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Written by Keith McLachlan
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Wednesday, 31 October 2007 |
SAB&T UBuntu is a company built on a proven business model, with dedicated and
highly competent management, loyal customers, and immense potential for
acquisitive and organic growth in a robust and healthy industry both local and
international appeal.
I have mentioned SUL in a number of Small Caps Newsletters and always due to
positive developments in their continuing success. Today is no exception with the
company adding to its growing list of achievements a Trading Update (released today)
informing shareholders that EPS and HEPS for the 6 months to August are
expected to be 80% and 120% higher than the previous period.
Going back a little in time reveals that SUL initially beat its 2007 forecast EPS of
2.48c by 41% to achieve full 2007 year earnings of 3.50c and declare a dividend of 1c
per share. This 41% growth has led into the 2008 interim period’s growth of 80% to
120% and could be an indication that the growth rate of the company is actually
accelerating.
Speaking to Bashier Adams, the CEO of SUL, the growth for the interim period was
entirely organic and came from the strong trading conditions of the industry. When I
asked whether the merger between SCI and Nexia International had contributed to this
exponential growth in earnings Bashier pointed out that the merger will only become
effective from 1 December 2007 and, thus, had not yet contributed to the Group’s
profits. This merger will help add critical mass to SUL through a international
network of skills and referrals that—in Bashier’s opinion—will be a major component
in SUL’s profitable future. As skills and the synergy across networks in a service
environment drive service profits I do agree with him on this notable point and I
believe in future years we will begin seeing significant growth stemming from this.
What is interesting is that the majority of SUL’s growth has come from the
management consulting division, which had won a number of significant contracts
during the year and continues to add to the Group’s growing bottom line.
Although I will write a full valuation on www.SmallCaps.co.za after the interims are
released I can venture the following suggestion of SUL’s true fair value range:
Worst-case scenario: only an 80% increase in EPS
Total attributable earnings at interim last year were R3,175,000. Thus, this interim’s
attributable earnings should be around R5,715,000. With 282,300,000 shares in issue
this gives rise to interim EPS of around 2c. EPS for the six months 1 September 2006
to 28 February 2007 were around 2.36c.
Thus EPS for PE use at this interim period is 4.37c.
Now the Support Services index is currently trading at around 12.82 and given a 20%
“Small Cap” discount this gives SUL a (what I feel is a unrealistically low) projected
PE of 10.26.
Thus, “worse-case scenario” fair value is around 45c (=4.37c x 10.26)…this is
considerably up from its current market price of 34c and gives a value-based return
of 32% on closing price!
Best-case scenario: a full 120% increase in EPS
Using the same information with the highest possible growth the fair value of
SUL could go as high as 50c (with a 10.26 PE) to 62c (with what I feel is a much
more reasonable full-index PE given SUL’s superb performance as a company)!
All of this is also ignoring the fact that SUL does pay dividends, which may be
declared at interim and will almost definitely be declared at final.
Furthermore, take this growth rate (say an average growth of 100%) and extrapolate
across the full year to the earnings of 3.50c. This gives full year earnings of around
7c per share and, given the conservative PE of 10.26 gives a 6 month fair value of
around 70c.
I have long felt that SAB&T Ubuntu is a strong buy and today’s Trading Update
simply continues to confirm this belief. Although I will only release a full valuation
on SmallCaps.co.za after the interims have been released my buy recommendation
will not change.
Finally, as SUL is presently under a cautionary announcement (so Bashier was
extremely limited in what he could disclose to me) it is worth mentioning that Bashier
believes that a number of extremely exciting developments should be coming through
soon…something for shareholders to look forward to.
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