Astoria Investments – Initiation of Coverage – Unique & Growing Businesses, Discounted

Share Code: ARA – Market Cap: R492m – Discount to NAV: 36%

Astoria: Structure, Aim & Portfolio

  • A tax-advantaged, Mauritian “HoldCo” that is listed on both the JSE and the SEM, Astoria Investments’ aim is to grow its hard currency (i.e. USD) NAV per share at a high real rate over time.
  • Having permanent capital & an aligned investment manager (see below), Astoria has invested in a range of unique, unlisted, growing businesses with strong, aligned management teams.
  • The largest of these is Outdoor Investment Holdings (a well-run retailer, wholesaler & manufacturer focussing on the outdoor, hunting and safari markets) with other notable investments in diamond mining (land & marine), tertiary educational (health & skincare), vehicle finance & IP-led protective biking equipment.
  • The Group does invest in the listed space when value is present, for example, their investment into RAC Preference shares as a discounted entry-point into Goldrush (amongst the largest domestic alternative gaming business in South Africa).
  • These investments are relatively conservatively valued in NAV (see our analysis and arguments for this in our full report).

Investment Manager & Alignment: RECM Global

  • RECM Global, offers an efficient investment manager that aligns interest with other shareholders through its association with key directors that also personally hold c.22% of Astoria’s ordinary shares.

Valuation, 12m TP & Implied Return: Discounted & Growing

  • Updating Astoria’s NAV to current prices, the share price is trading at a relatively large c.36% discount to it.
  • If we take out our calculated “HoldCo discount” of c.14.6% from this NAV, we arrive at a fair value for Astoria’s shares of c.1170cps or c.25% higher than the current share price.
  • Rolling this fair value forward at our Cost of Equity (18.1%), we arrive at a 12m TP of c.1381cps that implies a significant potential return of c.57% from the current share price.
  • Astoria is invested in unique & growing businesses that it values conservatively, which implies a material component driving future returns is likely to be the collective earnings growth of these businesses combined with their high discount rates unwinding.

Sabvest Capital – FY 22 Results – Exciting Prospects

Share Code: SBP – Market Cap: R3.2bn – Dividend Yield: 1.1%

FY 22 Results: Better than Expected

  • Sabvest Capital’s NAV grew 17.6% y/y to 11017cps beating our expectations, the Group’s HEPS was firm at 1591.2cps (FY 21: 1689.7cps) and management has materially lifted the dividend to 90cps (FY 21: 75cps).This was a busy period with a range of new investments from ARB Holdings, Halewood to Valemount Trading.
  • The Group’s investee companies executed various underlying investments from Apex buying into DRA Global to SA Bias’ Flowmax acquiring YG Prefab in the UK.

Thoughts: Exciting Portfolio Prospects

  • While ITL’s may be the only duller spot in Sabvest’s portfolio (longer-term, though, we are very optimistic about this group’s prospects), DNI-4PL is firing all cylinders, SA Bias is performing strongly, and Apex Partners is fast growing into a material investment for the Group.
  • ARB Holdings is benefitting from the boom in solar, Halewood and Valemount Trading both hold immense potential for profitable expansion from their positions in the RTD/beverage and pet industries respectively.

Valuation, 12m TP & Implied Return: Cheap & Growing

  • Updating the Group’s NAV for the latest market prices we arrive at a defendable (post-discount) fair value for Sabvest’s shares of 9227cps (previously: 8894cps), which still includes a HoldCo c.14.5% discount against this NAV.
  • Importantly, the underlying NAV appears to be conservatively valued and management’s track record for growth is well above average. These two factors combine favourably to form the Group’s investment appeal, particularly when offered at a discount (we estimate the share price currently offers a c.25% discount to NAV).
  • Rolling our post-discount fair value forward, we see the Group’s 12m TP as 10906cps (previously: 10511cps) with an implied return of +35%, excluding dividends.

Metrofile Holdings – H1:23 Results – Great Top-line Growth

Share Code: MFL – Market Cap: R1.3bn – PE: 10.0x – DY: 5.8%

H1:23 Results: Revenue & Digital Growth Occurring

  • Revenue rose +19% y/y to R564m (H1:22 – R474m), driven by a +61% y/y growth in digital services but revenue mix and costs moved against the Group’s margins and saw EBITDA only rise +6% y/y & HEPS lift +1% y/y to 15.0cps (H1:22 – 14.9cps).
  • Management returned R22.6m to shareholders through share buy-backs (c.6cps) and have declared a dividend of 9cps (H1:23 – 9cps).
  • We have somewhat lifted our forecast revenue expectations but also tried to factor more sustained inflationary pressures and higher interest rates into the Group’s forecast period.

Our Thoughts: Bottom-line Growth Coming…

  • While the current period was somewhat disappointing from a margin perspective (we did guide for margin pressure in H1:23 in our previous note), we do expect revenue growth to start to drop to the bottom-line in H2:23E.
  • The new go-to-market sales team in MRM South Africa, IronTree’s continuing (if not accelerating) growth, Metrofile VYSION’s success in the enterprise space, & a growing MRM Middle East (mostly digital services) are all likely to grow in contribution to the Group over time and, thus, the Group’s growth profile should start to move towards these businesses with their digital tailwinds.

Forecast, Valuation and Implied Return: Relatively Cheap

  • We see Metrofile’s fair value as 426cps (previously: 404cps), or c.37% higher than its current share price.
  • Importantly, our fair value implies an EV/EBITDA of 7.6x & a PE of 13.8x, which compares attractively to Iron Mountain’s current EV/EBITDA of 14.5x & PE of 27.4x.
  • Rolling our fair value forward, we arrive at a 12m TP of 496cps (previously: 473cps), implying an attractive c.60% return (including dividends) from these levels.

Renergen – Producer Status Achieved

Share Code: REN – Market Cap: R3.9bn – PE: -108x – DY: 0.0%

Updates: Phase One now producing both LNG and helium

  • Renergen’s Virginia Gas Project’s Phase One is now producing both LNG & helium, thus signifying the Group’s transition from a developer to a producer. While initial project delays &, later, some operational teething issues pushed this event out later than planned, the Group announced late last year the production of LNG &, mid-January 2023, announced the production of liquid helium. Importantly, this now means that:
    • Phase One will start generating cash flows,
    • This provides further evidence of the resource and management’s ability to execute on the resource, &
    • The combination of the above two further de-risk Phase Two.
  • The Virginia Gas Project was awarded ‘Strategic Integrated Project’ status by the South African Government, & the Group completed a small capital raise, placing 4.4m shares at c.2464cps in early December 2023, bolstering its coffers.
  • Finally, the Group announced plans to list on the Nasdaq as a build-up to the equity-leg of Phase Two’s capital raise.

Valuation: Either peers expensive or REN (very) cheap

  • Working through global pure-play helium stocks we found that:
    • There are very few pure-play helium stocks and almost none of them are (or close to) producing anything,
    • Ignoring the two extremely speculative Tanzania-based resources, most helium reserves are lowly-proven & small, yet investors are willing to pay large multiples for them.
    • If Renergen’s reserve (which is proven and now producing) is valued on an equivalent basis, the stock would multiples of its current price. Hence, we believe, the Nasdaq listing…
  • Ignoring peers & the huge relative value in the stock, we see Renergen’s fair value at c.6233cps (previously: 6700cps) and 12m TP c.7,347cps (previously: 8000cps).

Renergen – H1:23 Results – Share Price Disconnected from Underlying

Share Code: REN – Market Cap: R3.7bn – PE: -105x – DY: 0.0%

H1:23 Results: Delayed but moving swiftly forward

  • Renergen’s revenue was flat at R1.2m and the Group reported a loss of -19.31cps (H1:21 -21.05cps) as it neared production status.
  • Phase One is moments from producing gas and, although delayed against the original timeframe, this will be an exciting moment as the Group transitions from a developer to a producer.
  • Phase Two funding is progressing well, having issued shares to Ivanhoe Mines (though the larger equity deal expired), the CEF has agreed to inject R1bn into the Project, & various blue chip debt funders have expressed interest in funding up to $1.2bn of debt for the project.

Our Thoughts: Enviable Position

  • While Phase One delays are disappointing, the underlying fundamentals and attractive economics of the Virginia Gas Project remain and are further highlighted by the interest in funding Phase Two.
  • The conclusion of the well-priced CEF R1bn equity investment is a strong positive and, we believe, the expiry of the Ivanhoe equity deal is a net positive by avoiding expensive dilution.
  • Furthermore, the large pool of interested debt funders into Phase Two means that Renergen has both time to find the appropriate equity funding and the flexibility to pick terms.
  • All in all, we believe that Renergen is in an enviable position for a developer as it transitions into a fully-fledged gas producer.

Valuation and Implied Return: Share Price Disconnected from Value

  • We see Renergen’s fair value at c.6700cps (previously: 6337cps) and 12m TP c. 8000cps (previously: 7491cps).
  • With a range of fair values from c.5000cps to c.6700cps (CEF deal implies c.6600cps for REN shares), what is clear is that REN’s share price deviates substantially from even the low-end of this range.

Metrofile Holdings – Headwinds Obscure Good Digital Growth

Share Code: MFL – Market Cap.: R1.4bn – PE: 10.6x – DY: 5.4%

FY 22 Results: Tougher H2:22 than expected

  • Revenue rose +5% y/y, EBITDA +1.0% y/y and HEPS slipped to 30.7cps (FY 21: 31.8cps) as floods, disruptions, inflationary pressures and longer customer lead times combined to make for a weaker H2:22 than we had expected.
  • Despite this, cash generation was strong (R324m EBITDA converted into R327m of cash flow), debt levels are comfortable, and management hiked the dividend by +20%.
  • Finally, management have asserted that share buy-backs will be initiated, which should be quite accretive at this share price.

Our Thoughts: Core remains strong, digital growing quickly

  • The tumultuous environment obscured the progress made in retaining the Group’s core (net boxes grew +2.8% y/y) & growing its digital services (now making up 21% of Group revenue and grew +35% y/y).
  • On the latter point, digital services are growing even quicker than reported because scanning revenues were in fact down -9% over this period; IronTree was slightly ahead of targets, & DataStor & eTracker (Metrofile Vysion) grew +40% y/y in this period.
  • Annexure A shows the Group’s digital strategy (past, present & future) and it is very much worth studying as roadmap.

Forecast, Valuation and Implied Return: Undemanding multiples

  • We see Metrofile’s fair value as 404cps (previously: 405cps), or c.24% higher than its current share price. Higher interest rates and our inclusion of IFRS 16 leases into net debt (taking c.34cps of fair value out of SOTP) were the major headwinds that kept our fair value flat over this period.
  • Importantly, our fair value implies an EV/EBITDA of 7.5x & a PE of 12.7x, which compares attractively to Iron Mountain’s EV/EBITDA of 14.2x & PE of 37.7x.
  • Given the large (c.21% of revenue) and growing (+35% y/y growth) digital revenue in Metrofile, our implied multiples appear even more attractive when you consider them relative to listed digital peers in this space (average EV/EBITDA of 20.2x & average PE of 44.4x).
  • Rolling our fair value forward, we arrive at a 12m TP of 473cps (previously: 472cps), implying an attractive +46% return (including dividends) from these levels.

Sabvest Capital – H1:22 Results – Better than Expected

Share Code: SBP – Market Cap: R2.9bn – Dividend Yield: 1.0%

H1:22 Results: Better than expected

  • Sabvest’s Net Asset Value (NAV) grew +10.9% p/p and +26.1% y/y to 10388cps (FY 21: 9371cps) driven by strong performances almost across all its investments that beat our full-year estimates.
  • The Group concluded investments in ARB Holdings and Halewood International South Africa during the period.
  • Despite this investment activity, the Group received good dividend flows, remains relatively lowly geared and management has declared a +50% y/y growth in dividend to 30cps (H1:21 – 20cps).

Thoughts: H1:22 growth likely to continue in H2:22E

  • ARB Holdings and Halewood are currently being carried at cost. While we expect operational growth in ARB to carry this investment value upwards, Halewood’s investment price appears quite conservative, and we expect both operational and re-rating to lift this valuation going forward.
  • Likewise, DNI-4PL, Masimong & Apex are all growing quickly, ITL Holdings’ global group has recovered strongly and SA Bias’ Flowmax appears to be on the front foot for acquisitions.
  • Finally, coupled with Sabvest’s superb capital allocation, relatively lowly-geared centre and its ability to buy-back its own shares below NAV, and it is likely that the good growth rate in H1:22 carries comfortably into H2:22E (and beyond).

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 a defendable (post-discount) fair value for Sabvest Capital shares of 8894cps (previously: 7487cps) or +22% higher than the current share price.
  • Rolling this fair value forward at our Cost of Equity, we see the Group’s 12m TP as 10511cps (previously: 8825cps) with an implied return of +44%.

Refer to our Initiation of Coverage for more background.

Renergen – Key Due Diligence Is Successful

Share Code: REN – Market Cap: R4.6bn – PE: -124x – DY: 0.0%

Central Energy Fund: Due Diligence Successful, Fair Value Implied

  • Following Ivanhoe Mines’ option expiring (see our previous note), questions surfaced about the reason for this expiry &, indeed, whether it involved the quality of the Virginia Gas Project (VGP).
  • Concurrent to Ivanhoe’s deal, Renergen was fielding a due diligence (DD) by the Central Energy Fund (CEF) for a 10% stake in VGP for R1bn. This DD has successfully concluded and both parties are now seeking final approvals to complete the transaction.
  • This is an important event for at least three reasons:
    1. The positive DD by CEF confirms the quality of the VGP,
    2. Assuming final approvals are received, this injects R1bn of equity funding into the Phase II funding, &
    3. This solidifies an arms-length R10bn valuation for VGP (i.e. if 10% is worth R1bn, 100% is worth R10bn).

Our Thoughts: Much Better Price + Less Dilution

  • Above, point (3) implies that REN’s 90% stake is worth R9bn or c.6660cps (= R9bn/135.1m shares) versus our previous fair value of 6337cps & the share’s current market price of 3460cps.
  • Ivanhoe’s option would have come in at a discount to the current market price (if exercised) &, thus, the CEF’s deal is a lot less dilutive for shareholders and ensures a much large proportion of the eventual VGP value likely accrues to existing shareholders.

Valuation and Implied Return: Unchanged

  • We are currently reassessing our valuation and model for REN and will publish this in due course.
  • Despite that & due to the CEF deal—assuming no deterioration in exchange rates, commodity prices or interest rates—we believe that the previously communicated valuation at least guides towards a floor value of the Group. Previously, we saw REN’s fair value as around 6337cps & 12m TP of about 7491cps.

Renergen – First Gas-to-Plant & Ivanhoe Option Expiry

Share Code: REN – Market Cap: R4.4bn – PE: -123x – DY: 0.0%

Phase 1: First gas-to-plant

  • On the 8th of July 2022, Renergen successfully achieved its first natural gas to its Phase 1 plant. This was signified by opening the main inlet line from the gas gathering system, to the process plant and then to the natural gas filtration and pre-compression system.
  • This is a major qualitative derisking moment for the entire project and one that, strangely, its share price did not seem to notice.

Ivanhoe Mines: Option expiry allows for better options

  • The Ivanhoe Mines’ option to ramp-up their stake in Renergen (at a discount to VWAP) has expired due to unfilled conditions (we believe that the specific outstanding condition is Competition Commission approval). Ivanhoe remains a c.4.3%-shareholder & there remains a potential LNG offtake deal on the table.
  • This option expiry may appear to leave a funding gap for Phase 2, but it does remove a potentially very dilutionary action (especially if the share price remains well below our fair value).
  • How dilutionary? Consider that the Ivanhoe shares could have been issued at a discount to VWAP/market price (currently c.R4bn or the low-3000cps) while the Central Energy Fund (CEF) deal values the project at c.R10bn or 6933cps (c.102% premium!). Indeed, a positive outcome from the CEF deal’s due diligence should peg REN’s implied fair value higher than the Ivanhoe deal.
  • Finally, as evidenced by the appetite for Phase 2 lending (see our note) & following discussions with management (they have just come back from a well-received global roadshow), we believe that the Phase 2 equity-funding should be filled and we hope it could be done so at a better price, i.e. with less dilution.

Valuation and Implied Return: Unchanged

We have left our model and forecasts unchanged, even though they incorporate Ivanhoe’s now expired options because there should still be some equity dilution for Phase 2 and this allows us to somewhat account for it in our forecasts and valuation.

Renergen – Funding (Almost) Secured

Share Code: REN – Market Cap: R5.0bn – PE: -139x – DY: 0.0%

Phase 2 Debt Funding: Quantum Points to Larger Phase 2

  • Renergen has signed a Retainer Letter with the US International Development Finance Corporation (DFC) for Phase 2 debt funding of up to $500m. The DFC provided debt of $40m in Phase 1.
  • Added to this, Renergen has received multiple Letters of Intent to co-lend alongside the DFC of up to $700m in senior debt.
  • The lenders are currently conducting a due diligence to finalize their offers &, assuming a positive outcome, it leaves Renergen in the envious position to pick and choose its debt funding.
  • These lines of debt are up to $1.6bn in potential funding that—when combined with potential equity funding from Ivanhoe Mines & the CEF—points a clear path to a fully-funded Phase 2.
  • Renergen is now targeting 65% gearing & the implications of the amounts are that Phase 2 will be materially larger than originally envisioned; we originally assumed a c.R12bn capex cost for Phase 2, but the above figures imply >R15bn – Gas projects tend to get returns to scale & a c.25% larger size may produce >25% more gas.
  • If we assume a c.$1bn Phase 2, & Ivanhoe (capped to c.$250m) & CEF (c.R1bn) both follow through for their equity and Renergen management draw down on their debt with a 65% gearing (drawing c.$650m), this implies that there remains equity funding of c.$45m or c.R700m (c.1-for-10 rights issue at current prices).

Valuation and Implied Return: Updated for latest spot prices

  • While Phase 2 size is rising, output upgrades & the Ivanhoe & CEF equity needs to be pinned down for us to correctly model. These are large variables and, currently, still have conditions outstanding.
  • For now, we have kept the size of Phase 2 flat (which creates upside risk to our valuation and forecasts), assumed debt is drawn down at the end of FY 23E (but interest capitalized until FY 25E), Ivanhoe & CEF follow their full equity rights, 11.5m REN shares are placed during FY 23E (1-for-10 rights issue), & Phase 2 production starts during FY 25E (9 months) with steady-state in FY 26E (albeit, we have used flat spot prices as based on the current basket, ArgHe token price and exchange rates).
  • This produces a fair value of 6337cps (previously: 6344cps) & 12m TP of 7491cps (previously: 7501cps).