Tag Archives: South Africa

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.

Renergen – Initiation of Coverage – Lighter-than-Air Falling to the Bottom-Line

Share Code: REN – Market Cap: R2.3bn – PE: -34.9x – DY: 0.0%

Business Overview: Near-term Helium & LNG Producer

  • Renergen owns an onshore petroleum production right to the “Virginia Gas Project” that is rich in methane (LNG) and helium and the Group is developing in a two-phased approach.
  • Renergen is in a formidable position to move up the value-curve as Phase One nears first-production.
  • Importantly, the Virginia’s Phase Two could be multiples the size of Phase One and unlock staggering value in the Group.

LNG & Helium Markets: Attractive Prospects

  • South Africa is an energy-scarce economic region with both a good potential LNG demand and a potential supply deficit of the gas in its near-future as some existing assets come offline.
  • The global helium market is opaquer, but the recent drop-off in USA supply and uncertainty around Russia’s planned supply growth combine to imply tight(er) helium supplies post-pandemic. Finally, the major consumers of helium (aerospace, semiconductors & MRIs) are all above-average growth vectors and cannot substitute helium for anything else.

Forecast, Valuation and Implied Return: Upside Apparent

  • 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 3539cps. After options for Evander and Cryo-Vacc are added, we see Renergen’s share as potentially worth c.4247cps.
  • Rolled-forward by CoE, our 12m TP is 4977cps.

Key Up- & Downside Risks: Lots of Moving Parts

  • Running a sensitivity analysis on our model highlights that Renergen’s valuation is more sensitive to helium than LNG, but both prices are ultimately sensitive to the USD/ZAR rate.
  • Inflation, production, and resource risks also exist 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.

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.

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.

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%

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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.

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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.

ARB Holdings – Good Story in a Tough Market

Initiation of Coverage – Share Code: ARH – Market Cap: R1.4bn – PE: 12.7x – DY: 2.2%

Download the full ARB Holdings Initiation of Coverage Report Here

Business Overview: Market, Store and Product Expansion

  • ARB has built a scalable electrical products distribution and wholesaling business off the back of a core cable product supply with key growth drivers being the expansion in product lines, movement into new territories, markets and industries and selected strategic bolt-on acquisitions.
  • The Electrical Division is predominantly a wholesaler of cables, overhead lines and related electrical components in Southern Africa.
  • In mid-FY 12 ARB Holdings acquired a 60%-stake in Eurolux (Pty) Ltd, a fast growing importer and distributor of light fittings, lamps and ancillary electrical products.
  • The Group Services segment includes the strategic and operational activities as well as holding the underlying property portfolio of the Group with a book value of R163m.

Key Issues: Macro-economic Variables Worrying

  • With many frothy indicators, the construction, building and related market in South Africa has many short-term downside risks including the current labour environment, the rising interest rate cycle and the upcoming elections.
  • Despite this, South Africa’s infrastructure needs are significant as encapsulated in the National Development Plan (budgeted c.R827bn spend) and the building materials market stands to benefit handsomely from this (eventual) roll-out.

Forecast, Valuation and Implied Return: Attractively Priced

  • Our fair value for ARH is 622cps on a PE of 13.5x. Rolling this forward at our Cost of Equity (CoE), we arrive at a 12 month Target Price (TP) of 727cps on an Exit PE of 12.7x implying a return of 21% from the current levels.
  • The two key risks to our above valuation methodologies are (1) the major macro-economic variables in South Africa (noted above), and (2) the timing and successful implementation of ARB’s product, store and market expansion drive (including any potential future acquisitions).

Download the full ARB Holdings Initiation of Coverage Report Here

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

See our methodology here and note our disclaimer here.

Accentuate – H1:14 Results – Tough Trading Period

H1:14 Results Note – Share Code: ACE – Market Cap: R73m – PE: 11.3x – DY: 0.0%

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H1:14 Results: Tough Trading Period, Hampered by Weak Rand & December

  • Accéntuate reported disappointing H1:14 results that saw sales rise 7% to R157m (H1:13 – R146m), but margins compress and Operating Expenses rise by c.13%. The rise in opex was partly due to Suntups duplicate leasing costs (eventually this business will moved into existing Group premises) and distribution costs being passed onto the Group by the higher diesel price.
  • This culminated in profit attributable to shareholders falling c.49%, HEPS being reported below our expectations at 2.81cps (H1:14 – 6.01cps).
  • Two small acquisitions were made during the period, being Suntups (wooden flooring) and Degrachem (metal treatment chemicals).

Our Thoughts: Promising Start to H2:14E

  • Floorworx saw a particularly tough December 2013 that appears to have reversed during January 2014, but the volatile Rand has affected most its businesses units negatively in the short-term.
  • In the long-term, though, the weak Rand creates a massive competitive advantage for the Group’s East London manufacturing asset (key in Floorworx) that positions the business well for the (very) slow recovery in some key indicators in the local construction and infrastructure market continues.
  • The South African elections (coming early May) create some short-term downside risk, as we believe that public sector spend is likely to be interrupted before, during and after this period.

Forecast, Valuation and Implied Return: Underpinned by Tangible NAV of c.90cps

  • We lower our fair value to 86cps (previously: 122cps), which is underpinned by ACE’s current TNAV of c.90cps and arrive at a 12m TP of 100cps (previously: 142cps), on an Exit PE of 11.0 (which is arguably inflated due to the trough earnings the Group is trading through currently as well as the fact that Ion Exchange Safic adds to our DCF SOTP but doesn’t add to the Group’s profits at this point).
  • Our 12m TP of 100cps (previously: 142) implies an attractive 73% return, but note the risks to our view later in this report.

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See our disclaimer.

Wescoal Holdings – H1:14 Results – A Precursor of Prospects

H1:14 Results Note – Share Code: WSL – Market Cap: R374m – PE: 12.0x – DY: 1.3%

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H1:14 Results: Intibane & Higher Coal Price Lift Results

  • 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.

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