Tag Archives: electrical wholesaling

ARB Holdings – FY 20 – Battening Down the Hatches

Share Code: ARH – Market Cap: R0.8bn – PE: 10.7x – DY: 0.0%

FY 20 – Winning Amidst A Pandemic

  • 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.

Refer to our original Initiation of Coverage for more background.

ARB Holdings – H1:18 Results – Improving Prospects

Share Code: ARH – Market Cap: R1.3bn – PE: 7.6x – DY: 3.65%

Download the full H1:18 results note here

H1:18 – Operationally Robust

  • ARB Holdings reported revenue +5% for H1:18 and operating profit growing +3%.
  • The mark-to-market fair value changes in the Put Option for Eurolux distorted the IFRS numbers by 5.9cps, but excluding this effect, the Group’s HEPS would have been +13% y/y to 31.72cps (H1:17 – 28.07cps). This is materially better than our bottom-line expectations for FY 18E.
  • One sore point in the Group’s results was its Lighting segment where revenue slipped and profits felt pressure as consumer destocking, technology and delays combined.
  • Post-reporting period, the Group acquired a 60% interest in Craigcor for a maximum consideration of R30m. The business is a process automation distributor for Rockwell Automation products.

Our Thoughts: Well-positioned for an ‘SA Inc’ Recovery

  • While risks remain and ‘big ticket’ infrastructure spend roll-out is always lagging, ARB Holdings is extremely well to benefit from the de-risking of South Africa, the recovering sentiment and the potential recovering domestic economic activity.

Forecast, Valuation & Implied Return: Getting Exciting…

  • We raise our estimated fair value for ARH to 777cps (previously: 687cps), which puts the stock on an implied Price Earnings (PE) of 10.0x and implies that it is currently c.44% undervalued.
  • In our opinion, this 10.9x PE is reasonable when measured against either itself or comparatives.
  • Rolling our fair value forward at our Cost of Equity (CoE) we arrive at a 12m TP of 911cps (previous 12m TP: 809cps).
  • A 12m TP of 911cps places the share on a fair Exit PE of 14.5x, though we note a number of timing and environmental risks to our view.
  • Our 12m TP implies a return of c.69%.
  • Despite improving domestic sentiment, key risks to the Group are unchanged from our original Initiation of Coverage.

Download the full H1:18 results note here

See our methodology here and note our disclaimer here.

ARB Holdings – Good Story in a Tough Market

Initiation of Coverage – Share Code: ARH – Market Cap: R1.4bn – PE: 12.7x – DY: 2.2%

Download the full ARB Holdings Initiation of Coverage Report Here

Business Overview: Market, Store and Product Expansion

  • ARB has built a scalable electrical products distribution and wholesaling business off the back of a core cable product supply with key growth drivers being the expansion in product lines, movement into new territories, markets and industries and selected strategic bolt-on acquisitions.
  • The Electrical Division is predominantly a wholesaler of cables, overhead lines and related electrical components in Southern Africa.
  • In mid-FY 12 ARB Holdings acquired a 60%-stake in Eurolux (Pty) Ltd, a fast growing importer and distributor of light fittings, lamps and ancillary electrical products.
  • The Group Services segment includes the strategic and operational activities as well as holding the underlying property portfolio of the Group with a book value of R163m.

Key Issues: Macro-economic Variables Worrying

  • With many frothy indicators, the construction, building and related market in South Africa has many short-term downside risks including the current labour environment, the rising interest rate cycle and the upcoming elections.
  • Despite this, South Africa’s infrastructure needs are significant as encapsulated in the National Development Plan (budgeted c.R827bn spend) and the building materials market stands to benefit handsomely from this (eventual) roll-out.

Forecast, Valuation and Implied Return: Attractively Priced

  • Our fair value for ARH is 622cps on a PE of 13.5x. Rolling this forward at our Cost of Equity (CoE), we arrive at a 12 month Target Price (TP) of 727cps on an Exit PE of 12.7x implying a return of 21% from the current levels.
  • The two key risks to our above valuation methodologies are (1) the major macro-economic variables in South Africa (noted above), and (2) the timing and successful implementation of ARB’s product, store and market expansion drive (including any potential future acquisitions).

Download the full ARB Holdings Initiation of Coverage Report Here

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

See our methodology here and note our disclaimer here.