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Renergen – FY 21 – Nearing Phase One & Derisking Phase Two

Share Code: REN – Market Cap: R2.7 – PE: -65.2x – DY: 0.0%

Download full Renergen FY 21 Results NoteDownload

FY 21 Results: Smaller than Expected Preproduction Loss

  • Renergen’s operating loss was smaller than expected despite a small revenue miss as lost production (due to the lockdown) was offset costs.
  • The Group spent R125.7m on assets under construction, capitalized R21.5m intangible assets and made a second draw down on its US International Development Finance Corporation (DCF) loan to the tune of $12.5m. The Group’s short-term unencumbered cash reserves sit at R130m.

Progress Updates: Almost Entire Positive

  • The Group has concluded a partnership with Total SA as LNG distribution is set up down the key N1 route.
  • Drilling of P007 & MDR1 both reflect strong resource, flow & helium concentration data, highlighting potentially better-quality resources and/or lower capex intensity of Phase Two.
  • The Group has concluded its first helium sales agreement with a global tier-one automotive supplier for Phase Two.
  • Finally, The Group’s innovative cold chain storage solution (Cryo-Vacc™) made its first sale, moving post-revenue.

Forecast, Valuation and Implied Return: Appears Undervalued

  • Since our Initiation, our major assumptions remain the same, albeit we have updated our model for the latest spot prices that, in general, have moved in Renergen’s favour.
  • 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 4149cps (previously 3539cps). After options for Evander and Cryo-Vacc are added, we see Renergen’s share as potentially worth 4978cps (previously 4247cps).
  • Rolled-forward by CoE, our 12m TP is 5850cps (previously 4977cps) or over double what the current share price is.
Download full Renergen FY 21 Results NoteDownload

Refer to our Initiation of Coverage for more background on this stock.

ARB Holdings – FY 20 – Battening Down the Hatches

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

ARB-Holdings_- FY 20_Results NoteDownload

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 – FY 20 Results NoteDownload

ARB Holdings – H1:20 – Lean & Efficient

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

ARB Holdings – H1:20 Results NoteDownload

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 – H1:20 Results NoteDownload

ARB Holdings – FY 19 – (Still) Awaiting Macro-Tailwinds

Share Code: ARH – Market Cap: R0.9bn – PE: 7.0x – DY: 6.2%

Download the full ARB Holdings FY 19 Results NoteDownload

FY 19 – Macro-headwinds Remain Strong

  • ARB Holdings grew revenue +4.5% y/y, partially bolstered by Radiant, GMC and CraigCor acquisitions.
  • An anaemic domestic economy and construction sector, supply chain disruptions, competitor activity & a volatile currency all combined to put downward pressure on Group results, while the Group also began accounting for Radiant with restructuring once-offs costs, relocated operations in Gauteng and suffered some non-cash impairments and Put Option revaluations due to subsidiary results.
  • IFRS HEPS slipped -19% y/y to 58.2cps (FY 18: 71.7cps), but this materially beat our conservative expectations of 50.1cps. We see our calculated ‘Normalized’ earnings figure as c.-21% y/y.
  • The Group maintained its dividend at 25cps (FY 18: 25cps + 10cps special dividend) as cash flows remained strong.

Our Thoughts: Domestic versus Global – Eskom versus Trump

  • Globally, a red-flags are flashing as the US-China Trade War escalates and the global economy suffers.
  • Domestically, Brexit (as the UK is a large South African trading partner) and Eskom continue directly hurting our economy.
  • While these global and domestic risks are well-known, any positive resolutions to them would create macro-upside that should bolster prospects going forward.
  • Given the depth of discount the valuation of the domestic small cap sector currently trades at, we would argue that no positives anywhere have been priced in and therein lies the opportunity.

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

  • Our fair value for ARH is 576cps (previously: 636cps) on an implied Price Earnings (PE) of 9.9x, indicating that the stock is c.42% undervalued at its current share price.
  • Rolling our fair value forward at our CoE, we arrive at a 12m TP of 670cps (previous 12m TP: 744cps) on an Exit PE of 12.6x.
Download the full ARB Holdings FY 19 Results Note Download

See our methodology here and note our disclaimer here.