Tag Archives: small cap

Renergen – Key Due Diligence Is Successful

Share Code: REN – Market Cap: R4.6bn – PE: -124x – DY: 0.0%

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:
    1. The positive DD by CEF confirms the quality of the VGP,
    2. Assuming final approvals are received, this injects R1bn of equity funding into the Phase II funding, &
    3. 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.

Trellidor Door Holdings – H1:22 – Series of Unfortunate Events

Share Code: TRL – Market Cap.: R267m – PE: 7.9x – DY: 3.9%

H1:22 Results: Riots, Strike, Shortages & Curveballs…

  • 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.

Forecast, Valuation & Implied Return: Worth > 400cps

  • 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%.

Renergen – Government Investor Highlights Virginia’s Value

Share code: REN – Market Cap.: R5.1bn – PE: -114x – DY: 0.0%

News: South African Government invests directly

  • 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.

Sabvest Capital – FY 21 – Great Performance with More to Come

Share Code: SBP – Market Cap: R2.4bn – Dividend Yield: 0.6%

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%.
  • All these measures exclude the potential upside from the ARB Holdings delisting, Apex’s Ascendis Medical deal & any Rand weakness going forward that will lift hard currency valuations.
  • Refer to our Initiation of Coverage for more background.

Renergen – Strategic Partner Invests with Tailwinds

Share Code: REN – Market Cap: R4.9bn – PE: -115x – DY: 0.0%

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 – Tough, Chaotic Trading Period

Share Code: ARH – Market Cap: R1.8bn – PE: 9.3x – DY: 4.3%

H1:22 – July Riots, Omicron 4th Wave & Fading DIY Spend

  • 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.
  • Refer to our previous note for more detail as to this offer – Offer to Minorities & Proposed Delisting.

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.

Sabvest Capital – New Investments & Strong Trading Update

Share Code: SBP – Market Cap: R2.4bn – Dividend Yield: 0.6%

New Investment: ARB Holdings Ltd

  • 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.
  • Refer to our notes on ARB Holdings for detail on the Group.

New Investment: Apex Acquires Ascendis Medical

  • Sabvest’s 44.8%-held investment, Apex Partners, has acquired a stable of Ascendis Health medical devices businesses for R550m (less c.R200m catch-up capex & up to R25m excess rental). See the full announcement here.
  • Ascendis Medical’s FY 21 revenue was R983m but bottom-line expectations vary given Ascendis’ neglect of the businesses.

Trading Update: Growth in NAV Better than Expected

  • Sabvest expects its FY 21 Net Asset Value (NAV) to be more than +19%y/y (>8858cps) while also hiking its dividend >80%.

Valuation*, 12m TP* & Implied Return*: Awaiting FY 21 Results

  • 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.
  • See H1:21 Results Note & our Initiation for more background.

* Under review until post-FY 21 results

ARB Holdings – Offer to Minorities & Proposed Delisting

Share Code: ARH – Market Cap: R1.8bn – PE: 9.3x – DY: 4.3%

Offer to Minorities & Proposed Delisting

  • 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.
  • See the full announcement here: LINK.

Previously Published Valuation: Justifies Offer Price

  • In our previously published FY 21 results piece, we saw fair value as 654cps on a Price Earnings (PE) of c.7.9x, which is hardly demanding given the quality of the underlying businesses and did imply some upside risk to this view.
  • 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.

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.