PICK OF THE MONTH
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