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.
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.
While ARB missed out topline expectations,
management’s extraction of efficiencies across the Group saw a resilient profit
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.
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
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.
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.