FY 21 Results: Strong NAV growth, large hike in dividend
Sabvest’s FY 21 Net Asset Value (NAV) per share grew by +26% y/y to 9371cps (FY 20: 7444cps), adding to the Group’s fantastic track record as it has compounded NAV per share (excluding dividends) at +16.9% CAGR for a decade & a half!
Updating this NAV (keeping unlisted valuations flat), we see the current share as trading at a c.37% discount. This is despite JSE-listed HoldCo’s average discount-to-NAV being c.30%, and despite most of these other HoldCo’s having a worse track record than Sabvest. Using this peer-average discount, Sabvest shares should be trading closer to 7000cps.
Sabvest hiked its dividend to 75cps (FY 20: 25cps) as its balance sheet remains comfortably capitalized.
Thoughts: “Quality” growth in NAV, more likely to come…
As most of Sabvest’s investments are unlisted (c.86% of NAV), it is important to emphasise that the growth in NAV is not due to rising valuation multiples (all valuation multiples are flat from FY 20). The growth in NAV was driven by earnings growth &, therefore, we consider it “quality growth”.
As investee companies are trading at-or-better than 2019 pre-COVID levels, we expect continuing NAV growth in FY 22E.
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 defendable (post-discount) fair value for Sabvest Capital shares of 7487cps (previously: 6826cps) or +19% higher than the current share price.
Rolling this fair value forward at our Cost of Equity, we see the Group’s 12m TP as 8825cps (previously: 8000cps) with an implied return of +40%.
Metrofile’s H1:22 period saw domestic riots & elections, the implementation of the POPIA, Kenyan regulatory pressures, COVID lockdowns & supply chains disruptions.
The Group’s revenue rose +4% y/y (driven by the Middle East and Digital Services), though margin pressure lowered Operating Profit -2% y/y.
Strong cash generation allowed the Group to degear further (despite acquiring IronTree during this period) & the combination of lower finance charges & a lower effective tax rate (attributable to the Middle East) saw HEPS grow +1% y/y.
Implementing a new dividend policy, management has hiked the interim dividend by +29% y/y.
Our Thoughts: H2:22 Recovery + Digital is Growing
Many of the headwinds in H1:22 should abate during H2:22E, thus we expect some upside in the coming full FY 22E results.
Already in Q2 management saw box volumes in South Africa recovering while H2:22E should also see a full six month’s consolidation from IronTree (it was only consolidated for a single month in H1:22).
Perhaps not obvious at first glance, but Digital Services now contributes 20% of the Group’s revenues. We are extremely bullish on developments in this space and expect Digital Services to be a growing vector in future results.
Forecast, Valuation and Implied Return: Margin of Safety
We see Metrofile’s fair value as 405cps (previously: 428cps), or c.20% higher than its current share price.
Importantly, our fair value of 405cps for Metrofile implies an EV/EBITDA of 7.1x & a PE of 12.7x, which compares attractively to Iron Mountain’s EV/EBITDA of 14.6x & PE of 31.1x.
In fact, when compared to Iron Mountain, Metrofile has the same-or-better returns & significantly less gearing.
Rolling the 405cps fair value forward, we arrive at a 12m TP of 472cps (previously: 497cps). This implies an attractive +41% return (including dividends) from these levels.
Masimong Electrical (49.9%-held by Sabvest & 50.1% by Masimong) has offered minority shareholders in ARB Holdings 800cps. Along with the Burke Family (62.9%-shareholding in ARB), the deal aims to take the electrical & lighting wholesaler private. The total consideration will be c.R697m, & Masimong and Sabvest have each committed R223.5m funding (Sabvest’s share is c.9.3% of its market cap & c.6.5% of published NAV).
Irrevocable undertakings to vote in favour of the deal have been received from 69.4% of eligible shareholders, thus, we believe that this deal’s successful outcome is quite likely.
We have left our fair value (6826cps*) & 12m TP (8000cps*) unchanged & will update these after the FY 21 results. Given the trading update, though, we expect to upgrade our views.
While we do not expect ARB Holdings to materially change Sabvest’s NAV in the short-term, in the long-term the Group is an excellent, cash-generative & well-positioned business that is likely to contribute positively to NAV growth. Likewise with Ascendis Medical’s optionality. Perhaps, more subtly, these new investments further entrench Sabvest as a unique listed entry-point into a portfolio of unlisted companies.
A company owned by Masimong (50.1%-shareholding) and Sabvest (49.9%) has made an offer to minority shareholders (other than the Burke Family that collectively holds 62.9% of ARB’s shares) to acquire their shares for cash of 800cps.
If the scheme is approved by shareholders (75% vote is required) & goes ahead, ARB will also be delisted from the JSE.
Besides the usual conditions/clauses & the approvals needed, the scheme currently has irrevocable support of 69.41% of shareholders (that can vote at the scheme meeting, i.e. “disinterested shareholders”) and, thus, we view it as highly-likely that this transaction successfully conclude.
Our EV/EBITDA-implied fair value of 740cps adds weight to this view of fair value and its upside risk.
Our Thoughts: Fair Premium & Well-supported Offer
Given our view of ARB’s fair value, the 800cps offer price for minorities comes in at a c.22% premium to this (not counting the even larger premium against the pre-offer share price).
The offer is pricing a material minority stake. The Burke family will remain in control post-delisting and, thus, this offer should not include a classical “control premium” as control is not, in fact, being acquired. Thus, we consider this offer price to be quite fair and, likely, attractive to minorities.
This view is backed up by the large number of irrevocables secured (including institutional investors and former insiders). These irrevocables (totalling c.69.41% of shares able to vote on this deal) furthermore imply the likelihood of this deal successfully concluding as quite probable.
FY 21 Results: Smaller than Expected Preproduction Loss
Renergen’s operating loss was smaller than expected despite a small revenue miss as lost production (due to the lockdown) was offset costs.
The Group spent R125.7m on assets under construction, capitalized R21.5m intangible assets and made a second draw down on its US International Development Finance Corporation (DCF) loan to the tune of $12.5m. The Group’s short-term unencumbered cash reserves sit at R130m.
Progress Updates: Almost Entire Positive
The Group has concluded a partnership with Total SA as LNG distribution is set up down the key N1 route.
Drilling of P007 & MDR1 both reflect strong resource, flow & helium concentration data, highlighting potentially better-quality resources and/or lower capex intensity of Phase Two.
The Group has concluded its first helium sales agreement with a global tier-one automotive supplier for Phase Two.
Finally, The Group’s innovative cold chain storage solution (Cryo-Vacc™) made its first sale, moving post-revenue.
Forecast, Valuation and Implied Return: Appears Undervalued
Since our Initiation, our major assumptions remain the same, albeit we have updated our model for the latest spot prices that, in general, have moved in Renergen’s favour.
Our DCF-driven sum-of-the-parts (SOTP) valuation for Renergen implies Phase One & Two—offset by central costs, debt and (potential) dilution—are worth 4149cps (previously 3539cps). After options for Evander and Cryo-Vacc are added, we see Renergen’s share as potentially worth 4978cps (previously 4247cps).
Rolled-forward by CoE, our 12m TP is 5850cps (previously 4977cps) or over double what the current share price is.
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.
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 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.
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.