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.
Wescoal reported its H1:15 results with Revenue rising 93% boosting Operational EBITDA (which excludes once-offs) to R84m (H1:14 – R49m) and HEPS grew by 33% to 15.2cps (H1:14 – 11.4cps).
The Group also concluded a financing agreement for its Elandspruit mine, acquired the Muhanga plant, added an extension to both Intibane and Khanyisa’s Life of Mine (LoM) and integrated MacPhail into its Coal Trading segment.
Our Thoughts: Big Strides Forward, Underrated Trading Business
The successful acquisition and integration of MacPhail into the Group’s Coal Trading segment now makes this enlarged business the largest coal trader in South Africa. We do not believe that this dominant position’s value is fully appreciated by the market and see significant (though hard to value) upside coming from this base.
The timing and ultimate profitability of Elandspruit, though, will still have a significant impact the Group’s future. We have assumed that its Water Use License (WUL) is issued during December 2014 and mining starts in the first month of FY 16E.
Forecast, Valuation and Implied Return: Under Appreciated
We raise our fair value by 5% to 254cps (previous: 240cps), as the various Group projects de-risk, the mine extensions add uplift and MacPhail synergies are increasingly realized.
The implied PE of 13.0x is not very illustrative, though, as Elandspruit is currently adding to our valuation, but not yet contributing to the Group’s profits.
Based off this fair value, we keep our 12m TP flat at 294cps (previous 12m TP: 301cps), implying a 51% return on an Exit PE of 10.0x, though with plenty of up- and downside risks attached.
Note the numerous key risks to our view hereon at the end of this report given the junior mining status of the stock.
FY 14 Results: Once-off Costs Create Earnings Miss
Wescoal reported its FY 14 results with revenue rising 70% to R1.1bn (FY 13: R0.7bn), largely driven by the H2:14 inclusion of the MacPhail acquisition into the Group’s Coal Trading segment.
Excluding the once-off profits on the sale of mineral assets during the period, the Group recorded an “Operational” EBITDA growth of 124% and HEPS rising to 15.7cps (FY 13: 12.4cps),
While the Group’s revenue slightly surpassed our forecast of R1.0bn, restructuring and relocation costs in the Coal Trading segment (R6m), intangibles amortisation (R2m), higher than expected costs and a more aggressive rehabilitation programme at Khanyisa and a general dip in Eskom-related volumes of coal collectively saw the Group miss our target HEPS of 21.2cps.
Our Thoughts: Uncontrollable Eskom and Spot Price Variables
The Group has identified mine extensions for Khanyisa and Intibane while Elandspruit is progressing well towards an expected first production during January 2015.
MacPhail is integrating well into the Group’s Coal Trading segment and the enlarged business’s prospect look positive.
Two key variables that will determine the Group’s short-term prospects are (1) Eskom-related coal volumes, and (2) the Rand-price of inland coal. Both variables were soft during FY 14E and—while hard to forecast—indications point to upside here.
Forecast, Valuation and Implied Return: Relatively Flat Update
We lower our fair value by 5% to 240cps (previous: 253cps), as the time value of money has been offset by a lower spot coal price and slightly lower Eskom volumes.
The implied PE of 15.3x is not very illustrative, though, as both Elandspruit and MacPhail are currently adding to our SOTP, but not yet (fully) contributing to the Group’s profits.
Based off this fair value, we marginally raise our 12m TP by 4% to 301cps (previous 12m TP: 287cps), implying a 48% return on an Exit PE of 12.2x (which still would not include a full year’s steady-state contribution from Elandspruit).