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.
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%.