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.
In Q3:23, Astoria reported a flat ZAR-NAV of 1408cps (FY 22: 1406cps), though a weaker ZAR (11% weaker against the USD from FY 22 close to Q3:23 reporting date) pushed the USD-valuation slightly lower to $0.74 per share (FY 22: $0.83ps).
Astoria typically only fairly values its unlisted investments with its Q2 (i.e. H1) & Q4 (i.e. Full-year) results &, thus, this result involves only updated share prices & exchange rates.
Commentary: Loadshedding Impacted Goldrush
RECM & Calibre Preferences Shares’ (code: RACP) lower share price shaved c.39cps from Astoria’s SOTPs, & this appears driven by pressure at Goldrush from loadshedding (i.e. lost trading hours, higher costs from generators & consumer pressure). It is encouraging to see that Goldrush’s average revenue per (active) machine grew +5% y/y & that the Sports Betting & Online Gaming divisions grew strongly (+18% & +51% respectively). Cash flow was strong at Goldrush & we expect its operations to stabilize as it solves for power & optimises for the environment, thus we remain optimistic on RACP’s prospects.
As noted above, the other significant drag on Astoria’s USD-NAV has been the 11% weaker ZAR/USD exchange rate.
Valuation, 12m TP & Implied Return: (Still) Under Cautionary…
Updating Astoria’s NAV to current prices, the share price is trading at a c.34% discount to current NAV (Previously: 24%).
If we take out our calculated “HoldCo discount” of c.15.0% (Previously: 14.5%) from this NAV, we arrive at a fair value for Astoria’s shares of c.1152cps (Previously: 1213cps) or c.22% higher than the current share price.
Rolling this fair value forward at our Cost of Equity, we arrive at a 12m TP of c.1365cps (Previously: 1440cps) that implies a potential return of c.52% from the current share price.
Note: The share is (still) trading under a cautionary announcement due to a potential acquisition.
Metrofile revenue grew per our forecasts at +16% y/y (+3% added via the consolidation of IronTree for the full period and, importantly, +13% of this growth was organic in nature) but EBITDA was slightly lighter than we expected at R345m (FY 22: R325m) as inflationary pressure, the full cost of the prior year’s established go-to-market team was carried and necessary IT upgrades were all carried in these results.
The Group bought back 10m shares, helping HEPS grow +5% y/y to 32.1cps (FY 22: 30.8cps) and the dividend was maintained at 18cps (FY 22: 18cps).
Our Thoughts: Two Large, Near-term Contract Wins Offer Upside
The Group’s MRM South Africa and MRM Middle East both won significant contracts during the period. While the South African one’s timing is hard to know (we have excluded it from our forecasts), the Middle Eastern contract should start generating revenue from the end of FY 24E (included in our forecasts from the start of FY 25E).
Note: These two contracts alone add c.+20% to Group annual revenues for the periods they occur, we cannot understate how significant they (and their timing) are to Metrofile’s next couple of financial years.
Forecast, Valuation and Implied Return: Inexpensive quality
We see Metrofile’s fair value as 423cps (previously: 426cps), implying an EV/EBITDA of 7.4x & a PE of 13.2x (comparing attractively to Iron Mountain’s current EV/EBITDA of 16.1x & PE of 47.8x).
Rolling our fair value forward, we arrive at a 12m TP of 500cps (previously: 496cps), implying an attractive c.65% return (including dividends) from these levels.
Given the fast growth in Digital Services over the period and the significant premium these businesses trade at in public markets, we are increasingly expecting some sort of inflection points in the coming years where Metrofile’s valuation starts to reflect the growing percentage of revenue coming from Digital Services.
Sabvest grew its Net Asset Value (NAV) by +10.4% y/y to 11465cps (H1:23 10388cps) and maintained its interim dividend at 30cps (H1:22 – 30cps).
The Group is fully invested and, indeed, has several investment disposals in progress. With net debt at c.10% of gross assets, we expect realizations to be applied (somewhat) to degearing.
Management expects moderate growth in NAV per share for the full FY 23E period.
Note (below) how unlisted valuation multiples have remained flat over the period.
Sources: Sabvest, Iress, Profile Media, various company reports, & Blue Gem Research workings & assumptions; *Valuation performed by Masimong management predominantly based on Discounted Free Cash Flow methodology. **Average between subsidiaries’ multiples (4.5x and 6.0x).
Thoughts: More Nuanced Performances from Investees
While H1:23 was generally a tougher trading period for underlying businesses, particularly Apex, ARB and SA Bias all performed strongly and saw good growth in their earnings and, thus, resulting valuations.
Somewhat offsetting this, Halewood saw a cyclical adverse product mix and ITL continued to be buffeted by macro headwinds in the global apparel supply chain causing both to underperform. Both these businesses are good quality, and, in time, we expect these headwinds to abate, normal growth to continue and their respective contributions to Sabvest’s NAV to rise accordingly.
Valuation, 12m TP & Implied Return: 40% discount to NAV
Updating the Group’s NAV for the latest market prices we arrive at a defendable (post-discount) fair value for Sabvest’s shares of 10060cps (previously: 9227cps), which still includes a HoldCo c.13% discount against this NAV.
Rolling our post-discount fair value forward, we see the Group’s 12m TP as 11920cps (previously: 10906cps) with an implied return of +73%, excluding dividends.
Beyond the above numbers and implied returns, the fact is that the Group’s share price (6900cps) is currently at a large c.40% discount to what we estimate its current NAV is (11534cps). Given the Group’s track record, quality of NAV and prospects, we find this large discount strange.
Astoria reported Net Asset Value of $0.748ps (FY 22: $0.827ps) or R14.08ps (FY 22: R14.06ps) with growth in Outdoor Investment Holdings (OIH) offset by lower RACP (i.e. Goldrush) & Leatt Corp share prices. A weaker Rand offset this in the Rand-based NAV but detracted against the USD-based NAV.
Unlisted valuations remain conservative with multiples unchanged.
Importantly—given its 48% of NAV—OIH is trading well, growing both footprint and store-level trading density.
Broadly, underlying businesses are performing &, even those facing headwinds, are trading resiliently and offer upside the moment the broader economy/ies improve.
Along with existing businesses growing their profits, other potential future fair value moves include both the Family Pet Centre (FPC) and Vehicle Care Group’s (VCG) refined business models showing success. Likewise, Trans Hex Marine’s historic cost should be fairly valued in future results.
During H1:23, Astoria paid back some of its investment-level debt (we expect this to continue). This adds to NAV & lowers financial risk while freeing capacity to regear for another acquisition (see the cautionary noted below).
Valuation, 12m TP & Implied Return: Under Cautionary…
Updating Astoria’s NAV to current prices, the share price is trading at a c.24% discount to current NAV (Previously: 34%).
If we take out our calculated “HoldCo discount” of c.14.5% (Previously: 14.0%) from this NAV, we arrive at a fair value for Astoria’s shares of c.1213cps (Previously: 1192cps) or c.11% higher than the current share price.
Rolling this fair value forward at our Cost of Equity, we arrive at a 12m TP of c.1440cps (Previously: 1422cps) that implies a potential return of c.33% from the current share price.
Note: The share is currently trading under a cautionary announcement due to a potential acquisition.
Astoria reports quarterly but its valuation policy is only to perform detailed valuations of its unlisted investments at major Q2 (i.e. H2) and Q4 (i.e. FY) period ends. For Q1 and Q3 results, unlisted valuations are kept unchanged, except in instances where developments require an immediate and material change in value (i.e. ‘no news is good news’ if unlisted valuations remain unchanged). Price changes for listed investments and currencies are reflected on an ongoing basis.
Due to this, we will publish one-page Q1 & Q3 results notes with fuller results notes for Q2/H2 and Q4/FY period ends.
As per our Initiation of Coverage, we have updated valuations in their respective economic currencies (e.g. OIH in Rands, Trans Hex in USD, etc) and converted either back to Rands or back to USD’s for respective NAVs. Given the weakening in the Rand against the US Dollar, this approach is creating some short-term volatility in our USD-based NAV while our ZAR-based NAV is more “stable”. This should smooth out over time.
Updating Astoria’s NAV to current prices, the share price is trading at a c.34% discount to current NAV (Previously: 36%).
If we take out our calculated “HoldCo discount” of c.14.0% (Previously: 14.6%; narrowed due to the spike in the domestic risk-free rate) from this NAV, we arrive at a fair value for Astoria’s shares of c.1192cps (Previously: 1170cps) or c.23% higher than the current share price (Previously: 25%).
Rolling this fair value forward at our Cost of Equity, we arrive at a 12m TP of c.1422cps (Previously: 1381cps) which implies a potential return of c.55% from the current share price.
FY 23 Results: Producing Cash Flows from Phase One
With Phase One’s LNG production started ramping up during FY 23, Renergen produced its first Liquid Natural Gas (LNG) revenues of R12.7m (FY 22: R2.6) with R11.1m coming from LNG and the balance from the now closed CNH pilot plant (FY 22: zero from LNG & R2.6m from CNG).
Our FY 23 cost assumptions were too heavy, and we expected a full year loss of -22.3cps while the Group only actually lost -19.86cps (FY 22: -27.73cps).
Material Updates: A Coming Year of Big Events…
Phase One will spend FY 24E ramping up production, & it pivotally shifts Renergen from developer to producer status.
The Nasdaq listing process has started with management expecting its conclusion towards the end of this year. A circular to was released detailing the issuance of equity in two tranches; the first being 67.5m shares upon Nasdaq IPO raising c.$150m with the remaining tranche being raised towards the end of the Phase Two build. This is less implied dilution than we forecast & we have adjusted our view and SOTPs for this new data.
Management also published a revealing “Phase Two Guidance Note” forecasting FY 27E estimated EBITDA of between R5.7bn and R6.2bn per annum. Given that Renergen’s entire market cap is currently only R2.7bn, R5.7bn EBITDA is significant!
Valuation: SOTPs & Peer Relatives Higher Than Share Price
Updating and refining our forecasts, we see Renergen’s current fair value at c.6400cps (previously: 6233cps) and 12m TP as a little over 7500cps (previously: 7347cps).
Updating the crude listed helium peer relatives (market cap/helium), Renergen remains discounted against this measure. This remains true even if we take Phase Two’s future equity raises into account and despite Renergen being more advanced than its peers in both proving and starting to produce from its resource.
A tax-advantaged, Mauritian “HoldCo” that is listed on both the JSE and the SEM, Astoria Investments’ aim is to grow its hard currency (i.e. USD) NAV per share at a high real rate over time.
Having permanent capital & an aligned investment manager (see below), Astoria has invested in a range of unique, unlisted, growing businesses with strong, aligned management teams.
The largest of these is Outdoor Investment Holdings (a well-run retailer, wholesaler & manufacturer focussing on the outdoor, hunting and safari markets) with other notable investments in diamond mining (land & marine), tertiary educational (health & skincare), vehicle finance & IP-led protective biking equipment.
The Group does invest in the listed space when value is present, for example, their investment into RAC Preference shares as a discounted entry-point into Goldrush (amongst the largest domestic alternative gaming business in South Africa).
These investments are relatively conservatively valued in NAV (see our analysis and arguments for this in our full report).
Investment Manager & Alignment: RECM Global
RECM Global, offers an efficient investment manager that aligns interest with other shareholders through its association with key directors that also personally hold c.22% of Astoria’s ordinary shares.
Updating Astoria’s NAV to current prices, the share price is trading at a relatively large c.36% discount to it.
If we take out our calculated “HoldCo discount” of c.14.6% from this NAV, we arrive at a fair value for Astoria’s shares of c.1170cps or c.25% higher than the current share price.
Rolling this fair value forward at our Cost of Equity (18.1%), we arrive at a 12m TP of c.1381cps that implies a significant potential return of c.57% from the current share price.
Astoria is invested in unique & growing businesses that it values conservatively, which implies a material component driving future returns is likely to be the collective earnings growth of these businesses combined with their high discount rates unwinding.
Sabvest Capital’s NAV grew 17.6% y/y to 11017cps beating our expectations, the Group’s HEPS was firm at 1591.2cps (FY 21: 1689.7cps) and management has materially lifted the dividend to 90cps (FY 21: 75cps).This was a busy period with a range of new investments from ARB Holdings, Halewood to Valemount Trading.
The Group’s investee companies executed various underlying investments from Apex buying into DRA Global to SA Bias’ Flowmax acquiring YG Prefab in the UK.
Thoughts: Exciting Portfolio Prospects
While ITL’s may be the only duller spot in Sabvest’s portfolio (longer-term, though, we are very optimistic about this group’s prospects), DNI-4PL is firing all cylinders, SA Bias is performing strongly, and Apex Partners is fast growing into a material investment for the Group.
ARB Holdings is benefitting from the boom in solar, Halewood and Valemount Trading both hold immense potential for profitable expansion from their positions in the RTD/beverage and pet industries respectively.
Updating the Group’s NAV for the latest market prices we arrive at a defendable (post-discount) fair value for Sabvest’s shares of 9227cps (previously: 8894cps), which still includes a HoldCo c.14.5% discount against this NAV.
Importantly, the underlying NAV appears to be conservatively valued and management’s track record for growth is well above average. These two factors combine favourably to form the Group’s investment appeal, particularly when offered at a discount (we estimate the share price currently offers a c.25% discount to NAV).
Rolling our post-discount fair value forward, we see the Group’s 12m TP as 10906cps (previously: 10511cps) with an implied return of +35%, excluding dividends.
Revenue rose +19% y/y to R564m (H1:22 – R474m), driven by a +61% y/y growth in digital services but revenue mix and costs moved against the Group’s margins and saw EBITDA only rise +6% y/y & HEPS lift +1% y/y to 15.0cps (H1:22 – 14.9cps).
Management returned R22.6m to shareholders through share buy-backs (c.6cps) and have declared a dividend of 9cps (H1:23 – 9cps).
We have somewhat lifted our forecast revenue expectations but also tried to factor more sustained inflationary pressures and higher interest rates into the Group’s forecast period.
Our Thoughts: Bottom-line Growth Coming…
While the current period was somewhat disappointing from a margin perspective (we did guide for margin pressure in H1:23 in our previous note), we do expect revenue growth to start to drop to the bottom-line in H2:23E.
The new go-to-market sales team in MRM South Africa, IronTree’s continuing (if not accelerating) growth, Metrofile VYSION’s success in the enterprise space, & a growing MRM Middle East (mostly digital services) are all likely to grow in contribution to the Group over time and, thus, the Group’s growth profile should start to move towards these businesses with their digital tailwinds.
Forecast, Valuation and Implied Return: Relatively Cheap
We see Metrofile’s fair value as 426cps (previously: 404cps), or c.37% higher than its current share price.
Importantly, our fair value implies an EV/EBITDA of 7.6x & a PE of 13.8x, which compares attractively to Iron Mountain’s current EV/EBITDA of 14.5x & PE of 27.4x.
Rolling our fair value forward, we arrive at a 12m TP of 496cps (previously: 473cps), implying an attractive c.60% return (including dividends) from these levels.
Updates: Phase One now producing both LNG and helium
Renergen’s Virginia Gas Project’s Phase One is now producing both LNG & helium, thus signifying the Group’s transition from a developer to a producer. While initial project delays &, later, some operational teething issues pushed this event out later than planned, the Group announced late last year the production of LNG &, mid-January 2023, announced the production of liquid helium. Importantly, this now means that:
Phase One will start generating cash flows,
This provides further evidence of the resource and management’s ability to execute on the resource, &
The combination of the above two further de-risk Phase Two.
The Virginia Gas Project was awarded ‘Strategic Integrated Project’ status by the South African Government, & the Group completed a small capital raise, placing 4.4m shares at c.2464cps in early December 2023, bolstering its coffers.
Finally, the Group announced plans to list on the Nasdaq as a build-up to the equity-leg of Phase Two’s capital raise.
Valuation: Either peers expensive or REN (very) cheap
Working through global pure-play helium stocks we found that:
There are very few pure-play helium stocks and almost none of them are (or close to) producing anything,
Ignoring the two extremely speculative Tanzania-based resources, most helium reserves are lowly-proven & small, yet investors are willing to pay large multiples for them.
If Renergen’s reserve (which is proven and now producing) is valued on an equivalent basis, the stock would multiples of its current price. Hence, we believe, the Nasdaq listing…
Ignoring peers & the huge relative value in the stock, we see Renergen’s fair value at c.6233cps (previously: 6700cps) and 12m TP c.7,347cps (previously: 8000cps).