Central Energy Fund: Due Diligence Successful, Fair Value Implied
Following Ivanhoe Mines’ option expiring (see our previous note), questions surfaced about the reason for this expiry &, indeed, whether it involved the quality of the Virginia Gas Project (VGP).
Concurrent to Ivanhoe’s deal, Renergen was fielding a due diligence (DD) by the Central Energy Fund (CEF) for a 10% stake in VGP for R1bn. This DD has successfully concluded and both parties are now seeking final approvals to complete the transaction.
This is an important event for at least three reasons:
The positive DD by CEF confirms the quality of the VGP,
Assuming final approvals are received, this injects R1bn of equity funding into the Phase II funding, &
This solidifies an arms-length R10bn valuation for VGP (i.e. if 10% is worth R1bn, 100% is worth R10bn).
Our Thoughts: Much Better Price + Less Dilution
Above, point (3) implies that REN’s 90% stake is worth R9bn or c.6660cps (= R9bn/135.1m shares) versus our previous fair value of 6337cps & the share’s current market price of 3460cps.
Ivanhoe’s option would have come in at a discount to the current market price (if exercised) &, thus, the CEF’s deal is a lot less dilutive for shareholders and ensures a much large proportion of the eventual VGP value likely accrues to existing shareholders.
Valuation and Implied Return: Unchanged
We are currently reassessing our valuation and model for REN and will publish this in due course.
Despite that & due to the CEF deal—assuming no deterioration in exchange rates, commodity prices or interest rates—we believe that the previously communicated valuation at least guides towards a floor value of the Group. Previously, we saw REN’s fair value as around 6337cps & 12m TP of about 7491cps.
Phase 2 Debt Funding: Quantum Points to Larger Phase 2
Renergen has signed a Retainer Letter with the US International Development Finance Corporation (DFC) for Phase 2 debt funding of up to $500m. The DFC provided debt of $40m in Phase 1.
Added to this, Renergen has received multiple Letters of Intent to co-lend alongside the DFC of up to $700m in senior debt.
The lenders are currently conducting a due diligence to finalize their offers &, assuming a positive outcome, it leaves Renergen in the envious position to pick and choose its debt funding.
These lines of debt are up to $1.6bn in potential funding that—when combined with potential equity funding from Ivanhoe Mines & the CEF—points a clear path to a fully-funded Phase 2.
Renergen is now targeting 65% gearing & the implications of the amounts are that Phase 2 will be materially larger than originally envisioned; we originally assumed a c.R12bn capex cost for Phase 2, but the above figures imply >R15bn – Gas projects tend to get returns to scale & a c.25% larger size may produce >25% more gas.
If we assume a c.$1bn Phase 2, & Ivanhoe (capped to c.$250m) & CEF (c.R1bn) both follow through for their equity and Renergen management draw down on their debt with a 65% gearing (drawing c.$650m), this implies that there remains equity funding of c.$45m or c.R700m (c.1-for-10 rights issue at current prices).
Valuation and Implied Return: Updated for latest spot prices
While Phase 2 size is rising, output upgrades & the Ivanhoe & CEF equity needs to be pinned down for us to correctly model. These are large variables and, currently, still have conditions outstanding.
For now, we have kept the size of Phase 2 flat (which creates upside risk to our valuation and forecasts), assumed debt is drawn down at the end of FY 23E (but interest capitalized until FY 25E), Ivanhoe & CEF follow their full equity rights, 11.5m REN shares are placed during FY 23E (1-for-10 rights issue), & Phase 2 production starts during FY 25E (9 months) with steady-state in FY 26E (albeit, we have used flat spot prices as based on the current basket, ArgHe token price and exchange rates).
This produces a fair value of 6337cps (previously: 6344cps) & 12m TP of 7491cps (previously: 7501cps).
The riots in July & the metalworkers strike (c.12% lost production time in Trellidor) combined with stock shortages in the Taylor to hurt sales & pressure margins.
Despite losing an estimated c.R25m of turnover & c.R12m of EBITDA to these unfortunate events, Group revenue managed to be maintained at R284m (H1:21 – R282m).
Gross margin contracted to 40.1% (H1:21 – 44.6%), EBITDA fell to R46.5m (H1:21 – R57.8m) & HEPS contracted to 25.4cps (H1:21 – 30.6cps).
As a final curveball, a contingent liability has manifested in the form of an adverse labour judgement being upheld. We have assumed an R29m one-off expense in H2:22 due to this & management have skipped their dividend in anticipation of having to fund this drawdown.
Our Thoughts: Better H2:22 Likely
We expect that in H2:22E, the acquisitions in Trellidor Retail, the full-period consolidation of the UK, the maintenance of full production in the factories and more aggressive price increases are all likely to see some of the H1:22 underperformance clawed back.
Despite this, recent raw material price spikes (from Russia-Ukraine) & supply chain disruptions (from China’s latest COVID outbreak meeting its zero COVID policy) put this view at risk.
Our DCF Models imply that Trellidor is worth c.469cps (previously: 548cps) on a PE of 13.2x & EV/EBITDA of 7.3x.
Our Relative Valuation implies a fair value of 411cps (previously 470cps), which does not agree with the above DCF. Despite this, both models indicate a fair value for Trellidor at least greater than 400cps (well above the current 285cps share price).
Rolling this DCF SOTP fair value forward we arrive at a 12m TP of 580cps (previously 656cps) implying a total return of c.103%.
South Africa’s Schedule 2 state-owned diversified energy company, Central Energy Fund (CEF), has signed a non-binding term sheet to invest R1bn into Renergen’s wholly-owned subsidiary that houses the Virginia Gas Project, Tetra4, in exchange for new shares equalling 10% of Tetra4 being issued.
The agreement leaves 141 days for the CEF to complete a due diligence, get necessary approvals, & sign a binding legal agreement with Renergen. This period can be extended & Renergen has the option to renegotiate the price.
Our Thoughts: Adds momentum, derisks further & implies fair value
This deal adds further momentum to the direct investment into the Group by Ivanhoe Mines, further capitalizes Phase II and, more subtly, aligns this project’s success directly with domestic Government that somewhat politically & regulatory derisks it.
Management has confirmed that the CEF deal is backed by Ivanhoe Mines. Thus, it may add to the probability that Ivanhoe Mines will follow their remaining rights at Group-level.
Valuation and Implied Return: CEF price tag implies 6946cps
Given the proximately to our last note, we have not updated our fair value for Renergen and maintain it at 5821cps (previously: 5821cps) with a 12m TP of 6867cps (previously: 6867cps).
The R1bn price attached to 10% of Tetra4 implies a valuation of R9bn for the remaining 90% held by Renergen, or c.6946cps per issued REN share (=R9bn / c.129.5m issued shares).
While this implied valuation is only indicative (the CEF likely has different criteria for making/valuing investments than stock market minorities, the investment further derisks the project, & shareholding in a subsidiary does not take into account other Group assets nor HoldCo costs), it certainly highlights how undervalued Renergen’s shares potentially are.
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.
News: Helium & LNG more valuable, Ivanhoe Mines invests
Helium market update: Supply challenges from BLM, Qatar & Amur all limit helium availability as SpaceX & the semiconductor industry ramps up demand, implying large helium spot upside.
LNG market update: The oil price rally should drive domestic fuel prices (further) upwards. Reasons for the rally are both sticky and bode well for Renergen’s LNG revenues (tied to diesel &/or CPI).
Ivanhoe Mines “strategic partnership”: In a momentous moment for Renergen, Ivanhoe Mines has invested into the Group (an initial 4.35%-stake) with a roadmap to potentially ramp this investment up to a maximum of either 55% or $250m of capital.
Our Thoughts: Renergen’s Potential Upside is Growing Quickly
The tailwinds lifting Renergen’s underlying gas resource keep driving its fair value upwards. While the LNG revenue should track domestic fuel prices & CPI upwards, the helium revenue (even the revenue locked into the long-term supply contracts) holds immense upside potential too.
The latter may see wild card renegotiation clauses being triggered and repricing in the increasingly tight global helium market.
The investment by Ivanhoe Mines is a vote of confidence in the Group and, depending on how/if Ivanhoe Mines takes up their options to further invest, may underpin the (equity) funding for (a much larger!) Phase II that further derisks the Group.
Valuation and Implied Return: Plenty of Room…
Despite keeping our helium basket price flat and a stronger Rand exchange rate, we upgrade our fair value to 5821cps (previously: 5747cps) & 12m TP to 6867cps (previously: 6766cps).
Given the commodity pricing dynamics, there is considerable upside risk to this valuation from both LNG & repricing helium closer to spot, not to mention any Rand-weakness.
ARB Holdings’ H1:22 results reflected a tough, chaotic trading period where riots in July and the Omicron 4th Wave all hit the Group’s operations while supply chains remained unpredictable and inflation pressures began to materialize.
The Group’s revenue rose 7.5% y/y, though this was driven by the Electrical Division’s good performance. The Lighting Division saw a contraction over this period as the July riots disrupted many of its customers, discretionary retail spending faded off the high DIY-led base, and supply chains put pressure on in-house logistics.
Headline Earnings Per Share (HEPS) slipped somewhat to 39.1cps (H1:21 – 41.1cps), though backed by good cash generation and the Group’s normal bulletproof balance sheet.
Per Group policy, management has not declared an interim dividend (only a final dividend is normally declared).
Finally, during the period, the Group acquired the 25%-minority in CraigCor and secured a replacement supplier of switchgear, TosunLux, that should contribute positively to the Group going forward.
Our Thoughts: Offer to Minorities Key Short-term Event
More pertinent to the Group’s short-term future, Masimong Electrical made an 800cps cash offer to ARB minorities with a proposed delisting of the Group.
Forecast, Valuation & Implied Return: Based on Offer to Minorities
We see the 12m TP as 800cps (previously: 766cps) and have derived it from the existing cash offer to minorities of 800cps.
This implies that there remains c.5% return at the current share price versus this offer.
Using the 12m TP and assuming the deal takes approximately four months for funds to flow, we see fair value as 775cps (previously: 654cps) based on the time value of money and the South African 10-year bond yield.
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.