This week has (and indeed the last couple weeks have) seen a splurge of news on the JSE from results to major moves.
African Bank (ABL) saw its share price collapse yesterday and, while it was down over 26% at one stage, it managed to recover somewhat to close only 17% down. ABIL has been sold off 40% in the last three months, but, perhaps more importantly, has dragged other related and unrelated counters down with its taint. Capitec (CPI), Lewis (LEW) and numerous other stocks saw themselves get sold off over the same time period that Nasper (NPN) and Richemont (CFR) have quite simply shot the lights out.
The divergence is just so dramatic.
But there are numerous shares just outside this predominantly Top 40 limelight where things are happening, but almost no one is noticing.
Santova (SNV) is really a niche logistics provider utilizing an integrated IT platform, OSCAR, for supply chain management, particularly and increasingly with an international flavour.
The Group has steadily performed over the last couple of years, weathering the volatile local and international trade as it established offices in Hong Kong, Australia, the United Kingdom and the Netherlands, as well strategic partners throughout the world.
This key move has obviously led the Group's International segment's revenues to rise to R49m (FY 12: R29m) driving Net Profit from these operations to R8.7m (FY 12: 4.5m). These numbers came out in the Group's recently reported FY 13 results that saw the Group grow turnover c.6% and via Operating Leverage lift HEPS 10% to 17.62cps (FY 12: 15.99cps).
What is not readily apparent by this fairly robust set of results is how tough the local market obviously is... Revenue in South African declined 6%, slumping Net Profit from this area down to R16.3m (FY 12: R18.8m).
There was an acquisition during the period and a post-balance sheet date event, but moving beyond this detail, Santova's prospects are probably best summed up by management's comment that "Whilst the outlook for world economies for the year ahead is relatively 'flat' to 'slightly optimistic', we are confident that not only will we be capable of meeting the challenges as they present themselves but will capitalise further on our entrepreneurial capability and the 'spirit' in which we engage such challenges."
Next up is the turnaround, Buildmax (BDM), that also reported its FY 13 results this week. In summary, Buildmax managed to lift HEPS to 28.6cps from HEPS from Continuing Operations the year before of only 13.72cps. Revenue was up 9% as operating profit remained flat.
Interestingly Depreciation dropped by almost 20% in FY 13, despite capex of R400m (FY 12: R415m) being spent and Property, Plant and Equipment on the balance sheet rising to R873m (FY 12: R712m).
This paradox only makes sense once you read the commentary pointing out how "management reviewed the current remaining economic useful lives and residual values of all items of property, plant and equipment. When determining these estimates, the company considered the following: replacement and market value, local and international demand, OEM support and their value perspective, reliable availability of spare parts, maintenance philosophy and history, operational application and value in use. This exercise, coupled with preferred brand purchases and balancing of applications, identified the need to expand the categories of plant in order to cater for the different economic useful lives of different brands. These revised estimates were implemented from March 2012 and resulted in a reduction in depreciation costs."
So, basically, management has adjusted their depreciation in FY 13, making it not very comparable to FY 12. Carefully of clever little tricks like this, they can sometimes make results look a lot better than they actually are.
Probably more reflective of the progress Buildmax has made in its turnaround is its cash flow statement. The Group generated 9% more cash from operations while a combination of degearing and capex saw it's cash balance slip a little to R66m by year end (FY 12: R109m).
Finally, another off-the-radar counter is Protech Khuthele (PKH) that is only ever seemingly mentioned when Eqstra (EQS) and the latter's bid for the former arises.
Protech Khuthele reported its FY 13 results this morning with revenue rose 6% to R1027m (FY 12: R965m) as EBITDA improved to R116m (FY 12: R63m). HEPS turned to a profit of 3.9cps (FY 12: Loss of 1.0cps).
Now roughly R20m of once-off costs were incurred in FY 13 relating to defending the Eqstra bid (c.R7.5m to R10m) and the new management’s due diligence of Protech (c.R9.5m to R10m) were incurred. If this amount is taken out of the Group’s financial results, we estimate that HEPS would be have been c.7.4cps or at an ROE of c.8.1%.
The Group’s Order Book is stated at R1013m with ‘Work to Be Completed’ at R463m, ‘New Work in Final Negotiation’ at R360m and assuming an R190m revenue pipeline for the Readymix segment.
Interestingly (and backing up commentary from Afrimat and Stefanutti Stocks) the Group is seeing local construction work picking up into FY 14 (particularly in the public sector in South Africa), and is targeting c.30% of its revenue to come from public sector work. The Group is also targeting c.55% of its revenue coming from the mining sector (predominantly in South Africa, but also in Zambia, Zimbabwe and Mozambique).
Now, here is an interesting observations I have regarding Protech's NAV...
PriceWaterhouseCoopers (PwC) has valued PKH at between 79cps to 88cps and advised the Board that Eqstra’s 60cps bid for PKH is unfair and unreasonable. While this may be a fair point, PwC’s fair value range (with a high-end of only 88cps) implies that the Group’s balance sheet is overstated as PKH’s NAV is 94.5cps implying that some or all of the goodwill (R33m) and intangible assets (R3.5m) should perhaps be impaired?
The Group’s Tangible NAV is 84.2cps, though, versus the current share price of 53cps.
I really only see three scenarios playing out here with Protech:
Firstly, Eqstra’s 60cps bid appears opportunistic after PwC’s independent report speaks out against it. Despite that, the share price remains <60cps, implying that the market disagrees and there may well be a number of shareholder’s that accept the offer (our understanding is the offer is currently non-binding). [i.e. short-term upside.]
Alternatively, Eqstra may well also raise its offer to Protech minorities. In this event it will likely raise it to the low-band of PwC’s fair value range. This would also likely trigger a run on the share price. [i.e. short-term upside.]
Finally, Eqstra may also just pull its offer from the table. Given PKH’s PE based on FY 13 HEPS and our “Normalized” HEPS implies a range of between 7.2x to 13.5x, it is likely that the share price will not slide too far in the short-term based on this scenario. In the long-term, the turnaround appears to be gaining traction and to have significantly de-risked the Group, thus arguably implying healthy upside potential for the medium- to longer-term investors. [i.e. short-term downside, long-term upside.]
On a balance of probabilities across all these scenario’s I am starting to see limited downside in PKH’s share price with either short-term opportunistic or long-term turnaround-driven upside potential in the Group.
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