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.
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.
Share Code: MFL – Market Cap.: R1.5bn – PE: 10.5x – DY: 4.5%
H1:22 Results: Tough Period
- Metrofile’s H1:22 period saw domestic riots & elections, the implementation of the POPIA, Kenyan regulatory pressures, COVID lockdowns & supply chains disruptions.
- The Group’s revenue rose +4% y/y (driven by the Middle East and Digital Services), though margin pressure lowered Operating Profit -2% y/y.
- Strong cash generation allowed the Group to degear further (despite acquiring IronTree during this period) & the combination of lower finance charges & a lower effective tax rate (attributable to the Middle East) saw HEPS grow +1% y/y.
- Implementing a new dividend policy, management has hiked the interim dividend by +29% y/y.
Our Thoughts: H2:22 Recovery + Digital is Growing
- Many of the headwinds in H1:22 should abate during H2:22E, thus we expect some upside in the coming full FY 22E results.
- Already in Q2 management saw box volumes in South Africa recovering while H2:22E should also see a full six month’s consolidation from IronTree (it was only consolidated for a single month in H1:22).
- Perhaps not obvious at first glance, but Digital Services now contributes 20% of the Group’s revenues. We are extremely bullish on developments in this space and expect Digital Services to be a growing vector in future results.
Forecast, Valuation and Implied Return: Margin of Safety
- We see Metrofile’s fair value as 405cps (previously: 428cps), or c.20% higher than its current share price.
- Importantly, our fair value of 405cps for Metrofile implies an EV/EBITDA of 7.1x & a PE of 12.7x, which compares attractively to Iron Mountain’s EV/EBITDA of 14.6x & PE of 31.1x.
- In fact, when compared to Iron Mountain, Metrofile has the same-or-better returns & significantly less gearing.
- Rolling the 405cps fair value forward, we arrive at a 12m TP of 472cps (previously: 497cps). This implies an attractive +41% return (including dividends) from these levels.
Share Code: REN – Market Cap: R4.9bn – PE: -115x – DY: 0.0%
News: Helium & LNG more valuable, Ivanhoe Mines invests
- Helium market update: Supply challenges from BLM, Qatar & Amur all limit helium availability as SpaceX & the semiconductor industry ramps up demand, implying large helium spot upside.
- LNG market update: The oil price rally should drive domestic fuel prices (further) upwards. Reasons for the rally are both sticky and bode well for Renergen’s LNG revenues (tied to diesel &/or CPI).
- Ivanhoe Mines “strategic partnership”: In a momentous moment for Renergen, Ivanhoe Mines has invested into the Group (an initial 4.35%-stake) with a roadmap to potentially ramp this investment up to a maximum of either 55% or $250m of capital.
Our Thoughts: Renergen’s Potential Upside is Growing Quickly
- The tailwinds lifting Renergen’s underlying gas resource keep driving its fair value upwards. While the LNG revenue should track domestic fuel prices & CPI upwards, the helium revenue (even the revenue locked into the long-term supply contracts) holds immense upside potential too.
- The latter may see wild card renegotiation clauses being triggered and repricing in the increasingly tight global helium market.
- The investment by Ivanhoe Mines is a vote of confidence in the Group and, depending on how/if Ivanhoe Mines takes up their options to further invest, may underpin the (equity) funding for (a much larger!) Phase II that further derisks the Group.
Valuation and Implied Return: Plenty of Room…
- Despite keeping our helium basket price flat and a stronger Rand exchange rate, we upgrade our fair value to 5821cps (previously: 5747cps) & 12m TP to 6867cps (previously: 6766cps).
- Given the commodity pricing dynamics, there is considerable upside risk to this valuation from both LNG & repricing helium closer to spot, not to mention any Rand-weakness.