70%-stake for an upfront cash payment of c.R49m & a top-up payment of up to R12.3m if Irontree hits EBITDA of R18.7m for its FY 22E (February) financial year (likely), &
30% to be acquired at a price based on a FY 24E revenue target of R100m (i.e. allowing integration of the business in the Group) but limited to the maximum (total) acquisition price of R140m.
Depending on how you view Irontree’s min/max purchase price:
It is on an FY 22E EV/EBITDA of c.4.3x ~ 7.5x,
An FY 22E Price Earnings of c.6.7x ~ 11.7x, &
Appears attractive against our implied DCF of the business.
Our Thoughts: Good Start on Digital Strategy
Irontree is highly cash generative with c.15,000 SME customers & earns c.90% of its revenue from digital backup & hosting services (i.e. recurring revenue) with c.10% of its revenue from digital, security & compliance services.
The business has grown revenue by c.+15% y/y CAGR over the last 5 years &, assuming this remains unchanged, the Group’s FY 24E revenue could be c.R69m (i.e. missing the R100m). Therefore, the R100m revenue target implies confidence that Irontree’s addition to Metrofile’s group will raise its growth rate (i.e. synergies).
This is a good first step in Metrofile’s Digital Strategy with a well-thought-out, reasonably-priced & comfortably-sized acquisition that should fit neatly into the Group and bolster both the Group and the acquired business’s growth rates (assumptions in note body).
Forecast, Valuation and Implied Return: Updated
Irontree lifts Metrofile’s FY 22E & FY 23E HEPS to 35.6cps (previously 35.1cps) and 40.2cps (previously 39.5cps) and adds c.+6% to our fair value of 428cps (previously 405cps).
Rolling this fair value forward, we lift our 12m TP to 497cps (previously 468cps) implying a 57% return from these levels.
H1:21 Results: Businesses trading at-or-better than 2019 levels
Sabvest Capital’s Net Asset Value (NAV) per share grew by +24% y/y to 8240cps (H1:20 – 6624cps) to the end of 30 June 2021. We have updated this post-period and see NAV currently at closer to 8500cps (our estimate).
The Group doubled its interim dividend to 20cps (H1:21 – 10cps) as its balance sheet saw degearing and management has steadily continued buying back shares in the open market (which we consider value accretive at these levels).
Perhaps most importantly, management emphasises that at the date of publishing the results all the Group’s businesses are trading at-or-better than 2019 (and 2020) levels.
Thoughts: Upside to forward valuation, corporate actions
Multiples used to value the Group’s unlisted investments were flat or slightly lower than prior periods. This gives us comfort that NAV growth is earnings-based (i.e. good quality).
In Classic Foods (and, even Revix) case(s), it looks likely that valuations may be written upwards in the near-term. Added to this, the current trading of the underlying businesses implies higher forward valuations too, even if multiples remain flat.
Finally, management’s share buy-back & hints at a potential acquisition may drive further upside from here.
Valuation, 12m TP & Implied Return: Lots of value available
Updating the Group’s NAV for the latest market prices and taking out our fairly-valued “HoldCo discount” of 20% (previously: 19%), we arrive at defendable (post-discount) fair value for Sabvest Capital shares of 6826cps (previously: 6402cps) or +31% higher than the current share price. As noted, we see upside risk to this expression of fair value.
Rolling our fair value forward at our Cost of Equity, we see the Group’s 12m TP as 8000cps (previously: 7542cps) with an implied return of +54%.
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.
Revenue rose 33% to R466m (H1:13 – R351m), driven mostly by Intibane’s three month contribution and a slightly higher average coal price. Operating leverage lifted EBITDA by 75% and HEPS grew 65% to 11.4cps (H1:13 – 6.9cps).
The Coal Trading segment saw lower volumes squeezing margin and really had quite a dismal trading period. The conclusion of the MacPhail acquisition (still contingent on Competition Commission approval) will likely add significantly to this segment in H2:14E and, especially, FY 15E.
Despite investing c.R51m during the period, the Group was highly cash generative and management sees the potential for further mid-tier coal asset acquisitions as majors continue to dispose of non-core assets from their portfolios.
Our Thoughts: MacPhail Exciting, but Awaiting CompCom Approval
The only outstanding condition for the MacPhail acquisition is the Competition Commission (CompCom) approval.
We have adjusted our forecasts to reflect our anticipated effective date for MacPhail (13 November 2013), assuming the CompCom approves of the deal, and have inserted c.R2m worth of restructuring costs into H2:14 while modelling annual savings of c.R9m being realized from FY 15E onwards.
Downside event risk is if the CompCom does not approve of the merger of Chandler and MacPhail. In this event, our 12m TP would drop by at least c.14cps or c.5%.
Forecast, Valuation and Implied Return: 12m TP Raised 17%
We lift our fair value by 19% to 253cps (previous: 213cps), implying a PE of 15.1x. This PE is not very illustrative, as both Elandspruit and MacPhail are not yet adding to profits.
We raise our 12m TP by 17% to 287cps (previous 12m TP: 246cps), implying a 43% return on an Exit PE of 6.4x.
As Wescoal is a junior miner, we draw your attention to the risks we identify in the body of this report.
Business Overview: A Group of attractive businesses
Floorworx is the most significant player in the South African resilient flooring market and stands to gain from the National Healthcare Insurance (NHI) driving hospital refurbishments and expansion. In the long term it should benefit from the eventual roll-out of the pent-up infrastructure spend in South Africa.
Safic is an industrial chemical business in the fast-growing chemicals market with strong linkage into and synergies with Floorworx.
Ion Exchange Safic is 40%-held, early-stage (but extremely promising) water treatment solutions business with key backing by its large Indian-listed parent, Ion Exchange India Ltd.
Accéntuate has de-risked its balance sheet, streamlined its various businesses and now begun to focus on growth. NHI spend should help near-term revenues, public sector infrastructure roll-out should drive medium-term revenues and Ion Exchange Safic offers long-term blue sky optionality.
Key Issues: Macro-economic uncertainty
Despite the promising businesses in Accéntuate’s stable, the Group’s prospects rely very much on the activity, timing and quantum of a recovery in the local construction and infrastructure markets. While the long-term prospects of these sectors remain positive, there remains significant short-term macro-economic uncertainty.
Forecast, Valuation and Implied Return: Appears very inexpensive
We have pegged our valuation to our segmentally-driven SOTP DCF model, implying that ACE has a fair value of 114cps. This would put the share on a comfortable 10.6x PE and also implies that the current share price of 85cps undervalues Accéntuate by c.35%.
Rolling forward our fair value, we arrive at a 12m TP of 132cps with an Exit PE of 11.0x, which is slightly elevated due to Ion Exchange Safic adding to our valuation but its operations not yet adding to the Group’s profits.
Our 12m TP implies an attractive c.56% return.
Finally, even if Ion Exchange Safic is excluded from our valuation (assumed to be of nil value), the share’s fair value still appears between 90cps to 100cps, thus lending some comfort to our view that the share is currently undervalued.