ARB Holdings released exceptionally strong FY 21 results with revenue roaring ahead by +24% y/y (and +8% versus FY 19) to R2.9bn (FY 20: R2.3bn) driven by a recovery in both Electrical and Lighting that is likely to carry into FY 22E (at least).
Added to this top-line expansion, the Group’s cost-savings, efficiency gains & cash preservation all aided HEPS upwards by +38% y/y (and +41% versus FY 19) to 82.5cps (FY 20: 59.9cps) & making a mockery of our forecast FY 21 HEPS.
The Group resumed its dividend payments and declared a full-year dividend of 42.5cps that includes a 10cps special dividend.
Our Thoughts: CEO continuity in place
ARB’s results are even more impressive considering that they were produced during a period that saw a range of hard lockdown levels, multiple waves of COVID, Eskom loadshedding and a domestic recession.
Long-serving CEO, William Neasham, has announced his retirement and lined up Blayne Burke as his successor.
Burke has run the Group’s major Electrical Division for many years and, thus, provides deep institutional knowledge, expertise, and comfortable continuity at the executive level.
Forecast, Valuation & Implied Return: Margin of Safety
We see fair value as 654cps (previously: 631cps) on a Price Earnings (PE) of c.7.9x, which is hardly demanding given the quality of the underlying businesses.
Our EV/EBITDA-implied fair value of 740cps backs up this view, if not hinting at a degree of upside risk to our forecasts.
Using our DCF as a base, our implied 12m TP of 766cps (previous 12m TP: 737cps) places the share on an Exit PE of 8.0x & implies a potential return of c.37%.
ARB Holdings published an excellent H1:21 result showing good revenue growth and particularly strong profit growth from key cost-savings measures annualizing across the period.
Revenue rose +5% y/y, Operating Profit shot up +59% y/y (thoroughly beating our expectations), & HEPS grew +26% to 41.1cps (H1:20 – 32.6cps).
For a Group that typically generates strong cash flows, cash generation was particularly strong over this period and the Group’s balance sheet remains very much ungeared.
Our Thoughts: Emerged Stronger
Management has built a superb Group over the years and, over the current pandemic, reacted swiftly in reigning back expenditure. Following from our previous results note, we believe that H1:21 has demonstrated that the Group has emerged stronger with more market share than at the beginning of this period. In the long-term, this can only be a good thing.
We expect dividends to resume with the full-year results and have maintained our revenue expectations while adjusting our margin assumptions to reflect the fantastic gains made by the Group in H1:21 annualizing even further into H2:21E.
Forecast, Valuation & Implied Return: EV/EBIDTA lining up with DCF
We see fair value as 631cps (previously: 464cps) on a Price Earnings (PE) of c.9.2x.
Interestingly, we have built a new EV/EBITDA Model for ARB against a hand-selected peer set and this model arrives at a fair value of 624cps, thus lending weight to our DCF fair value.
Our implied 12m TP of 737cps (previous 12m TP: 546cps) places the share on an Exit PE of 12.9x & implies a potential return of c.71%, albeit with typical macro-risks remaining present.
While “cheap” is not a defining characteristic of the current domestic small cap market, the combination of it with the high-quality of ARB’s track record and prospects makes it unique.
During a period deeply marked by the COVID-19-induced lockdown and a global recession, ARB’s FY 20 numbers are not particularly reflective of much other than its environment.
Revenue contracted -13%, margins improved as deep cost-cutting, rationalization of operations, retrenchments and management salary sacrifices all protected the Group, & a range of IFRS entries flowed through results distorting comparisons.
The Group ended up seeing HEPS rise +3.0% y/y to 59.96cps (FY 19 – 58.2cps), but, above all else, the Group appears to have protected its balance sheet (cash on hand of R152m), bolstered by operations generating R135m (FY 19 – R226m) cashflow.
Our Thoughts: Emerging Stronger
Near-term numbers (both historic & forecast) are somewhat meaningless in an environment of heightened chaos & uncertainty with major global variables playing out.
Despite this, ARB management has done all the right things and the Group is likely to emerge from this period stronger, if not absolutely then at least relatively speaking.
Key variables remain, though, from the global (pandemic & geopolitics) to domestic (infrastructure spend, public sector finances & Eskom) that imply both up- & downside risks.
Forecast, Valuation & Implied Return: Still Underrated
We see fair value as 464cps (previously: 562cps) on a Price Earnings (PE) of c.7.4x. This appears reasonable against the various comparatives in the market (average: 10.3x) despite the reliability of PE as a metric declining due to the abnormality of this period and the raft of IFRS non-operational entries flowing through both ARB’s & the rest of the market’s financial results.
Our implied 12m TP of 546cps (previous 12m TP: 659cps) places the share on an Exit PE of 8.8x & implying a return of c.56%.
While “cheap” is not a unique domestic small cap characteristic, the profitability, cash generation & robust balance sheet of ARB make it one of the higher-quality stocks in this universe.
While ARB missed out topline expectations,
management’s extraction of efficiencies across the Group saw a resilient profit
The disappointments were all in sales, as
Eskom/contractor volumes remained weak in the Electrical Division and
retailer/consumer markets stagnated.
The victories were all won in costs as the Radiant
acquisition begins to bed-down, an underperforming Electrical store was closed
and the Lord’s View DC began operations.
Slight “pre-Chinese New Year” overstocking across the
Group negatively impacted on cash flows but should serve the Group well given
the current Covid-19 (i.e. “Coronavirus”) disruption to global supply chains
and the coming likely stock shortages across global and domestic markets.
Thoughts: H2 to remain tough, but long-term positive
The Group remains ungeared, has positive cost-savings
that should annualize nicely going forward and is well-positioned to weather
the current macro-headwinds and capture any growth that may appear going
Unfortunately, H2 in South Africa and with growing
global risks is likely to remain a tight trading environment and one with a lot
of forecast risk (either upside or downside).
Forecast, Valuation & Implied Return: Still underrated
Our fair value for ARH is 562cps (previously: 576cps)
on an implied Price Earnings (PE) of 8.3x, indicating that the stock is c.39%
undervalued at its current share price.
Rolling our fair value forward at our CoE, we arrive
at a 12m TP of 659cps (previous 12m TP: 670cps) on an Exit PE of 13.2x.
ARB Holdings reported growth in FY 18 revenues and stable profits with consistently strong cash generation, generous dividends, and an opportunistic post-year-end acquisition.
FY 18 revenue came in per our expectations at R2.6bn (FY 17: R2.4bn), & HEPS rose +16% to 71.7cps (FY 17: 61.9cps), which is materially higher than our forecast of 65.6cps.
The Lighting segment disappointed but was actually slightly better than our downwardly-adjusted forecasts at H1:18. Inversely, the Electrical segment performed well but slightly below our half-year expectations.
Our Thoughts: Eskom & Radiant Key Variables
Post-year end, the Group concluded a conditional acquisition of the Radiant Group. This move consolidates the Group’s position in the lighting market while materially transforming the Group’s segmental exposures; post-consolidation of Radiant, Lighting may become similar in size to the Group’s cable exposure.
A slowdown in Eskom spending has prolonged the domestic malaise. Top-level Board and management changes in the utility have been positive, and supply chain audits and related reorganization (in an attempt to both eliminate corruption in the SOE and stabilize it) are likely to blame for this drop in spending.
Logically, the spending from Eskom should materially pick up after this internal process is completed (while Eskom will come out of it stronger for having gone through this period).
Thus, we remain positive on South Africa and the sector.
Forecast, Valuation & Implied Return: Still Quality & Still Value
We update our fair value for ARH to 714cps (previously: 777cps), implying a reasonable Price Earnings (PE) of 10.0x.
Rolling our fair value forward at our CoE, we arrive at a 12m TP of 838cps (previous 12m TP: 911cps), placing the share on a comfortable Exit PE of 11.4x, and implying a return of c.34%.
Key risks to the Group are unchanged from our original Initiation of Coverage, though note that we have not taken the Radiant acquisition into account in our forecasts or valuation.
ARB Holdings maintained its revenue during a tough period that included political upheaval in South Africa, SOE paralysis, sour consumer sentiment, a sovereign downgrade and a technical recession (not officially over at the date of publishing).
The Group reported +4% y/y growth in HEPS to 61.9cps (FY 16: 59.7cps), beating our previous forecast of 61.4cps.
The Group continued to generate strong cash flow with well-managed working capital whilst adding to its store and product footprint.
Management remains committed to the organic and acquisitive growth of existing operations.
Our Thoughts: Resilience & Upside
Solid results year-after-year continue to build the Group’s track record for resilience while management put in place longer-term initiatives for growth that looks
We do note the various changing dynamics in the cabling supply market as a risk while the currently exercisable put option by Eurolux is actually a good opportunity (in our opinion).
Forecast, Valuation & Implied Return: Still Undervalued
We raise our estimated fair value for ARH to 687ps (previously: 664cps), which puts the stock on an implied Price Earnings (PE) of 11.1x.
In our opinion, this PE does not appear unreasonable against either ARH’s own history or the various comparatives in the market.
Rolling our fair value forward at our CoE we arrive at a 12m TP of 809cps (previous 12m TP: 779cps).
A 12m TP of 809cps places the share on a comfortable Exit PE of 12.9x.
ARB Holding’s revenue rose by 3% to R1.27bn (H1:16 – R1.23bn) with Lighting leading the growth while soft municipal spend dampening Electrical’s contribution during the period.
HEPS rose 1% to 28.07cps (H1:16 – 27.79cps) while cash flow generation remained good and the balance sheet ungeared with R175m of net cash on hand.
Although in the ARB’s results are a bit below our expectations, the Group continues to steadfastly execute their strategy of geographic, product and customer expansion with cabling dropping from >50% of the Group’s turnover seven years ago to c.37% of it in these results.
Our Thoughts: Stagnation in the Base, Upside in the Future
While we may be premature in this call, we believe that we are currently in the trough in both South Africa (2016/17) and in ARB’s market (FY 17E and, perhaps, FY 18E).
SA’s Leading Indicator and as well as many global indicators everywhere are, at worst, not falling anymore and, at best, starting to rise.
That said, we do not expect a sudden recovery and would not be surprised if this trough stretched out (i.e. flat growth) into 2018.
We lift our fair value for ARH to 664ps (previously: 650cps) on an implied Price Earnings (PE) of 11.1x. This PE does not appear unreasonable against either ARH’s own history or the various comparatives in the market.
Rolling this fair value forward at our CoE we arrive at a 12m TP of 779cps (previous 12m TP: 762cps), which places the share on a comfortable Exit PE of 11.4x.
This 12m TP also implies a reasonably attractive return of c.23%.
ARB Holding’s revenue grew by 16% to R2.49bn (FY 15: R2.15bn) while Gross Profit (GP) Margin compression in the Electrical Division from 24.1% in FY 15 to 22.0% was offset by Group efficiencies and led the Group to beat our HEPS expectation of 53.6cps by 11% to reach 59.7cps (FY 15: 51.7cps).
This reflected 15% y/y HEPS growth and was matched by an equal hike in the dividends to 23.1cps (FY 15: 20.1cps).
Another 10cps special dividend (FY 15: 10cps) was declared with further special dividends likely in the coming year or two.
Our Thoughts: Tough Trading Environment Unlikely to Abate
We have marginally raised our expected FY 17E revenues for ARB Holdings to R2.8bn (previous forecast: R2.7bn).
Despite this, we have lowered previously noted margin assumptions and see this margin squeeze continuing into at least FY 18E.
Therefore we forecast FY 17E HEPS growth of 10% to 65.4cpscps (previously forecast: 64.9cps), though we note the high degree of forecast risk in the present economic environment (both to the downside due to the economy and the upside due to management initiatives and the potential for acquisitive activity).
We raise our fair value for ARH to 650ps (previously: 520cps) on an implied Price Earnings (PE) of 10.9x, which appears unreasonable against either ARH’s own history or the various comparatives in the market.
Rolling our fair value forward at our CoE we arrive at a 12m TP of 762cps (previous 12m TP: 609cps), on a comfortable Exit PE of 11.6x, implying a 27% return.
ARB Holdings reported their FY 14 results with revenue growing by 14% to R2,2bn (FY 13: R1,9bn) versus our forecasts of R2,3bn.
The Group achieved better margins than we had expected due to both a rising contribution from the higher margin Lighting segment and from the Group driving purchasing savings across its business in H2:14, which saw HEPS rising nicely by 27% to 50.3cps (FY 13: 39.6cps) versus our expectation of 52.1cps.
The Group remains highly cash generative and declared both a dividend of 20.1cps (FY 13: 16.2cps) and a special dividend of 10cps (FY 13: 10cps), yet remained ungeared (R197m net cash).
While cognisant of the tough trading environment, management remain focussed on both organic growth and, potentially, adding the elusive “third pillar” (acquisition) to the Group.
Our Thoughts: High Quality Group, High Quality Share
ARB has proven itself a remarkably high quality group in some very tough trading conditions as it successfully executes on its communicated strategies of expanding product lines, geographies and markets (both organically and acquisitively).
While our valuation metrics indicate the share is fully valued, the “quality” quotient is a hard one to quantify and likely to prove very valuable for the long-term investor.
Forecast, Valuation and Implied Return: Attractively Priced
Our fair value for ARH is 715cps on a PE of 14.2x (previously 622cps). Rolling this forward at our Cost of Equity (CoE), we arrive at a 12m TP of 836cps (previous 12m TP: 727cps) on an Exit PE of 14.7x implying a total return of c.7%.
The key risks stated in this report remain the same from our Initiation of Coverage on the Group. Also note the newly added risk relating to the phasing out of incandescent lamps in South Africa and the uncertainty it creates in the Lighting segment.