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Financial Mail - Investors Monthly - - Contents - Marc Hasenfuss

Torre In­dus­tries

Read­ers may won­der just how pru­dent it is to punt Torre, an ac­quis­i­tive industrial ser­vices com­pany, when its more es­tab­lished (and larger) coun­ter­mates like In­victa and Hu­daco seem to of­fer good value.

Torre is the en­fant ter­ri­ble of the JSE industrial sec­tor, an ex­u­ber­ant up­start re­fus­ing to be con­fined by con­ser­va­tive cor­po­rate con­ven­tions as it rapidly bun­dles to­gether an ar­ray of industrial in­ter­ests that to­day is worth some R1,7bn.

In re­cent months the ini­tial fears that Torre would make a dud ac­qui­si­tion that would strain its cor­po­rate cen­tre have di­min­ished. The com­pany has hit its earn­ings tar­gets with­out any se­ri­ous hitches, and man­age­ment has shown con­sid­er­able skill in rais­ing new fund­ing from share­hold­ers and banks to en­sure the bal­ance sheet is suit­ably geared for fur­ther for­ays into new industrial seg­ments.

Still, it could be con­vinc­ingly ar­gued that the easy money has al­ready been made on Torre — which, it’s worth re­mem­ber­ing, was re­assem­bled from the debt-man­gled cor­po­rate chas­sis of SA French. The com­pany’s shares have quadru­pled since 2013 and gained around 40% in the last three months.

But two re­cent events lead IM to be­lieve Torre still has the stamina to notch up some solid long-term growth.

The first is the dec­la­ra­tion of a maiden in­terim div­i­dend of 3,5c/share for the pe­riod end­ing De­cem­ber 2014. Most mar­ket watch­ers be­lieved Torre would de­clare a pay­out at the end of the 2016 fi­nan­cial year, at the ear­li­est.

Though the pay­out was con­ser­va­tively cov­ered more than four times by in­terim earn­ings of 14,36c/share, the div­i­dend sug­gests the Torre board is con­fi­dent that the com­pany’s growth en­gines are ca­pa­ble of pump­ing cash flows that can not only sus­tain op­er­a­tions but also ac­com­mo­date any ac­qui­si­tion op­por­tu­ni­ties.

The op­er­a­tional cash flow for the in­terim pe­riod was a re­as­sur­ing R58,5m, equiv­a­lent to around 17c/share.

Based on pre­vi­ous guid­ance around pay­outs, the un­ex­pect­edly early div­i­dend can also be in­ter­preted as Torre’s board ex­press­ing sat­is­fac­tion that the com­pany’s strate­gic plans are com­fort­ably ahead of what had ini­tially been en­vis­aged.

The sec­ond fac­tor to con­sider when weigh­ing up the pos­si­ble up­side left in the share price is the last two ac­qui­si­tions clinched by Torre.

The sec­ond half of this fi­nan­cial year hope­fully will in­clude a jumbo profit con­tri­bu­tion from Ele­phant, re­cently ac­quired for R180m. It pro­duced net profit af­ter tax of R27m in the year to end March 2014. It seems rea­son­able to bank on Ele­phant de­liv­er­ing more than R30m in net prof­its in the cur­rent fi­nan­cial year, mean­ing a nice up­lift at bot­tom line for Torre in the sec­ond half.

It also seems safe to as­sume for the sec­ond half that Torre will se­cure ad­di­tional ef­fi­cien­cies from au­to­mo­tive com­po­nents sup­plier Con­trol In­stru­ments and a more feisty per­for­mance from Trac­tor & Grader Sup­plies af­ter dour first-half trad­ing.

The most re­cent ac­qui­si­tion, spe­cial­ist industrial and min­ing ser­vice provider Set Point, adds even more in­trigue to the longer-term earn­ings gauge.

The Set Point deal was tagged to a net profit af­ter tax war­ranty of R40m, a fig­ure that IM thinks will be com­fort­ably achieved, con­sid­er­ing how ef­fec­tively Torre right-sized and re­shaped the cor­po­rate cost struc­ture at Con­trol In­stru­ments. For the record, Set Point will add R700m of rev­enue to Torre.

Per­haps a more sig­nif­i­cant slant to the Set Point deal is that a large ven­dor is listed in­vest­ment com­pany Sab­vest, al­ready a “sig­nif­i­cant mi­nor­ity” share­holder in Torre. The Set Point deal sees Sab­vest tak­ing an­other par­cel of scrip at 500c/share in set­tle­ment, and push­ing its stake in Torre from 7% to 12%.

Sab­vest is headed by Christo­pher Seabrooke, one of the most re­spected in­vestors in and around the JSE. The in­volve­ment of Sab­vest — which has shown an in­cli­na­tion to in­vest cau­tiously over the last decade — not only speaks vol­umes about Torre’s po­ten­tial for the longer term, but also means an en­thu­si­as­tic backer is on hand should fur­ther cap­i­tal need to be raised to fund a large deal.

Turn­ing to fun­da­men­tals, there seems to be suf­fi­cient sup­port for the cur­rent share price in fore­cast earn­ings.

Though it is not cov­ered by a slew of re­search houses, there is a gen­eral ac­cep­tance among Torre acolytes that full-year earn­ings for the 12 months to end June should be in the re­gion of 33c/share. That puts Torre on a fair earn­ings mul­ti­ple of around 14 times.

A con­ser­va­tive fore­cast prob­a­bly pen­cils in earn­ings of around 42c/share for the 2016 fi­nan­cial year, putting Torre on a mod­est for­ward earn­ings mul­ti­ple of around 11 times. All things con­sid­ered, a fair price for an ex­cit­ing com­pany.

The in­volve­ment of Sab­vest …speaks vol­umes about Torre’s longer term po­ten­tial

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