

FY 21 Results: Smaller than Expected Preproduction Loss

  • Renergen’s operating loss was smaller than expected despite a small revenue miss as lost production (due to the lockdown) was offset costs.
  • The Group spent R125.7m on assets under construction, capitalized R21.5m intangible assets and made a second draw down on its US International Development Finance Corporation (DCF) loan to the tune of $12.5m. The Group’s short-term unencumbered cash reserves sit at R130m.

Progress Updates: Almost Entire Positive

  • The Group has concluded a partnership with Total SA as LNG distribution is set up down the key N1 route.
  • Drilling of P007 & MDR1 both reflect strong resource, flow & helium concentration data, highlighting potentially better-quality resources and/or lower capex intensity of Phase Two.
  • The Group has concluded its first helium sales agreement with a global tier-one automotive supplier for Phase Two.
  • Finally, The Group’s innovative cold chain storage solution (Cryo-Vacc™) made its first sale, moving post-revenue.

Forecast, Valuation and Implied Return: Appears Undervalued

  • Since our Initiation, our major assumptions remain the same, albeit we have updated our model for the latest spot prices that, in general, have moved in Renergen’s favour.
  • 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 4149cps (previously 3539cps). After options for Evander and Cryo-Vacc are added, we see Renergen’s share as potentially worth 4978cps (previously 4247cps).
  • Rolled-forward by CoE, our 12m TP is 5850cps (previously 4977cps) or over double what the current share price is.

Refer to our Initiation of Coverage for more background on this stock.

Trellidor – Initiation of Coverage – Compounder with Yield & Tailwinds

Share Code: TRL – Market Cap: R333m – PE: 18.4x – DY: 2.3%

Business Overview: Leveraging Product, Route-to-Market & Returns

  • Trellidor’s traditional business of customized manufacturing of security gates for a national, African and export network of franchisees remains strong while management’s addition of innovative & complementary products (including Taylor blinds and shutters, and NMC) is logical and steadily gaining traction.
  • The Group is cash generative and management’s careful capital allocation into the acquisition of (some) the main regional franchisee, share buy-backs below fair value & degearing the Group’s balance sheet while paying dividends should all add to the Group’s financial performance and shareholder returns.

Macro Environment: Home Improvement Tailwinds

  • While high domestic real rates had depressed residential property and home improvement markets, the South African Reserve Bank’s strongly accommodative monetary response to COVID-19 has reversed this trend with exciting implications.
  • Building materials, home improvement sales and the residential property markets have all positively responded to this and, in many instances, are trading at-or-above their pre-COVID levels.
  • Despite numerous domestic & global macro risks remaining, Trellidor should be a beneficiary of these home improvement & residential property market tailwinds.

Forecast, Valuation and Implied Return: Undervalued & Yielding

  • Given a reasonableness check against our implied EV/EBITDA regression, our DCF Model indicates that Trellidor is worth c.442cps or a c.8.8x PE and c.4.4x EV/EBITDA against our expected FY 21E earnings. These valuation metrics appear quite undemanding of a Group with a 5-year average ROE of >20% and a Free Cash Flow/EV Yield just shy of 18%.
  • Rolling 442cps forward by our CoE, we arrive at a 12m TP of 532cps implying a 54% return from the current share price.
  • Even if the market never fully reflects this valuation, it is worth noting that the share’s attractive c.6.0~7.0% Dividend Yield also makes this compounder a good yield play.

Sabvest Capital – Initiation of Coverage – Superb Capital Allocator at Unjustified Discount

Share Code: SBP – Market Cap: R1.6bn – Discount-to-SOTP: 64%

Group & Portfolio Overview: Majority Unlisted Investments

  • Sabvest Capital offers a unique entry-point into a portfolio of majority unlisted investments that have demonstrated strong growth, dedicated management teams (often co-investors) and that are carried at reasonable valuations.
  • The Group’s three largest investments (all unlisted) are (1) DNI-4PL, a cash-generative last-mile telcos distribution group, (2) ITL Holdings, a global labelling & technology-enabled tagging business, & (3) SA Bias, an exporter of narrow textiles/strapping from South Africa and group offering process-critical fluid handling solutions in the United Kingdom.

Investment Case: Better than the Best (Fund Manager) & Cheaper

  • Management has grown Group NAV (+18.6% CAGR y/y for fifteen years, excluding dividends) faster than the best-of-the-best general equity fund managers across South Africa (even after including distributions) and management have done so at a lower cost-to-NAV than these leading unit trusts.
  • Finally, this performance is currently priced at a c.51% discount to NAV on the JSE (relative to our estimated fair discount of only c.19% and the peer-group average discount of 42% currently applied to listed HoldCo’s > R1bn market cap).
  • The key competitive advantages that have helped Sabvest generate this growth (permanent capital & alignment of interest/‘Partnership Principle’) remain intact and, thus, we see no non-macro factors why the Group could not continue performing as it has done in the past.

Valuation, 12m TP & Implied Return: Cheap Against All Measures

  • We have formed a view that the Group’s unlisted investments are reasonably valued. Importantly, most of them have seen trading recover strongly following the impact of COVID.
  • Furthermore, updating the Group’s NAV for the latest listed price, inserting post-period corporate actions and taking out our fairly-valued “HoldCo discount” of 19%, we arrive at defendable (post-discount) fair value for Sabvest Capital shares of 6402cps or +64% higher than the current share price.
  • Rolling this fair value forward at our Cost of Equity, we see the Group’s 12m TP as 7542cps with an implied return of +93%.

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.