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.