Tag Archives: lighting

ARB Holdings – FY 18 Results – Still Quality & Still Value

Share Code: ARH – Market Cap: R1.4bn – PE: 8.7x – DY: 3.2%

FY 18 – Tougher H2 Than Expected

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.

See our methodology here and note our disclaimer here.

FY 14 Results Note – Share Code: ARH – Market Cap: R1.8bn – PE: 15.5x – DY: 3.8%

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FY 14: In Line With Our Expectations

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.

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

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).

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

See our methodology here and note our disclaimer here.