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.