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