Tag Archives: South Africa

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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