Business Overview: Leveraging Product, Route-to-Market & Returns
Trellidor’s traditional business of customized manufacturing of security gates for a national, African and export network of franchisees remains strong while management’s addition of innovative & complementary products (including Taylor blinds and shutters, and NMC) is logical and steadily gaining traction.
The Group is cash generative and management’s careful capital allocation into the acquisition of (some) the main regional franchisee, share buy-backs below fair value & degearing the Group’s balance sheet while paying dividends should all add to the Group’s financial performance and shareholder returns.
Macro Environment: Home Improvement Tailwinds
While high domestic real rates had depressed residential property and home improvement markets, the South African Reserve Bank’s strongly accommodative monetary response to COVID-19 has reversed this trend with exciting implications.
Building materials, home improvement sales and the residential property markets have all positively responded to this and, in many instances, are trading at-or-above their pre-COVID levels.
Despite numerous domestic & global macro risks remaining, Trellidor should be a beneficiary of these home improvement & residential property market tailwinds.
Forecast, Valuation and Implied Return: Undervalued & Yielding
Given a reasonableness check against our implied EV/EBITDA regression, our DCF Model indicates that Trellidor is worth c.442cps or a c.8.8x PE and c.4.4x EV/EBITDA against our expected FY 21E earnings. These valuation metrics appear quite undemanding of a Group with a 5-year average ROE of >20% and a Free Cash Flow/EV Yield just shy of 18%.
Rolling 442cps forward by our CoE, we arrive at a 12m TP of 532cps implying a 54% return from the current share price.
Even if the market never fully reflects this valuation, it is worth noting that the share’s attractive c.6.0~7.0% Dividend Yield also makes this compounder a good yield play.
FY 15: Tougher Trading Environment Than We Anticipated
Amidst a tough domestic economy and a management transition, ARB Holdings reported flat FY 15 results with a small decline in the Electrical Division being offset by growth in the Lighting and Corporates Divisions.
The Group reported revenue of R2.1bn (FY 14: R2.2bn), strong cash generation and flat HEPS of 50.0cps (FY 14: 50.3cps).
These results were driven by an unexpected drop in activity and spending by Eskom (particularly in their rural electrification programme) and infrastructure-related work in a slowing, troubled domestic economy.
The Group’s finances remain robust and management has declared a normal and a special dividend of 20.1cps (FY 14: 20.1cps) and 10cps (FY 14: 10cps) respectively, implying that the Group’s share is trading on a Dividend Yield (DY) of c.5.0%.
Given the tough environment, we see ARB Holdings’ good FY 15 results as indicative of the Group’s underlying quality.
The macro-environment will be the biggest challenge for the Group’s short-term organic growth ambitions, but the long-term strategy of expanding the Group’s product lines, geographies and markets (both organically and acquisitively) should yield upside.
In the short- to medium-term, though, it is likely that any major growth will be driven by acquisitive actions taken by the Group. While this is hard to forecast (and we do not even try), management have reasserted their intentions to conclude strategic and meaningful acquisitions in due course.
We revise our fair value to 613cps (previously 715cps) putting the share on a Price Earnings (PE) of 12.3x. This arrives at a 12m TP of 712cps (previously 836cps) on an Exit PE of 12.9x implying a 12m return of c.20% with acquisitive upside risk to these numbers
Key risks to the Group are unchanged from our original Initiation of Coverage. In fact, the macro risks remain even more pertinent in the current environment.