Sabvest Capital – New Investments & Strong Trading Update

Share Code: SBP – Market Cap: R2.4bn – Dividend Yield: 0.6%

Sabvest Capital – Ad Hoc Note – 7 February 2022Download

New Investment: ARB Holdings Ltd

  • Masimong Electrical (49.9%-held by Sabvest & 50.1% by Masimong) has offered minority shareholders in ARB Holdings 800cps. Along with the Burke Family (62.9%-shareholding in ARB), the deal aims to take the electrical & lighting wholesaler private. The total consideration will be c.R697m, & Masimong and Sabvest have each committed R223.5m funding (Sabvest’s share is c.9.3% of its market cap & c.6.5% of published NAV).
  • Irrevocable undertakings to vote in favour of the deal have been received from 69.4% of eligible shareholders, thus, we believe that this deal’s successful outcome is quite likely.
  • Refer to our notes on ARB Holdings for detail on the Group.

New Investment: Apex Acquires Ascendis Medical

  • Sabvest’s 44.8%-held investment, Apex Partners, has acquired a stable of Ascendis Health medical devices businesses for R550m (less c.R200m catch-up capex & up to R25m excess rental). See the full announcement here.
  • Ascendis Medical’s FY 21 revenue was R983m but bottom-line expectations vary given Ascendis’ neglect of the businesses.

Trading Update: Growth in NAV Better than Expected

  • Sabvest expects its FY 21 Net Asset Value (NAV) to be more than +19%y/y (>8858cps) while also hiking its dividend >80%.

Valuation*, 12m TP* & Implied Return*: Awaiting FY 21 Results

  • We have left our fair value (6826cps*) & 12m TP (8000cps*) unchanged & will update these after the FY 21 results. Given the trading update, though, we expect to upgrade our views.
  • While we do not expect ARB Holdings to materially change Sabvest’s NAV in the short-term, in the long-term the Group is an excellent, cash-generative & well-positioned business that is likely to contribute positively to NAV growth. Likewise with Ascendis Medical’s optionality. Perhaps, more subtly, these new investments further entrench Sabvest as a unique listed entry-point into a portfolio of unlisted companies.
  • See H1:21 Results Note & our Initiation for more background.

* Under review until post-FY 21 results

Sabvest Capital – Ad Hoc Note – 7 February 2022Download

ARB Holdings – Offer to Minorities & Proposed Delisting

Share Code: ARH – Market Cap: R1.8bn – PE: 9.3x – DY: 4.3%

ARB Holdings – Ad-Hoc NoteDownload

Offer to Minorities & Proposed Delisting

  • A company owned by Masimong (50.1%-shareholding) and Sabvest (49.9%) has made an offer to minority shareholders (other than the Burke Family that collectively holds 62.9% of ARB’s shares) to acquire their shares for cash of 800cps.
  • If the scheme is approved by shareholders (75% vote is required) & goes ahead, ARB will also be delisted from the JSE.
  • Besides the usual conditions/clauses & the approvals needed, the scheme currently has irrevocable support of 69.41% of shareholders (that can vote at the scheme meeting, i.e. “disinterested shareholders”) and, thus, we view it as highly-likely that this transaction successfully conclude.
  • See the full announcement here: LINK.

Previously Published Valuation: Justifies Offer Price

  • In our previously published FY 21 results piece, we saw fair value as 654cps on a Price Earnings (PE) of c.7.9x, which is hardly demanding given the quality of the underlying businesses and did imply some upside risk to this view.
  • Our EV/EBITDA-implied fair value of 740cps adds weight to this view of fair value and its upside risk.

Our Thoughts: Fair Premium & Well-supported Offer

  • Given our view of ARB’s fair value, the 800cps offer price for minorities comes in at a c.22% premium to this (not counting the even larger premium against the pre-offer share price).
  • The offer is pricing a material minority stake. The Burke family will remain in control post-delisting and, thus, this offer should not include a classical “control premium” as control is not, in fact, being acquired. Thus, we consider this offer price to be quite fair and, likely, attractive to minorities.
  • This view is backed up by the large number of irrevocables secured (including institutional investors and former insiders). These irrevocables (totalling c.69.41% of shares able to vote on this deal) furthermore imply the likelihood of this deal successfully concluding as quite probable.
ARB Holdings – Ad-Hoc NoteDownload

Renergen – Large Reserve Upgrade & Implications

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

Renergen – Reserve Upgrade Note – 22 November 2021Download

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 – Reserve Upgrade Note – 22 November 2021Download

Metrofile Holdings Ltd – Acquisition of Irontree Internet Services

Share Code: MFL – Market Cap: R1.3bn – PE: 10.0x – DY: 3.8%

Metrofile Holdings – Ad-Hoc – 2 November 2021Download

News: Acquisition of Irontree Internet Services CC

  • Metrofile has conditionally acquired Irontree Internet Services for a minimum of R80m & a maximum of R140m in cash:
    • 70%-stake for an upfront cash payment of c.R49m & a top-up payment of up to R12.3m if Irontree hits EBITDA of R18.7m for its FY 22E (February) financial year (likely), &
    • 30% to be acquired at a price based on a FY 24E revenue target of R100m (i.e. allowing integration of the business in the Group) but limited to the maximum (total) acquisition price of R140m.
  • Depending on how you view Irontree’s min/max purchase price:
    • It is on an FY 22E EV/EBITDA of c.4.3x ~ 7.5x,
    • An FY 22E Price Earnings of c.6.7x ~ 11.7x, &
    • Appears attractive against our implied DCF of the business.

Our Thoughts: Good Start on Digital Strategy

  • Irontree is highly cash generative with c.15,000 SME customers & earns c.90% of its revenue from digital backup & hosting services (i.e. recurring revenue) with c.10% of its revenue from digital, security & compliance services.
  • The business has grown revenue by c.+15% y/y CAGR over the last 5 years &, assuming this remains unchanged, the Group’s FY 24E revenue could be c.R69m (i.e. missing the R100m). Therefore, the R100m revenue target implies confidence that Irontree’s addition to Metrofile’s group will raise its growth rate (i.e. synergies).
  • This is a good first step in Metrofile’s Digital Strategy with a well-thought-out, reasonably-priced & comfortably-sized acquisition that should fit neatly into the Group and bolster both the Group and the acquired business’s growth rates (assumptions in note body).

Forecast, Valuation and Implied Return: Updated

  • Irontree lifts Metrofile’s FY 22E & FY 23E HEPS to 35.6cps (previously 35.1cps) and 40.2cps (previously 39.5cps) and adds c.+6% to our fair value of 428cps (previously 405cps).
  • Rolling this fair value forward, we lift our 12m TP to 497cps (previously 468cps) implying a 57% return from these levels.
Metrofile Holdings – Ad-Hoc – 2 November 2021Download

Renergen – H1:22 Results – Approaching Phase One Production

Share Code: REN – Market Cap: R3.4bn – PE: -76.3x – DY: 0.0%

Renergen – Results Note – H1:22Download

H1:22 Results: Sufficiently Capitalised for Phase One

  • Group revenue rose during the period, but rising overheads as the Group ramps up towards Phase One first production in late H2 saw its loss slightly larger than we expected.
  • OPIC debt, a small share placement, offtake agreements for c.28% of Phase One’s LNG & c.65% of Phase Two’s helium production, & a digital tokenisation mechanism for “prepaid helium” all ensure that the Group is sufficiently capitalized to see Phase One over the line.
  • CryoVacc has moved into field trials that could see it becoming commercially viable as a standalone business soon.
  • Finally, the favourable exploration outcomes from Evander have triggered an updated reserve report that management anticipates publishing in Q4:22.

Progress Updates: Numerous Qualitative Updates

Forecast, Valuation & Implied Return: Undemanding SOTPs

  • Taking our Phase One & Phase Two DCF’s, Group overheads, factoring in debt, the recent share issue & (potential) future dilution, we arrive at a SOTPs for Renergen that indicates that the stock is worth 5,383cps (previously 5,093cps).
  • Assuming Cryo-Vacc & Evander collectively add +10% value, this boosts our fair value to 5,922cps (previously 5,603cps).
  • Finally, rolling this forward at our (nominal) Cost of Equity implies a 12m TP of 6,976cps (previously 6,567cps).
  • We highlight the likelihood of Phase Two being larger than we anticipate as a risk to our valuation, but we will only update our view after several variables have been resolved.
Renergen – Results Note – H1:22Download

Metrofile Holdings – Initiation of Coverage – Boxing Clever

Share Code: MFL – Market Cap: R1.3bn – PE: 11.6x – DY: 4.9%

Metrofile Holdings – Initiation of CoverageDownload

Business Overview: Dominant domestic document storage player

  • Metrofile has the largest share of the South African document storage market with a strong pan-African & Middle Eastern footprint enjoying good margins and attractive growth.
  • The Group has a long operating history with high returns, strong cash flows and a defendable track record against comparatives.

Document Storage + Digital Strategy = Evolving business

  • While the global paper sector appears to be slowly contracting by between -1.0~-2.0% y/y, the document storage market is still growing with net box growth and rising, compounding revenues.
  • Intuitively, while a piece of paper may only generate revenue once when sold, it appears to generate an average of between 14-to-15 years’ worth of revenue when it goes into storage.
  • Globally & domestically, strong regulatory tailwinds continue to drive the need for secure physical storage while economic activity continues to generate paper that requires this storage.
  • Metrofile is using this platform, its cash flows & position of trust with clients to grow its services and digital offerings.
  • Indeed—and likely key to Metrofile’s long-term growth rate—the Group’s management has specifically crafted a digital strategy that, while hard to quantify or value, may offer some exciting prospects as it is executed.

Forecast, Valuation and Implied Return: Undervalued share

  • Using a segmentally-driven DCF to build our SOTPs fair value, we see Metrofile shares as worth c.405cps on an implied EV/EBITDA of 6.8x (this is a 48% discount to Iron Mountain’s EV/EBITDA).
  • Rolling this fair value forward at our CoE, we arrive at a 12m TP of 468cps generating a large 52% implied return.
  • Given recent takeover approaches that were frustrated by COVID-19, adding a 15~30% control premium to our fair value implies a fair takeover price of between 465cps to 526cps. For this reason, we view MFL shares as holding a long-dated embedded takeover option, however hard to predict or value.
Metrofile Holdings – Initiation of CoverageDownload

Trellidor Holdings – FY 21 – Secured a Good Result

Share Code: TRL – Market Cap: R323m – PE: 8.3x – DY: 6.2%

Trellidor Holdings – Results Note – FY 21Download

FY 21 Results: Sterling results, strong cash flows & good dividend

  • Trellidor released strong results, reflecting the Group’s healthy recovery with revenue rising +23% y/y, cost-savings, efficiencies & lower finance costs lifting headline earnings by +181% y/y and HEPS doubling (+195% y/y) to 40.8cps (FY 20 – 13.8cps).
  • Underpinning the results was strong cash generation; management declared a full-year dividend of 21cps (FY 20 – 8cps) putting the share on a juicy 6.2% Dividend Yield.
  • Management continued to grow the Group’s product range (four new products were successfully launched & a commercial product range expansion is planned in the coming year) while bringing underperforming Main Centre franchisees in-house to great effect (acquired franchises grew revenue +46% like-for-like!), yet the Group also managed to control its overheads and saw a mere +4.3% y/y rise in operating expenses.

Our Thoughts: Bottom-line momentum likely to continue

  • Given the Group’s tight cost control, the price increases that it will leak into the market and franchisee consolidation & growth uplift that we expect, Trellidor’s EBITDA, operating profits and, ultimate, bottom-line momentum appears likely to continue for FY 22E.
  • We have raised our expectations of share buy-backs from 1.0% pa to 1.5% pa, especially if the share price remains languishing at its current market price.
  • All these initiatives imply attractive upside to forward HEPS.

Forecast, Valuation and Implied Return: Undervalued & Yielding

  • Our DCF Models imply that Trellidor is worth c.548cps (previously: 442cps) on a c.13.5x PE and c.7.1x EV/EBITDA.
  • Rolling this fair value forward at our CoE, we arrive at a 12m TP of 656cps (previously: 532cps) implying a large 93% return from the current share price (including dividends).
  • Speaking of dividends, irrespective of fair values, Trellidor shares still trade on an attractive 6.2% Dividend Yield (&  Forward DY of > 7%) that looks to be comfortably sustainable.
Trellidor Holdings – Results Note – FY 21Download

Renergen – More Positive Developments

Share Code: REN – Market Cap: R2.2bn – PE: -50.5x – DY: 0.0

Renergen – Update Note – 30 August 2021Download

News: Helium and LNG offtakes lining up nicely

  • Phase 1: Renergen has signed a 5-year LNG offtake with a major glass manufacturer, Consul Glass. The supply of LNG is to begin in January 2022 and ramp-up to 14tons/day. The LNG will be priced off the floating South African LPG price.
  • Phase 2: A raft of supply agreements for a total of c.65% of the expected helium production of Phase 2 has been signed with a range of major players (Linde Inc., Messer LLC, Helium24 LLC) for between 10 to 15 years. The helium will be priced in US Dollars with annual escalations linked to the US CPI.

Spot Prices: Moving in Renergen’s favour

  • Most spot prices and currencies have gone in Renergen’s favour, thus leading to a strong uplift in the Group’s implied Sum-of-the-Parts (SOTP):
  • South African Diesel Whole Price (A1) has risen +7%, leading to a higher value for the Group’s LNG reserve that is priced at a 25% discount to this price,
  • Rand has weakened nearly 9% versus the US Dollar, both helping lift up the above-noted diesel price and boosting the USD-denominated helium price, &
  • The South African 10-year bond rate has dropped from 9.26% to 8.96%, lowering our WACC & boosting our NPV.

Valuation and Implied Return: Contrary to share price weakness…

  • Reflecting the above-changed input variables (amongst several other minor ones), we see REN’s fair value as 5603cps (previously: 4535cps) and its 12m TP as 6567cps (previously: 5330cps).
  • We find it strange that the share price has moved contrary to the positive movements in the variables driving up the implied fair value of Renergen.

Refer to our Initiation of Coverage for more background.

Renergen – Update Note – 30 August 2021Download

ARB Holdings – FY 21 – Shooting the Lights Out

Share Code: ARH – Market Cap: R1.3bn – PE: 6.8x – DY: 4.6%

ARB Holdings – FY 21 – Results NoteDownload

FY 21 – Exceptionally strong results

  • ARB Holdings released exceptionally strong FY 21 results with revenue roaring ahead by +24% y/y (and +8% versus FY 19) to R2.9bn (FY 20: R2.3bn) driven by a recovery in both Electrical and Lighting that is likely to carry into FY 22E (at least).
  • Added to this top-line expansion, the Group’s cost-savings, efficiency gains & cash preservation all aided HEPS upwards by +38% y/y (and +41% versus FY 19) to 82.5cps (FY 20: 59.9cps) & making a mockery of our forecast FY 21 HEPS.
  • The Group resumed its dividend payments and declared a full-year dividend of 42.5cps that includes a 10cps special dividend.

Our Thoughts: CEO continuity in place

  • ARB’s results are even more impressive considering that they were produced during a period that saw a range of hard lockdown levels, multiple waves of COVID, Eskom loadshedding and a domestic recession.
  • Long-serving CEO, William Neasham, has announced his retirement and lined up Blayne Burke as his successor.
  • Burke has run the Group’s major Electrical Division for many years and, thus, provides deep institutional knowledge, expertise, and comfortable continuity at the executive level.

Forecast, Valuation & Implied Return: Margin of Safety

  • We see fair value as 654cps (previously: 631cps) on a Price Earnings (PE) of c.7.9x, which is hardly demanding given the quality of the underlying businesses.
  • Our EV/EBITDA-implied fair value of 740cps backs up this view, if not hinting at a degree of upside risk to our forecasts.
  • Using our DCF as a base, our implied 12m TP of 766cps (previous 12m TP: 737cps) places the share on an Exit PE of 8.0x & implies a potential return of c.37%.
  • Refer to our original Initiation of Coverage for more background.
ARB Holdings – FY 21 – Results NoteDownload

Sabvest Capital – H1:21 – Delivering Growth & Offering Value

Share Code: SBP – Market Cap: R2.1bn – Dividend Yield: 0.45%

Sabvest Capital – Results Note – H1:21Download

H1:21 Results: Businesses trading at-or-better than 2019 levels

  • Sabvest Capital’s Net Asset Value (NAV) per share grew by +24% y/y to 8240cps (H1:20 – 6624cps) to the end of 30 June 2021. We have updated this post-period and see NAV currently at closer to 8500cps (our estimate).
  • The Group doubled its interim dividend to 20cps (H1:21 – 10cps) as its balance sheet saw degearing and management has steadily continued buying back shares in the open market (which we consider value accretive at these levels).
  • Perhaps most importantly, management emphasises that at the date of publishing the results all the Group’s businesses are trading at-or-better than 2019 (and 2020) levels.

Thoughts: Upside to forward valuation, corporate actions

  • Multiples used to value the Group’s unlisted investments were flat or slightly lower than prior periods. This gives us comfort that NAV growth is earnings-based (i.e. good quality).
  • In Classic Foods (and, even Revix) case(s), it looks likely that valuations may be written upwards in the near-term. Added to this, the current trading of the underlying businesses implies higher forward valuations too, even if multiples remain flat.
  • Finally, management’s share buy-back & hints at a potential acquisition may drive further upside from here.

Valuation, 12m TP & Implied Return: Lots of value available

  • Updating the Group’s NAV for the latest market prices and taking out our fairly-valued “HoldCo discount” of 20% (previously: 19%), we arrive at defendable (post-discount) fair value for Sabvest Capital shares of 6826cps (previously: 6402cps) or +31% higher than the current share price. As noted, we see upside risk to this expression of fair value.
  • Rolling our fair value forward at our Cost of Equity, we see the Group’s 12m TP as 8000cps (previously: 7542cps) with an implied return of +54%.

Refer to our Initiation of Coverage for more background.

Sabvest Capital – Results Note – H1:21Download