Torre: Cutting Through the Noise

Torre Industries (TOR) has been one of my worse investment decisions. It is impossible to never make a mistake in the markets, and buying into Torre much higher was one of these. That is life.

But, I believe, you have to continuously analyse each investment as a standalone decision. That includes ignoring costs and previously prices paid. Capital is capital is capital, and it can be redeployed and recycle, but choosing not to do this is also a choice.

Each time you look at your investments you need to ask: would I buy it at this price? If the answer is ‘no’, then you should probably sell. Where the answer is ‘yes’, then you should either carry on holding or, in fact, buy more of it. Do not psychologically anchor nor grow sentimental over stocks. Investing is purely a relative game of opportunity cost that you keep playing at each point in time.

So, my past mistakes aside, how is Torre looking now?

The Group recently published a rather noisy trading update (see here), but allow me to summarise my view below as I try to cut out all the noise:

Normalized HEPS from Continuing Operations is expected to be between -7% lower to +13% higher, coming in at 7.40cps to 8.99cps. I.e. The Group remains profitable and is more or less flat versus the prior period last year.

This puts the stock on a Price Earnings (PE) range of between 17.5x to 14.5x. But, I don’t believe that this is representative of anything, given the noise in these numbers.

Forward FY 18E PE is closer to 11.0x (per my model), but there is a lot of forecast risk with this company at the moment. I.e. Take this “forecast” with a pinch of salt.

Anyway, this trading update also implies that the 4.75cps NHEPS in H1:17 softened a bit as the recession hit South Africa. H2:17 earned between 2.65cps to 4.24cps. This makes sense, given these South African macro-headwinds making any turnaround operation twice as tough right now.

Extrapolating from the difference between EPS and HEPS, I estimate that Torre has impaired its balance sheet by R494m (likely wiping out the entire goodwill balance of R462m, and then a further R32m of the intangible balance of R134m). This will bring the Group’s NAV near to its Tangible NAV, which I estimate to currently now be c.130cps to 140cps (interestingly, this is the same as its share price!).

Despite this chaos, the Group will be paying a dividend of 3cps putting its share on a c.2.3% DY.

Far more than anything, the dividend gives us an indication that the Group is profitably trading on a cash-basis and management remain comfortable regarding its recovery and prospects. Likewise, cash from Kanu’s sale has mostly come in, making the Group’s balance sheet ungeared.

Finally, if you stand back, a couple things become obvious:

  • Torre’s recovery continues, but it is far from over.
  • The Group is still profitable, despite H2:17 trading through a recession and a drought. I.e. These are likely trough earnings.
  • The new management is aggressively cleaning up its balance sheet (nil goodwill going forward).
  • The Group’s TNAV is the same as its share price and implies limited downside from here (given that the Group keeps trading profitable, which it should as these appear to be trough earnings given the recession and drought over the period).
  • A key thing we do not know is the Group’s free cash flows, though the dividend being declared is a good indication that the businesses are trading cash positively.

All in all, Torre trading update was not terrible. There is little to get excited about at this point, but that in itself is a good thing. It also probably means that the worst is over. Management is making the hard-calls and operationally focussing the businesses while the balance sheet and cash flows are likely comfortable.

So, how much is Torre worth?

The short answer is that Torre is probably worth a lot more than its current share price (or TNAV) if the turnaround works. The word “if” in that sentence is a key one and I will try to answer that once the full results are published.

For now, I continue to hold my Torre shares. My mistake is now a sunk cost, but the fact that these might be trough earnings with a well-capitalised balance sheet means that Torre might get a lot more interesting from here…

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