Tag Archives: small caps

Renergen – Large Reserve Upgrade & Implications

Share Code: REN – Market Cap.: R3.8bn – PE: -89.0x – DY 0.0%

News: Large Reserve Upgrade & Upsizing of Phase Two

  • Sproule has published an updated reserve statement on Renergen, revealing large upgrades to the Group’s gas reserves.
  • 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.

ARB Holdings – H1:17 Results – Quietly Growing

Share Code: ARH – Market Cap: R1.5bn – PE: 10.6x – DY: 3.0%

Download the full ARB Holdings_H1:17_Results Note

H1:17 – Steady Does It…

  • ARB Holding’s revenue rose by 3% to R1.27bn (H1:16 – R1.23bn) with Lighting leading the growth while soft municipal spend dampening Electrical’s contribution during the period.
  • HEPS rose 1% to 28.07cps (H1:16 – 27.79cps) while cash flow generation remained good and the balance sheet ungeared with R175m of net cash on hand.
  • Although in the ARB’s results are a bit below our expectations, the Group continues to steadfastly execute their strategy of geographic, product and customer expansion with cabling dropping from >50% of the Group’s turnover seven years ago to c.37% of it in these results.

Our Thoughts: Stagnation in the Base, Upside in the Future

  • While we may be premature in this call, we believe that we are currently in the trough in both South Africa (2016/17) and in ARB’s market (FY 17E and, perhaps, FY 18E).
  • SA’s Leading Indicator and as well as many global indicators everywhere are, at worst, not falling anymore and, at best, starting to rise.
  • That said, we do not expect a sudden recovery and would not be surprised if this trough stretched out (i.e. flat growth) into 2018.

Forecast, Valuation & Implied Return: Attractive Valuation

  • We lift our fair value for ARH to 664ps (previously: 650cps) on an implied Price Earnings (PE) of 11.1x. This PE does not appear unreasonable against either ARH’s own history or the various comparatives in the market.
  • Rolling this fair value forward at our CoE we arrive at a 12m TP of 779cps (previous 12m TP: 762cps), which places the share on a comfortable Exit PE of 11.4x.
    This 12m TP also implies a reasonably attractive return of c.23%.

Download the full ARB Holdings_H1:17_Results Note

See our methodology here and note our disclaimer here.

ARB Holdings – H1:16 Results – Great Results, Overlooked Share

Share Code: ARH – Market Cap: R1.2bn – PE: 10.0x – DY: 3.8%

Download: ARB Holdings H1:16 Results Note

H1:16 – Better Than Expected Results Despite Macro Pressure

  • ARB produced excellent H1:16 results with revenue rising 12% to R1.2bn (H1:15 – R1.1bn), comfortably beating our FY 16E full year expectation of 4% y/y, though the Gross Profit (GP) margin slimmed to 22.4% (H1:15 – 22.5%).
  • The Group’s Operating Profit followed revenue upwards by 11% as overheads were kept incrementally in line with revenues and resulting in HEPS growth of 12% to 27.8cps (H1:15 – 24.8cps).
  • While all segments saw growth in revenues and profits, the Lighting Segment (Eurolux) produced the majority of the growth as market share, customer and product gains all lifted its Profits before Interest and Tax (PBIT) grew by 27% y/y in another excellent period’s performance.
  • Cash generation remains exceptionally strong, the Group net ungeared and the underlying property portfolio’s valuation flat at R181m (FY 15: R181m).

Our Thoughts: Management Transition Complete

  • An experienced Financial Director being appointed to ARB’s Board implies that the Group’s management transition is now complete.
  • This period’s strong organic growth indicates the operational competency of the management team, but they are cognisant of their need to execute on the Group’s acquisitive intentions.

Forecast, Valuation & Implied Return: Overlooked by Market

  • We view ARB as worth c.520cps (previously: 613cps) on an implied Price Earnings (PE) of 9.8x (previously: 12.3x). The de-rating in our fair value has to do with the rise in South Africa’s risk-free rate impacting on our Discounted Free Cash Flow (DCF) valuation, rather than any major variables relating to ARB itself.
  • Rolling our fair value forward at our CoE we arrive at a 12m TP of 609cps (previous 12m TP: 712cps). A 12m TO of 609cps places the share on a comfortable Exit PE of 10.4x, implying a 12m return of c.15%.
  • 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.

Download: ARB Holdings H1:16 Results Note

See our disclaimer.

ARB Holdings – FY 14 – Growth Despite the Odds

FY 14 Results Note – Share Code: ARH – Market Cap: R1.8bn – PE: 15.5x – DY: 3.8%

[wpdm_file id=11]


FY 14: In Line With Our Expectations

  • ARB Holdings reported their FY 14 results with revenue growing by 14% to R2,2bn (FY 13: R1,9bn) versus our forecasts of R2,3bn.
  • The Group achieved better margins than we had expected due to both a rising contribution from the higher margin Lighting segment and from the Group driving purchasing savings across its business in H2:14, which saw HEPS rising nicely by 27% to 50.3cps (FY 13: 39.6cps) versus our expectation of 52.1cps.
  • The Group remains highly cash generative and declared both a dividend of 20.1cps (FY 13: 16.2cps) and a special dividend of 10cps (FY 13: 10cps), yet remained ungeared (R197m net cash).
  • While cognisant of the tough trading environment, management remain focussed on both organic growth and, potentially, adding the elusive “third pillar” (acquisition) to the Group.

Our Thoughts: High Quality Group, High Quality Share

  • ARB has proven itself a remarkably high quality group in some very tough trading conditions as it successfully executes on its communicated strategies of expanding product lines, geographies and markets (both organically and acquisitively).
  • While our valuation metrics indicate the share is fully valued, the “quality” quotient is a hard one to quantify and likely to prove very valuable for the long-term investor.

Forecast, Valuation and Implied Return: Attractively Priced

  • Our fair value for ARH is 715cps on a PE of 14.2x (previously 622cps). Rolling this forward at our Cost of Equity (CoE), we arrive at a 12m TP of 836cps (previous 12m TP: 727cps) on an Exit PE of 14.7x implying a total return of c.7%.
  • The key risks stated in this report remain the same from our Initiation of Coverage on the Group. Also note the newly added risk relating to the phasing out of incandescent lamps in South Africa and the uncertainty it creates in the Lighting segment.

[wpdm_file id=11]

See our disclaimer.

Wescoal Holdings – FY 14 Results Note – Positives Dampened by Eskom

FY 14 Results Note – Share Code: WSL – Market Cap: R374m – PE: 12.9x – DY: 1.3%

Download the full Wescoal Holdings FY 14 Results Note

FY 14 Results: Once-off Costs Create Earnings Miss

  • Wescoal reported its FY 14 results with revenue rising 70% to R1.1bn (FY 13: R0.7bn), largely driven by the H2:14 inclusion of the MacPhail acquisition into the Group’s Coal Trading segment.
  • Excluding the once-off profits on the sale of mineral assets during the period, the Group recorded an “Operational” EBITDA growth of 124% and HEPS rising to 15.7cps (FY 13: 12.4cps),
  • While the Group’s revenue slightly surpassed our forecast of R1.0bn, restructuring and relocation costs in the Coal Trading segment (R6m), intangibles amortisation (R2m), higher than expected costs and a more aggressive rehabilitation programme at Khanyisa and a general dip in Eskom-related volumes of coal collectively saw the Group miss our target HEPS of 21.2cps.

Our Thoughts: Uncontrollable Eskom and Spot Price Variables

  • The Group has identified mine extensions for Khanyisa and Intibane while Elandspruit is progressing well towards an expected first production during January 2015.
  • MacPhail is integrating well into the Group’s Coal Trading segment and the enlarged business’s prospect look positive.
  • Two key variables that will determine the Group’s short-term prospects are (1) Eskom-related coal volumes, and (2) the Rand-price of inland coal. Both variables were soft during FY 14E and—while hard to forecast—indications point to upside here.

Forecast, Valuation and Implied Return: Relatively Flat Update

  • We lower our fair value by 5% to 240cps (previous: 253cps), as the time value of money has been offset by a lower spot coal price and slightly lower Eskom volumes.
  • The implied PE of 15.3x is not very illustrative, though, as both Elandspruit and MacPhail are currently adding to our SOTP, but not yet (fully) contributing to the Group’s profits.
  • Based off this fair value, we marginally raise our 12m TP by 4% to 301cps (previous 12m TP: 287cps), implying a 48% return on an Exit PE of 12.2x (which still would not include a full year’s steady-state contribution from Elandspruit).

Download the full Wescoal Holdings FY 14 Results Note

What do you think of ARB Holding? Let us know…

See our methodology here and note our disclaimer here.

Accéntuate Ltd: FY 13 Results – Tough H2, Prospects Remain Good

Initiation of Coverage – Share Code: ACE – Market Cap: R102m – PE: 10.9x – DY: 0.0%

[wpdm_file id=6]

FY 13 Results: Inland Market Tough in H2:13; Acquisitions Made

  • Accéntuate experienced a much tougher H2:13 than we had expected. FY 13 revenue flattened to R284m (FY 12: R283m), c.4% shy of our expected turnover mark.
  • This soft performance during H2:13 comes from Floorworx where particularly the inland market struggled. Safic and Ion Exchange Safic performed in line with our expectations as the former grows its market exposures and the latter continues to build traction in the local market.
  • The Group’s FY 13 EPS rose 17% to 8.4cps (FY 12: 7.2cps), but critically the HEPS from Continuing Operations slipped 11% to 8.4cps (FY 12: 9.5cps).
  • Some of this balance sheet was employed post-results to cleverly acquire two small complementary businesses, both paid out in script and to be incorporated from 1 September 2013 (i.e. ten of the twelve months of FY 14E).

Our Thoughts: “When”, Not So Much “If”…

  • Disappointing results and acquisitions aside, Accéntuate still remains well positioned to benefit from the pent-up public sector infrastructure spend. That said, the 2014 elections potentially create downside risk regarding the timing thereof.
  • In the meantime, management has been driving growth initiatives into other markets and product lines, and seeking strategic acquisitions.

Forecast, Valuation and Implied Return: Small Upgrade

  • We raise our fair value for Accéntuate to 122cps (previously: 114cps), which implies a PE of 14.6x. This compares reasonably attractively to two listed comparatives, Distribution and Warehousing Network Ltd (Share code: DAW – PE of 15.3x) and Afrimat Ltd (Share code: AFT – PE of 14.8x).
  • Rolling our fair value forward by the Cost of Equity (CoE), we arrive at a 12m TP of 142cps (previously: 132cps), implying an Exit PE of 13.8x and an attractive implied return of 54%.
  • The key risks we see in our valuation of Accéntuate remain macro.

* Note that the Group remains under cautionary announcement pending the release of pro-forma financial results relating to the Suntups acquisition. This results note does not take into account any material information following the resolution of this cautionary announcement.

[wpdm_file id=6]

Five Lessons with Liquidity

Besides all the usual skills and knowledge that goes with investing in stocks, operating in the small cap space forces you to master handling positions in low liquidity stocks.

Here are five rules to help you handle low liquidity stocks:

1. Stretch your time horizon

Low liquidity makes exiting a position in a stock challenging and, often, costly. But, what if you never exited an investment? Suddenly the investment’s lack of liquidity really would not matter to you (or, at least, matter less).

Forever is a long time, though, but this is also work if you take much longer-term perspectives with your investments. This not only allows your gains to far more exponential (i.e. 10-baggers) from which a small liquidity cost of exiting is minor, but it also can lead to situations where you bought into an illiquid stock that re-rates over years, becomes popular and when you sell your position the market’s liquidity is sufficient to barely notice.

For an example of this latter phenomenon, looks at how the Rand-value traded in EOH has steadily grown over the last decade during which the stock re-rated and the share price exponential rose.

2. Buy with a sufficient margin of safety

By their very definition, low liquidity stocks cannot absorb significant volumes of their script being sold in the market. Thus, low liquidity stocks could see their share prices crash for no apparent reason other than one or a couple of random sellers have decided to dump their positions.

You need to be comfortable enough that the investment you have made into the low liquidity stock is sufficiently discounted against its intrinsic value and future prospects that, if the share price halves on a couple of trades, you could not care less. If fact, perhaps you even consider buying more (see (4) below)?

The only way you satisfy this rule is to thoroughly research and understand the company and then diligently value the stock from all angles. If the stock still appears deeply discounted against your valuation(s) of it, you are likely buying it with sufficient margin of safety that the short-term volatility of its share price can be ignored in favour of your (1) long-term time horizon.

3. The bidding spread

The spread between the bid and offer of a stock is called the ‘bidding spread’. Bidding spreads are actually a cost. The wider the spread, the worse the spread is considered and the greater it may cost the investor.

Let me phrase it like this, if the bidding spread of a stock was 5% and you had bought the stock a second ago and were forced to sell it immediately, you would have to take the highest bid. As that bid is 5% below the Offer, thus it is likely 5% below where you bought the stock. In this case, the bidding spread would cost you 5% of your investment.

Now bidding spreads tend to be ludicrously wide in low liquidity stocks, but if (1) your time horizon is sufficiently long and (2) the stock is discounted enough against its valuation and upside potential, then why haggle about a couple of percent in the bidding spread?

Instead of trying to be clever and placing a low bid (where you could save a couple of percent, but also risk missing out on the stock’s upside by never owning it at all), rather simply cross the bidding spread and pick up whatever stock you want (assuming it is available). Why worry about losing 5% on a bidding spread? If you are never in the stock you risk missing out on 5,000% upside!

So, if (1) your time horizon is sufficiently long and (2) the stock is discounted enough against its valuation and upside potential, then you should be comfortable enough about the value of the long-term position in the stock to do this.

4. Averaging up and averaging down

Sometimes the stock is so illiquid that even if you (3) cross the bidding spread, you would not be able to pick up sufficient script (or sufficient script at the prices you are willing to pay for it). In cases like this, building a position can take time, so consider “averaging up” or “averaging down”, depending on which way the stock is moving at the time.

In other words, if the stock is rising, steadily pick up chunks of it raising your average entry price. If the stock is falling, steadily stagger bids lower and lower and pick up more at lower prices, lowering your average entry price.

This needs to judged on a case-by-case basis and is not always appropriate. But if you have done your homework and are comfortable that you are (2) buying the stock with a sufficient margin of safety and (1) have a long-term time horizon, then you are simply using the market mechanisms to your advantage.

5. Absolutely only ever invest cash you do not need

All the rules from (2) to (4) are meaningless if your (1) time horizon is (forced to suddenly become) too short.

While you can buy into a low liquidity stock with all the right intentions of holding it for many, many years, if somethings happens (probably in your personal life) and you become a forced seller of that stock, then all the above rules are meaningless and the low liquidity will likely cost you dearly.

So, only make investments into low liquidity stocks with funds that you are absolutely, positively sure you do not and will not suddenly need.

The article originally appeared on SmallCaps.co.za.