Trellidor – Initiation of Coverage – Compounder with Yield & Tailwinds

Share Code: TRL – Market Cap: R333m – PE: 18.4x – DY: 2.3%

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.