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 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.

Renergen – H1:23 Results – Share Price Disconnected from Underlying

Share Code: REN – Market Cap: R3.7bn – PE: -105x – DY: 0.0%

H1:23 Results: Delayed but moving swiftly forward

  • Renergen’s revenue was flat at R1.2m and the Group reported a loss of -19.31cps (H1:21 -21.05cps) as it neared production status.
  • Phase One is moments from producing gas and, although delayed against the original timeframe, this will be an exciting moment as the Group transitions from a developer to a producer.
  • Phase Two funding is progressing well, having issued shares to Ivanhoe Mines (though the larger equity deal expired), the CEF has agreed to inject R1bn into the Project, & various blue chip debt funders have expressed interest in funding up to $1.2bn of debt for the project.

Our Thoughts: Enviable Position

  • While Phase One delays are disappointing, the underlying fundamentals and attractive economics of the Virginia Gas Project remain and are further highlighted by the interest in funding Phase Two.
  • The conclusion of the well-priced CEF R1bn equity investment is a strong positive and, we believe, the expiry of the Ivanhoe equity deal is a net positive by avoiding expensive dilution.
  • Furthermore, the large pool of interested debt funders into Phase Two means that Renergen has both time to find the appropriate equity funding and the flexibility to pick terms.
  • All in all, we believe that Renergen is in an enviable position for a developer as it transitions into a fully-fledged gas producer.

Valuation and Implied Return: Share Price Disconnected from Value

  • We see Renergen’s fair value at c.6700cps (previously: 6337cps) and 12m TP c. 8000cps (previously: 7491cps).
  • With a range of fair values from c.5000cps to c.6700cps (CEF deal implies c.6600cps for REN shares), what is clear is that REN’s share price deviates substantially from even the low-end of this range.

Metrofile Holdings – Headwinds Obscure Good Digital Growth

Share Code: MFL – Market Cap.: R1.4bn – PE: 10.6x – DY: 5.4%

FY 22 Results: Tougher H2:22 than expected

  • Revenue rose +5% y/y, EBITDA +1.0% y/y and HEPS slipped to 30.7cps (FY 21: 31.8cps) as floods, disruptions, inflationary pressures and longer customer lead times combined to make for a weaker H2:22 than we had expected.
  • Despite this, cash generation was strong (R324m EBITDA converted into R327m of cash flow), debt levels are comfortable, and management hiked the dividend by +20%.
  • Finally, management have asserted that share buy-backs will be initiated, which should be quite accretive at this share price.

Our Thoughts: Core remains strong, digital growing quickly

  • The tumultuous environment obscured the progress made in retaining the Group’s core (net boxes grew +2.8% y/y) & growing its digital services (now making up 21% of Group revenue and grew +35% y/y).
  • On the latter point, digital services are growing even quicker than reported because scanning revenues were in fact down -9% over this period; IronTree was slightly ahead of targets, & DataStor & eTracker (Metrofile Vysion) grew +40% y/y in this period.
  • Annexure A shows the Group’s digital strategy (past, present & future) and it is very much worth studying as roadmap.

Forecast, Valuation and Implied Return: Undemanding multiples

  • We see Metrofile’s fair value as 404cps (previously: 405cps), or c.24% higher than its current share price. Higher interest rates and our inclusion of IFRS 16 leases into net debt (taking c.34cps of fair value out of SOTP) were the major headwinds that kept our fair value flat over this period.
  • Importantly, our fair value implies an EV/EBITDA of 7.5x & a PE of 12.7x, which compares attractively to Iron Mountain’s EV/EBITDA of 14.2x & PE of 37.7x.
  • Given the large (c.21% of revenue) and growing (+35% y/y growth) digital revenue in Metrofile, our implied multiples appear even more attractive when you consider them relative to listed digital peers in this space (average EV/EBITDA of 20.2x & average PE of 44.4x).
  • Rolling our fair value forward, we arrive at a 12m TP of 473cps (previously: 472cps), implying an attractive +46% return (including dividends) from these levels.

Sabvest Capital – H1:22 Results – Better than Expected

Share Code: SBP – Market Cap: R2.9bn – Dividend Yield: 1.0%

H1:22 Results: Better than expected

  • Sabvest’s Net Asset Value (NAV) grew +10.9% p/p and +26.1% y/y to 10388cps (FY 21: 9371cps) driven by strong performances almost across all its investments that beat our full-year estimates.
  • The Group concluded investments in ARB Holdings and Halewood International South Africa during the period.
  • Despite this investment activity, the Group received good dividend flows, remains relatively lowly geared and management has declared a +50% y/y growth in dividend to 30cps (H1:21 – 20cps).

Thoughts: H1:22 growth likely to continue in H2:22E

  • ARB Holdings and Halewood are currently being carried at cost. While we expect operational growth in ARB to carry this investment value upwards, Halewood’s investment price appears quite conservative, and we expect both operational and re-rating to lift this valuation going forward.
  • Likewise, DNI-4PL, Masimong & Apex are all growing quickly, ITL Holdings’ global group has recovered strongly and SA Bias’ Flowmax appears to be on the front foot for acquisitions.
  • Finally, coupled with Sabvest’s superb capital allocation, relatively lowly-geared centre and its ability to buy-back its own shares below NAV, and it is likely that the good growth rate in H1:22 carries comfortably into H2:22E (and beyond).

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

  • Updating the Group’s NAV for the latest market prices & taking out our present valued “HoldCo discount”, we arrive at a defendable (post-discount) fair value for Sabvest Capital shares of 8894cps (previously: 7487cps) or +22% higher than the current share price.
  • Rolling this fair value forward at our Cost of Equity, we see the Group’s 12m TP as 10511cps (previously: 8825cps) with an implied return of +44%.

Refer to our Initiation of Coverage for more background.

Renergen – Key Due Diligence Is Successful

Share Code: REN – Market Cap: R4.6bn – PE: -124x – DY: 0.0%

Central Energy Fund: Due Diligence Successful, Fair Value Implied

  • Following Ivanhoe Mines’ option expiring (see our previous note), questions surfaced about the reason for this expiry &, indeed, whether it involved the quality of the Virginia Gas Project (VGP).
  • Concurrent to Ivanhoe’s deal, Renergen was fielding a due diligence (DD) by the Central Energy Fund (CEF) for a 10% stake in VGP for R1bn. This DD has successfully concluded and both parties are now seeking final approvals to complete the transaction.
  • This is an important event for at least three reasons:
    1. The positive DD by CEF confirms the quality of the VGP,
    2. Assuming final approvals are received, this injects R1bn of equity funding into the Phase II funding, &
    3. This solidifies an arms-length R10bn valuation for VGP (i.e. if 10% is worth R1bn, 100% is worth R10bn).

Our Thoughts: Much Better Price + Less Dilution

  • Above, point (3) implies that REN’s 90% stake is worth R9bn or c.6660cps (= R9bn/135.1m shares) versus our previous fair value of 6337cps & the share’s current market price of 3460cps.
  • Ivanhoe’s option would have come in at a discount to the current market price (if exercised) &, thus, the CEF’s deal is a lot less dilutive for shareholders and ensures a much large proportion of the eventual VGP value likely accrues to existing shareholders.

Valuation and Implied Return: Unchanged

  • We are currently reassessing our valuation and model for REN and will publish this in due course.
  • Despite that & due to the CEF deal—assuming no deterioration in exchange rates, commodity prices or interest rates—we believe that the previously communicated valuation at least guides towards a floor value of the Group. Previously, we saw REN’s fair value as around 6337cps & 12m TP of about 7491cps.

Renergen – First Gas-to-Plant & Ivanhoe Option Expiry

Share Code: REN – Market Cap: R4.4bn – PE: -123x – DY: 0.0%

Phase 1: First gas-to-plant

  • On the 8th of July 2022, Renergen successfully achieved its first natural gas to its Phase 1 plant. This was signified by opening the main inlet line from the gas gathering system, to the process plant and then to the natural gas filtration and pre-compression system.
  • This is a major qualitative derisking moment for the entire project and one that, strangely, its share price did not seem to notice.

Ivanhoe Mines: Option expiry allows for better options

  • The Ivanhoe Mines’ option to ramp-up their stake in Renergen (at a discount to VWAP) has expired due to unfilled conditions (we believe that the specific outstanding condition is Competition Commission approval). Ivanhoe remains a c.4.3%-shareholder & there remains a potential LNG offtake deal on the table.
  • This option expiry may appear to leave a funding gap for Phase 2, but it does remove a potentially very dilutionary action (especially if the share price remains well below our fair value).
  • How dilutionary? Consider that the Ivanhoe shares could have been issued at a discount to VWAP/market price (currently c.R4bn or the low-3000cps) while the Central Energy Fund (CEF) deal values the project at c.R10bn or 6933cps (c.102% premium!). Indeed, a positive outcome from the CEF deal’s due diligence should peg REN’s implied fair value higher than the Ivanhoe deal.
  • Finally, as evidenced by the appetite for Phase 2 lending (see our note) & following discussions with management (they have just come back from a well-received global roadshow), we believe that the Phase 2 equity-funding should be filled and we hope it could be done so at a better price, i.e. with less dilution.

Valuation and Implied Return: Unchanged

We have left our model and forecasts unchanged, even though they incorporate Ivanhoe’s now expired options because there should still be some equity dilution for Phase 2 and this allows us to somewhat account for it in our forecasts and valuation.

Renergen – Funding (Almost) Secured

Share Code: REN – Market Cap: R5.0bn – PE: -139x – DY: 0.0%

Phase 2 Debt Funding: Quantum Points to Larger Phase 2

  • Renergen has signed a Retainer Letter with the US International Development Finance Corporation (DFC) for Phase 2 debt funding of up to $500m. The DFC provided debt of $40m in Phase 1.
  • Added to this, Renergen has received multiple Letters of Intent to co-lend alongside the DFC of up to $700m in senior debt.
  • The lenders are currently conducting a due diligence to finalize their offers &, assuming a positive outcome, it leaves Renergen in the envious position to pick and choose its debt funding.
  • These lines of debt are up to $1.6bn in potential funding that—when combined with potential equity funding from Ivanhoe Mines & the CEF—points a clear path to a fully-funded Phase 2.
  • Renergen is now targeting 65% gearing & the implications of the amounts are that Phase 2 will be materially larger than originally envisioned; we originally assumed a c.R12bn capex cost for Phase 2, but the above figures imply >R15bn – Gas projects tend to get returns to scale & a c.25% larger size may produce >25% more gas.
  • If we assume a c.$1bn Phase 2, & Ivanhoe (capped to c.$250m) & CEF (c.R1bn) both follow through for their equity and Renergen management draw down on their debt with a 65% gearing (drawing c.$650m), this implies that there remains equity funding of c.$45m or c.R700m (c.1-for-10 rights issue at current prices).

Valuation and Implied Return: Updated for latest spot prices

  • While Phase 2 size is rising, output upgrades & the Ivanhoe & CEF equity needs to be pinned down for us to correctly model. These are large variables and, currently, still have conditions outstanding.
  • For now, we have kept the size of Phase 2 flat (which creates upside risk to our valuation and forecasts), assumed debt is drawn down at the end of FY 23E (but interest capitalized until FY 25E), Ivanhoe & CEF follow their full equity rights, 11.5m REN shares are placed during FY 23E (1-for-10 rights issue), & Phase 2 production starts during FY 25E (9 months) with steady-state in FY 26E (albeit, we have used flat spot prices as based on the current basket, ArgHe token price and exchange rates).
  • This produces a fair value of 6337cps (previously: 6344cps) & 12m TP of 7491cps (previously: 7501cps).

Renergen – FY 22 Results – Token Update

Share Code: REN – Market Cap: R4.6bn – PE: -129x – DY: 0.0%

FY 22 Results: Pilot CNG revenue higher, losses smaller

  • Given the elevated oil price, the diesel-linked pilot CNG plant at Renergen produced a higher revenue and smaller loss than expected and, in a way, is a precursor to the sensitivity of the Group’s coming Phase 1 (& Phase 2) LNG and helium projects.
  • Given that the Group is still in development stage, the FY 22 results are less relevant than focussing on key project and corporate activity during the period. For detailed analysis of these, see our previous reports listed here (LINK), but in summary:
    • The Group massively upgraded their proven gas reserves.
    • Lockdowns, supply chain challenges & a NUMSA strike negatively impacted Phase 1’s timing. This is a sunk cost and, importantly, Phase 1 is now in hot commissioning.
    • A partnership with Ivanhoe Mines &, subject to conditions, the investment by the Central Energy Fund (CEF) both solidified Virginia’s potential & helped derisk the funding of Phase 2.
    • Finally, the Group’s helium token has listed successfully and early trade indicates a healthy (future) spot market (while providing an effective prepaid offtake financing for Phase 2) while Cryo-VaccTM keeps progressing.

Valuation and Implied Return: Upgrading Fair Value & 12m TP

  • We have adjusted our model to reflect c.9 months of Phase 1 production (adjusting Phase 2 equivalently) while updating spot prices. We expected 35% of the Phase 2 helium revenues to earn Argonon Helium token “spot price” (currently c.$296.93/mcf). Finally, we have assumed Ivanhoe takes up their full equity stake & the CEF’s R1bn investment proceeds successfully.
  • We see Renergen’s fair value as 6344cps (previously: 5821cps) and upgrade its 12m TP to 7501cps (previously: 6867cps).

Trellidor Door Holdings – H1:22 – Series of Unfortunate Events

Share Code: TRL – Market Cap.: R267m – PE: 7.9x – DY: 3.9%

H1:22 Results: Riots, Strike, Shortages & Curveballs…

  • The riots in July & the metalworkers strike (c.12% lost production time in Trellidor) combined with stock shortages in the Taylor to hurt sales & pressure margins.
  • Despite losing an estimated c.R25m of turnover & c.R12m of EBITDA to these unfortunate events, Group revenue managed to be maintained at R284m (H1:21 – R282m).
  • Gross margin contracted to 40.1% (H1:21 – 44.6%), EBITDA fell to R46.5m (H1:21 – R57.8m) & HEPS contracted to 25.4cps (H1:21 – 30.6cps).
  • As a final curveball, a contingent liability has manifested in the form of an adverse labour judgement being upheld. We have assumed an R29m one-off expense in H2:22 due to this & management have skipped their dividend in anticipation of having to fund this drawdown.

Our Thoughts: Better H2:22 Likely

  • We expect that in H2:22E, the acquisitions in Trellidor Retail, the full-period consolidation of the UK, the maintenance of full production in the factories and more aggressive price increases are all likely to see some of the H1:22 underperformance clawed back.
  • Despite this, recent raw material price spikes (from Russia-Ukraine) & supply chain disruptions (from China’s latest COVID outbreak meeting its zero COVID policy) put this view at risk.

Forecast, Valuation & Implied Return: Worth > 400cps

  • Our DCF Models imply that Trellidor is worth c.469cps (previously: 548cps) on a PE of 13.2x & EV/EBITDA of 7.3x.
  • Our Relative Valuation implies a fair value of 411cps (previously 470cps), which does not agree with the above DCF. Despite this, both models indicate a fair value for Trellidor at least greater than 400cps (well above the current 285cps share price).
  • Rolling this DCF SOTP fair value forward we arrive at a 12m TP of 580cps (previously 656cps) implying a total return of c.103%.

Renergen – Government Investor Highlights Virginia’s Value

Share code: REN – Market Cap.: R5.1bn – PE: -114x – DY: 0.0%

News: South African Government invests directly

  • South Africa’s Schedule 2 state-owned diversified energy company, Central Energy Fund (CEF), has signed a non-binding term sheet to invest R1bn into Renergen’s wholly-owned subsidiary that houses the Virginia Gas Project, Tetra4, in exchange for new shares equalling 10% of Tetra4 being issued.
  • The agreement leaves 141 days for the CEF to complete a due diligence, get necessary approvals, & sign a binding legal agreement with Renergen. This period can be extended & Renergen has the option to renegotiate the price.

Our Thoughts: Adds momentum, derisks further & implies fair value

  • This deal adds further momentum to the direct investment into the Group by Ivanhoe Mines, further capitalizes Phase II and, more subtly, aligns this project’s success directly with domestic Government that somewhat politically & regulatory derisks it.
  • Management has confirmed that the CEF deal is backed by Ivanhoe Mines. Thus, it may add to the probability that Ivanhoe Mines will follow their remaining rights at Group-level.

Valuation and Implied Return: CEF price tag implies 6946cps

  • Given the proximately to our last note, we have not updated our fair value for Renergen and maintain it at 5821cps (previously: 5821cps) with a 12m TP of 6867cps (previously: 6867cps).
  • The R1bn price attached to 10% of Tetra4 implies a valuation of R9bn for the remaining 90% held by Renergen, or c.6946cps per issued REN share (=R9bn / c.129.5m issued shares).
  • While this implied valuation is only indicative (the CEF likely has different criteria for making/valuing investments than stock market minorities, the investment further derisks the project, & shareholding in a subsidiary does not take into account other Group assets nor HoldCo costs), it certainly highlights how undervalued Renergen’s shares potentially are.

Sabvest Capital – FY 21 – Great Performance with More to Come

Share Code: SBP – Market Cap: R2.4bn – Dividend Yield: 0.6%

FY 21 Results: Strong NAV growth, large hike in dividend

  • Sabvest’s FY 21 Net Asset Value (NAV) per share grew by +26% y/y to 9371cps (FY 20: 7444cps), adding to the Group’s fantastic track record as it has compounded NAV per share (excluding dividends) at +16.9% CAGR for a decade & a half!
  • Updating this NAV (keeping unlisted valuations flat), we see the current share as trading at a c.37% discount. This is despite JSE-listed HoldCo’s average discount-to-NAV being c.30%, and despite most of these other HoldCo’s having a worse track record than Sabvest. Using this peer-average discount, Sabvest shares should be trading closer to 7000cps.
  • Sabvest hiked its dividend to 75cps (FY 20: 25cps) as its balance sheet remains comfortably capitalized.

Thoughts: “Quality” growth in NAV, more likely to come…

  • As most of Sabvest’s investments are unlisted (c.86% of NAV), it is important to emphasise that the growth in NAV is not due to rising valuation multiples (all valuation multiples are flat from FY 20). The growth in NAV was driven by earnings growth &, therefore, we consider it “quality growth”.
  • As investee companies are trading at-or-better than 2019 pre-COVID levels, we expect continuing NAV growth in FY 22E.

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

  • Updating the Group’s NAV for the latest market prices & taking out our present valued “HoldCo discount”, we arrive at defendable (post-discount) fair value for Sabvest Capital shares of 7487cps (previously: 6826cps) or +19% higher than the current share price.
  • Rolling this fair value forward at our Cost of Equity, we see the Group’s 12m TP as 8825cps (previously: 8000cps) with an implied return of +40%.
  • All these measures exclude the potential upside from the ARB Holdings delisting, Apex’s Ascendis Medical deal & any Rand weakness going forward that will lift hard currency valuations.
  • Refer to our Initiation of Coverage for more background.