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.
For example, +428% and +610% was added to the amount of methane & helium in 1P. Similar upsides came through in 2P & 3P.
While Phase One remains mostly the same, this has resulted in us making the following key changes to our Phase Two assumptions:
Lifting our LNG production from 300tons/day to 720tons/day with a target of c.2.5% yield of helium, &
Boosting our capex to R12.2bn with 30% of being raised as equity (the balance being debt & prepaid tokens).
Our Thoughts & Spot Prices: Updated & Refined
We have used this opportunity to update spot prices, exchanges rates and interest rates across the model.
Likewise, we have tried to understand management’s expectations for LNG and helium basket pricing and, although we feel that some of their views are conservative, we have tried to align our model with these views.
Valuation and Implied Return: Dividend Discount Model Added
Our Sum-of-the-Parts for Renergen sees the share’s fair value as c.5,747cps and, on basic assumptions, implies an FY 30E Price Earnings of c.6.1x with a Dividend Yield of c.15.6%.
Upon maturity, management intends paying most profits out as dividends. Therefore, we have taken our valuation a step further and attempted a crude Dividend Discount Model (DDM).
Our DDM assumptions arrive at a fair value of 6,412cps for REN minority shareholders (after DWT). This is more or less in line with our SOTP model & adds conviction that REN shares are likely to be worth mid-R50/share to mid-R60/share, or certainly above their current 3,065cps share price, despite Phase Two dilution.
Trellidor released strong results, reflecting the Group’s healthy recovery with revenue rising +23% y/y, cost-savings, efficiencies & lower finance costs lifting headline earnings by +181% y/y and HEPS doubling (+195% y/y) to 40.8cps (FY 20 – 13.8cps).
Underpinning the results was strong cash generation; management declared a full-year dividend of 21cps (FY 20 – 8cps) putting the share on a juicy 6.2% Dividend Yield.
Management continued to grow the Group’s product range (four new products were successfully launched & a commercial product range expansion is planned in the coming year) while bringing underperforming Main Centre franchisees in-house to great effect (acquired franchises grew revenue +46% like-for-like!), yet the Group also managed to control its overheads and saw a mere +4.3% y/y rise in operating expenses.
Our Thoughts: Bottom-line momentum likely to continue
Given the Group’s tight cost control, the price increases that it will leak into the market and franchisee consolidation & growth uplift that we expect, Trellidor’s EBITDA, operating profits and, ultimate, bottom-line momentum appears likely to continue for FY 22E.
We have raised our expectations of share buy-backs from 1.0% pa to 1.5% pa, especially if the share price remains languishing at its current market price.
All these initiatives imply attractive upside to forward HEPS.
Forecast, Valuation and Implied Return: Undervalued & Yielding
Our DCF Models imply that Trellidor is worth c.548cps (previously: 442cps) on a c.13.5x PE and c.7.1x EV/EBITDA.
Rolling this fair value forward at our CoE, we arrive at a 12m TP of 656cps (previously: 532cps) implying a large 93% return from the current share price (including dividends).
Speaking of dividends, irrespective of fair values, Trellidor shares still trade on an attractive 6.2% Dividend Yield (& Forward DY of > 7%) that looks to be comfortably sustainable.
ARB Holdings released exceptionally strong FY 21 results with revenue roaring ahead by +24% y/y (and +8% versus FY 19) to R2.9bn (FY 20: R2.3bn) driven by a recovery in both Electrical and Lighting that is likely to carry into FY 22E (at least).
Added to this top-line expansion, the Group’s cost-savings, efficiency gains & cash preservation all aided HEPS upwards by +38% y/y (and +41% versus FY 19) to 82.5cps (FY 20: 59.9cps) & making a mockery of our forecast FY 21 HEPS.
The Group resumed its dividend payments and declared a full-year dividend of 42.5cps that includes a 10cps special dividend.
Our Thoughts: CEO continuity in place
ARB’s results are even more impressive considering that they were produced during a period that saw a range of hard lockdown levels, multiple waves of COVID, Eskom loadshedding and a domestic recession.
Long-serving CEO, William Neasham, has announced his retirement and lined up Blayne Burke as his successor.
Burke has run the Group’s major Electrical Division for many years and, thus, provides deep institutional knowledge, expertise, and comfortable continuity at the executive level.
Forecast, Valuation & Implied Return: Margin of Safety
We see fair value as 654cps (previously: 631cps) on a Price Earnings (PE) of c.7.9x, which is hardly demanding given the quality of the underlying businesses.
Our EV/EBITDA-implied fair value of 740cps backs up this view, if not hinting at a degree of upside risk to our forecasts.
Using our DCF as a base, our implied 12m TP of 766cps (previous 12m TP: 737cps) places the share on an Exit PE of 8.0x & implies a potential return of c.37%.