Tag Archives: small cap

ARB Holdings – H1:21 – Emerged Stronger

Share Code: ARH – Market Cap: R1.0bn – PE: 6.4x – DY: 0.0%

H1:21 – Strong Beat

  • ARB Holdings published an excellent H1:21 result showing good revenue growth and particularly strong profit growth from key cost-savings measures annualizing across the period.
  • Revenue rose +5% y/y, Operating Profit shot up +59% y/y (thoroughly beating our expectations), & HEPS grew +26% to 41.1cps (H1:20 – 32.6cps).
  • For a Group that typically generates strong cash flows, cash generation was particularly strong over this period and the Group’s balance sheet remains very much ungeared.

Our Thoughts: Emerged Stronger

  • Management has built a superb Group over the years and, over the current pandemic, reacted swiftly in reigning back expenditure. Following from our previous results note, we believe that H1:21 has demonstrated that the Group has emerged stronger with more market share than at the beginning of this period. In the long-term, this can only be a good thing.
  • We expect dividends to resume with the full-year results and have maintained our revenue expectations while adjusting our margin assumptions to reflect the fantastic gains made by the Group in H1:21 annualizing even further into H2:21E.

Forecast, Valuation & Implied Return: EV/EBIDTA lining up with DCF

  • We see fair value as 631cps (previously: 464cps) on a Price Earnings (PE) of c.9.2x.
  • Interestingly, we have built a new EV/EBITDA Model for ARB against a hand-selected peer set and this model arrives at a fair value of 624cps, thus lending weight to our DCF fair value.
  • Our implied 12m TP of 737cps (previous 12m TP: 546cps) places the share on an Exit PE of 12.9x & implies a potential return of c.71%, albeit with typical macro-risks remaining present.
  • While “cheap” is not a defining characteristic of the current domestic small cap market, the combination of it with the high-quality of ARB’s track record and prospects makes it unique.

Refer to our original Initiation of Coverage for more background.

ARB Holdings – FY 20 – Battening Down the Hatches

Share Code: ARH – Market Cap: R0.8bn – PE: 10.7x – DY: 0.0%

FY 20 – Winning Amidst A Pandemic

  • During a period deeply marked by the COVID-19-induced lockdown and a global recession, ARB’s FY 20 numbers are not particularly reflective of much other than its environment.
  • Revenue contracted -13%, margins improved as deep cost-cutting, rationalization of operations, retrenchments and management salary sacrifices all protected the Group, & a range of IFRS entries flowed through results distorting comparisons.
  • The Group ended up seeing HEPS rise +3.0% y/y to 59.96cps (FY 19 – 58.2cps), but, above all else, the Group appears to have protected its balance sheet (cash on hand of R152m), bolstered by operations generating R135m (FY 19 – R226m) cashflow.

Our Thoughts: Emerging Stronger

  • Near-term numbers (both historic & forecast) are somewhat meaningless in an environment of heightened chaos & uncertainty with major global variables playing out.
  • Despite this, ARB management has done all the right things and the Group is likely to emerge from this period stronger, if not absolutely then at least relatively speaking.
  • Key variables remain, though, from the global (pandemic & geopolitics) to domestic (infrastructure spend, public sector finances & Eskom) that imply both up- & downside risks.

Forecast, Valuation & Implied Return: Still Underrated

  • We see fair value as 464cps (previously: 562cps) on a Price Earnings (PE) of c.7.4x. This appears reasonable against the various comparatives in the market (average: 10.3x) despite the reliability of PE as a metric declining due to the abnormality of this period and the raft of IFRS non-operational entries flowing through both ARB’s & the rest of the market’s financial results.
  • Our implied 12m TP of 546cps (previous 12m TP: 659cps) places the share on an Exit PE of 8.8x & implying a return of c.56%.
  • While “cheap” is not a unique domestic small cap characteristic, the profitability, cash generation & robust balance sheet of ARB make it one of the higher-quality stocks in this universe.

Refer to our original Initiation of Coverage for more background.

ARB Holdings – H1:20 – Lean & Efficient

Share Code: ARH – Market Cap: R0.9bn – PE: 5.9x – DY: 6.3%

H1:20 – Great cost-control despite headwinds

  • While ARB missed out topline expectations, management’s extraction of efficiencies across the Group saw a resilient profit performance.
  • The disappointments were all in sales, as Eskom/contractor volumes remained weak in the Electrical Division and retailer/consumer markets stagnated.
  • The victories were all won in costs as the Radiant acquisition begins to bed-down, an underperforming Electrical store was closed and the Lord’s View DC began operations.
  • Slight “pre-Chinese New Year” overstocking across the Group negatively impacted on cash flows but should serve the Group well given the current Covid-19 (i.e. “Coronavirus”) disruption to global supply chains and the coming likely stock shortages across global and domestic markets.

Our Thoughts: H2 to remain tough, but long-term positive

  • The Group remains ungeared, has positive cost-savings that should annualize nicely going forward and is well-positioned to weather the current macro-headwinds and capture any growth that may appear going forward.
  • Unfortunately, H2 in South Africa and with growing global risks is likely to remain a tight trading environment and one with a lot of forecast risk (either upside or downside).

Forecast, Valuation & Implied Return: Still underrated

  • Our fair value for ARH is 562cps (previously: 576cps) on an implied Price Earnings (PE) of 8.3x, indicating that the stock is c.39% undervalued at its current share price.
  • Rolling our fair value forward at our CoE, we arrive at a 12m TP of 659cps (previous 12m TP: 670cps) on an Exit PE of 13.2x.
  • Key risks to the Group are unchanged from our Initiation of Coverage.

ARB Holdings – H1:19 – Awaiting Macro-Tailwinds

Share Code: ARH – Market Cap: R1.0bn – PE: 7.6x – DY: 4.6%

H1:19 – Macro-headwinds Remain Strong

  • ARB Holdings had a disappointing H1:19 period with results coming in lower than our expectations due to macro-headwinds.
  • South Africa’s political-drag and Eskom challenges continue to negatively affect business confidence with direct knock-on effects in the construction and infrastructure markets.
  • The Group reported flat revenue (+1.1% y/y) and—ignoring the IFRS-adjustments relating to Put Options—the Group’s normalized earnings slipped -6.1% y/y.
  • The Electrical segment saw the most pressure while the Lighting segment managed mild growth from market share gains.

Our Thoughts: Eskom & Radiant (Still) Two Key Variables

  • The Group is making all the right moves: It has concluded the acquisition of Radiant that bolsters its Lighting segment while the store roll-out continues in the Electrical Division.
  • Superb cash generation, margin management and operational control remains firmly in place with the Group positioning itself for above-average future growth.
  • Despite this, Eskom’s turnaround and related spend remain a major (upside & downside) variable in the Group’s prospects.

Forecast, Valuation & Implied Return: Still Quality & Still Value

  • Our fair value for ARH is 636cps (previously: 714cps) on an implied Price Earnings (PE) of 11.1x, indicating that the stock is c.48% undervalued at its current share price.
  • Rolling our fair value forward at our CoE, we arrive at a 12m TP of 744cps (previous 12m TP: 838cps) on an Exit PE of 12.2x.
  • While this exit multiple may be higher than normal, we see the Group as having an embedded option on South Africa and Eskom’s turnaround (currently a good thing, in our opinion).
  • Key risks to the Group are unchanged from our Initiation of Coverage, though Radiant has been consolidated from H2:19E.

See our methodology here and note our disclaimer here.

ARB Holdings – H1:18 Results – Improving Prospects

Share Code: ARH – Market Cap: R1.3bn – PE: 7.6x – DY: 3.65%

Download the full H1:18 results note here

H1:18 – Operationally Robust

  • 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.

Forecast, Valuation & Implied Return: Getting Exciting…

  • We raise our estimated fair value for ARH to 777cps (previously: 687cps), which puts the stock on an implied Price Earnings (PE) of 10.0x and implies that it is currently c.44% undervalued.
  • In our opinion, this 10.9x PE is reasonable when measured against either itself or comparatives.
  • Rolling our fair value forward at our Cost of Equity (CoE) we arrive at a 12m TP of 911cps (previous 12m TP: 809cps).
  • A 12m TP of 911cps places the share on a fair Exit PE of 14.5x, though we note a number of timing and environmental risks to our view.
  • Our 12m TP implies a return of c.69%.
  • Despite improving domestic sentiment, key risks to the Group are unchanged from our original Initiation of Coverage.

Download the full H1:18 results note here

See our methodology here and note our disclaimer here.

Wescoal Holdings – H1:15 Results – Big Strides Forward

H1:15 Results Note – Share Code: WSL – Market Cap: R380m – PE: 12.4x – DY: 2.0%

Download Wescoal Holdings H1:15 Results Note

H1:15 Results: Strong Results

  • 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.

Download Wescoal Holdings H1:15 Results Note

See our methodology here and note our disclaimer here.

Accéntuate Ltd: Ground Floor and Positioned for Upside

Initiation of Coverage – Share Code: ACE – Market Cap: R94m – PE: 9.5x – DY: 0.0%

Download Accentuate Initiation of Coverage Here

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.

Download Accentuate Initiation of Coverage Here

What do you think of Accéntuate? Let us know…

See our methodology here and note our disclaimer here.