Tag Archives: Blue Gem Research

ARB Holdings – FY 19 – (Still) Awaiting Macro-Tailwinds

Share Code: ARH – Market Cap: R0.9bn – PE: 7.0x – DY: 6.2%

FY 19 – Macro-headwinds Remain Strong

  • ARB Holdings grew revenue +4.5% y/y, partially bolstered by Radiant, GMC and CraigCor acquisitions.
  • An anaemic domestic economy and construction sector, supply chain disruptions, competitor activity & a volatile currency all combined to put downward pressure on Group results, while the Group also began accounting for Radiant with restructuring once-offs costs, relocated operations in Gauteng and suffered some non-cash impairments and Put Option revaluations due to subsidiary results.
  • IFRS HEPS slipped -19% y/y to 58.2cps (FY 18: 71.7cps), but this materially beat our conservative expectations of 50.1cps. We see our calculated ‘Normalized’ earnings figure as c.-21% y/y.
  • The Group maintained its dividend at 25cps (FY 18: 25cps + 10cps special dividend) as cash flows remained strong.

Our Thoughts: Domestic versus Global – Eskom versus Trump

  • Globally, a red-flags are flashing as the US-China Trade War escalates and the global economy suffers.
  • Domestically, Brexit (as the UK is a large South African trading partner) and Eskom continue directly hurting our economy.
  • While these global and domestic risks are well-known, any positive resolutions to them would create macro-upside that should bolster prospects going forward.
  • Given the depth of discount the valuation of the domestic small cap sector currently trades at, we would argue that no positives anywhere have been priced in and therein lies the opportunity.

Forecast, Valuation & Implied Return: Still Quality & Still Value

  • Our fair value for ARH is 576cps (previously: 636cps) on an implied Price Earnings (PE) of 9.9x, indicating that the stock is c.42% undervalued at its current share price.
  • Rolling our fair value forward at our CoE, we arrive at a 12m TP of 670cps (previous 12m TP: 744cps) on an Exit PE of 12.6x.

See our methodology here and note our disclaimer here.

Wescoal Holdings – FY 14 Results Note – Positives Dampened by Eskom

FY 14 Results Note – Share Code: WSL – Market Cap: R374m – PE: 12.9x – DY: 1.3%

Download the full Wescoal Holdings FY 14 Results Note

FY 14 Results: Once-off Costs Create Earnings Miss

  • Wescoal reported its FY 14 results with revenue rising 70% to R1.1bn (FY 13: R0.7bn), largely driven by the H2:14 inclusion of the MacPhail acquisition into the Group’s Coal Trading segment.
  • Excluding the once-off profits on the sale of mineral assets during the period, the Group recorded an “Operational” EBITDA growth of 124% and HEPS rising to 15.7cps (FY 13: 12.4cps),
  • While the Group’s revenue slightly surpassed our forecast of R1.0bn, restructuring and relocation costs in the Coal Trading segment (R6m), intangibles amortisation (R2m), higher than expected costs and a more aggressive rehabilitation programme at Khanyisa and a general dip in Eskom-related volumes of coal collectively saw the Group miss our target HEPS of 21.2cps.

Our Thoughts: Uncontrollable Eskom and Spot Price Variables

  • The Group has identified mine extensions for Khanyisa and Intibane while Elandspruit is progressing well towards an expected first production during January 2015.
  • MacPhail is integrating well into the Group’s Coal Trading segment and the enlarged business’s prospect look positive.
  • Two key variables that will determine the Group’s short-term prospects are (1) Eskom-related coal volumes, and (2) the Rand-price of inland coal. Both variables were soft during FY 14E and—while hard to forecast—indications point to upside here.

Forecast, Valuation and Implied Return: Relatively Flat Update

  • We lower our fair value by 5% to 240cps (previous: 253cps), as the time value of money has been offset by a lower spot coal price and slightly lower Eskom volumes.
  • The implied PE of 15.3x is not very illustrative, though, as both Elandspruit and MacPhail are currently adding to our SOTP, but not yet (fully) contributing to the Group’s profits.
  • Based off this fair value, we marginally raise our 12m TP by 4% to 301cps (previous 12m TP: 287cps), implying a 48% return on an Exit PE of 12.2x (which still would not include a full year’s steady-state contribution from Elandspruit).

Download the full Wescoal Holdings FY 14 Results Note

What do you think of ARB Holding? Let us know…

See our methodology here and note our disclaimer here.

Wescoal: An Overlooked Coal Junior With Exciting Prospects

Initiation of Coverage – Share Code: WSL – Market Cap: R239m – PE: 11.1x – DY: 2.2%

Download Wescoal Holdings Initiation of Coverage Report Here

Business Overview: Coal Miner with Strong Coal Trading Operations

  • Built out of long-established coal-trading operations, Wescoal has moved into thermal coal mining for supply to Eskom.
  • The Group has built a portfolio of valuable short- to medium-life coal deposits that are mostly either in or near to production.
  • Khanyisa was previously the only producing mine, but Intibane began production during June 2013 and will contribute to FY 14E. The larger, longer-life mine, Elandspruit, is planned for FY 15E.
  • The Group has also recently conditionally acquired a large competitor in the coal trading space.

Key Issues: Inland Coal Price and Inland Coal Market Dynamics

  • The inland coal tends to track international coal prices, which have been under short-term spot pressure as softer global markets attempt to absorb increasing USA exports.
  • A looming 2015 supply deficit to Eskom creates risks of regulatory intervention in South Africa’s inland coal market.

Forecast, Valuation and Implied Return: Highly Sensitive to Coal Price

  • Our forecasts are heavily influenced by the assumptions underpinning the timing, efficiency and rate of Wescoal’s new coal mines; critically, Intibane in the short term (from FY 14E) and Elandspruit in the medium term (from FY 15E).
  • Our SOTPs on Wescoal arrives at a fair value of R367m or 213cps, 54% more than the current share price on an implied PE of 18.6x of historical earnings. This implies a fair value of c.R10 per ton of in situ coal for the Group’s mining assets (c.218cps per WSL share) with a further R56m or 33cps fair value from the Group’s Coal Trading segment. We have taken out a 20% Group discount for overheads and corporate costs.
  • Rolling forward all the fair values at our Cost of Equity (19.2%), we arrive at our 12m TP of 246cps for Wescoal on an Exit PE of 10.6x, implying an attractive 78% return.
  • As a junior coal miner, our valuation of Wescoal is based on the assumption of a flat spot coal price. A sensitivity analysis of our models sees our fair value changing by between 10cps to 13cps for every 1% change in the assumed coal price.


Download Wescoal Holdings Initiation of Coverage Report Here

What do you think of Wescoal? Please send us a mail with your view of the Group…

See our methodology here and note our disclaimer here.

Accéntuate Ltd: Ground Floor and Positioned for Upside

Initiation of Coverage – Share Code: ACE – Market Cap: R94m – PE: 9.5x – DY: 0.0%

Download Accentuate Initiation of Coverage Here

Business Overview: A Group of attractive businesses

  • Floorworx is the most significant player in the South African resilient flooring market and stands to gain from the National Healthcare Insurance (NHI) driving hospital refurbishments and expansion. In the long term it should benefit from the eventual roll-out of the pent-up infrastructure spend in South Africa.
  • Safic is an industrial chemical business in the fast-growing chemicals market with strong linkage into and synergies with Floorworx.
  • Ion Exchange Safic is 40%-held, early-stage (but extremely promising) water treatment solutions business with key backing by its large Indian-listed parent, Ion Exchange India Ltd.
  • Accéntuate has de-risked its balance sheet, streamlined its various businesses and now begun to focus on growth. NHI spend should help near-term revenues, public sector infrastructure roll-out should drive medium-term revenues and Ion Exchange Safic offers long-term blue sky optionality.

Key Issues: Macro-economic uncertainty

  • Despite the promising businesses in Accéntuate’s stable, the Group’s prospects rely very much on the activity, timing and quantum of a recovery in the local construction and infrastructure markets. While the long-term prospects of these sectors remain positive, there remains significant short-term macro-economic uncertainty.

Forecast, Valuation and Implied Return: Appears very inexpensive

  • We have pegged our valuation to our segmentally-driven SOTP DCF model, implying that ACE has a fair value of 114cps. This would put the share on a comfortable 10.6x PE and also implies that the current share price of 85cps undervalues Accéntuate by c.35%.
  • Rolling forward our fair value, we arrive at a 12m TP of 132cps with an Exit PE of 11.0x, which is slightly elevated due to Ion Exchange Safic adding to our valuation but its operations not yet adding to the Group’s profits.
  • Our 12m TP implies an attractive c.56% return.
  • Finally, even if Ion Exchange Safic is excluded from our valuation (assumed to be of nil value), the share’s fair value still appears between 90cps to 100cps, thus lending some comfort to our view that the share is currently undervalued.

Download Accentuate Initiation of Coverage Here

What do you think of Accéntuate? Let us know…

See our methodology here and note our disclaimer here.

About Blue Gem Research (Pty) Ltd

Blue Gem Research is built upon the belief that we can make the market work better.

A structural bottleneck in the South African equity market is the reality that sell-side analysts are incentivized via allocation, trade volumes and related brokerage to cover large, liquid stocks. While this can add value to the market, the law of marginal diminishing returns implies that it adds less and less value as more and more analysts cover the same finite number of stocks (i.e. the Top 40 index on the JSE).

Even the few analysts covering stocks outside this Top 40 index are incentivized to cover the more liquid counters in this universe in order to effectively monetize their research.

The irony is that the very stocks that would benefit the most from being professionally researched are the very stocks that are also marginalized by these sell-side economics: the dynamic, growing, exciting small cap counters that do not feature on this radar due to size, illiquidity or both.

And so Blue Gem Research was founded to address this critical need in the local market and, by doing so, make our market work better for all participants.

The logic is simple. Research on the under-covered small caps cannot be economically monetized by brokerage. But the benefit of professional coverage is felt directly by the small cap itself. Hence we charge the company being covered directly for its coverage and provide the research to the rest of the market for free.

We need to be clear, Blue Gem Research produces commissioned research. But, let us also be clear, all research is indirectly paid for by one or more parties. We are merely being transparent about this fact on this website and in our research disclosures.

Offering the market selective commissioned research of small caps solves numerous challenges:

  1. Investors and the general market can benefit from freely available professional research on these under-covered stocks (you do not need to agree with every word or conclusion in a research note to take value from the work done and presented in it),
  2. The small caps can feel the benefit of professional coverage from added exposure in both the investment community and the general public, and
  3. The research is sufficiently monetized to justify the time, effort and expense of building and maintaining it (it has taken nearly two decades of experience and significant amounts of time to build an individual note).

Essentially, this is Blue Gem Research’s rationale: balancing the risk of commissioned research against the vast potential value-add to the broader market and individual stocks we have chosen to cover.

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Kind regards,

Keith McLachlan