BUY, HOLD, SELL
The JSE’s broader electronics sector is not exactly charged with positive sentiment. But perhaps plugging into reliable earnings generators is a way to insulate your portfolio against market shocks?
Broader electronics sector
AMALGAMATED ELECTRONICS CORPORATION
Share price: 230c JSE code: AER
BUY LOOKING AT THE LOWLY MARKET rating placed on Amecor you would assume this electronic security business was prone to producing the odd set of shocking results. A cursory scan of the latest results to end-March might confirm such suspicions with the bottom line reflecting a hefty loss of R50m. But the real operational performance was skewed by one-off impairments and provisions of R64m. Leaving aside that accounting anomaly, Amecor’s turnover was up a sprightly 28% to R113m with earnings before interest, tax, depreciation and amortisation up 11% to R35m. Cash generated from operations increased a reassuring 42% to R40m, justifying the decision to hike the dividend to 14,5c/share. The payout is covered 1,7 times by “normalised continuing” earnings of 25c/share, putting the share on a trailing earnings multiple of just over nine times.
Amecor’s modest market rating could be attributed to perceptions that prospects for the business are steady rather than spectacular. The main operations are Sabre and FSK. Sabre is the largest security network provider in southern Africa. It distributes data transmission equipment which allows users — mostly security companies — to route signals and data to their control centres. FSK designs and manufactures data transmission technology primarily used to provide signal transmission networks to security companies mainly in SA and Africa.
Earnings growth is unlikely to shoot out the lights, but Amecor’s annuity income is rising at a fair pace. Considering its defensive attributes, IM recommends loading up on Amecor.
SOUTH OCEAN HOLDINGS
Share price: 70c JSE code: SOH
HOLD SOH, AT THE TIME OF WRITING, WAS trading close to a 12-month low of 68c. The share price makes for compelling reading when matched against some of the figures available in the audited financial statements for the year to end-December 2014. Earnings came in at 24c/share, backed by operational cash flow of R80m (equivalent to 51c/share) and net operational cash flow of R43m (27c/share). This puts SOH (which consists of an electrical cabling business and a lighting wholesaler) on a trailing earnings multiple of just three times — a market rating that jolts when you consider what appears to be a decently profitable counter. But the market rating needs to be viewed against the backdrop of SOH recently indicating that the electrical cabling business has fizzled in the first six months of the financial year. Electricity supply problems (oh, the irony!) in April and May — due to faulty transformers supplying electricity to the cabling factory in Alrode — caused a loss of production and an increase in costs. This is not the first time SOH has endured operational problems beyond its control. But the prospect of a dismal six months has seemingly eroded the last remnants of positive sentiment for the company. IM does not expect too many sparks from SOH, but bear in mind that the company holds a tangible net asset value of 365c/share. The current discount surely must induce corporate action that will unlock value for shareholders, either from within the boardroom (a sale of the lighting division and a special dividend, a management buyout) or from predators circling this value opportunity.
Share price: 87c JSE code: ELI
SELL THIS FORMER SMALL CAP DARLING IS now suffering the indignity of having a share price trading below the offer price in a rights issue — the second such exercise undertaken in less than a year. Of course, Ellies provides some morbid fascination to small cap punters who can’t forget that the share flitted around the R10 mark in mid-2013. Perhaps the fact that former Hosken Consolidated Investments prime mover Marcel Golding infamously accumulated a pile of Ellies, purportedly as a strategic investment for the group’s media arm, has also fed into theories that a new-look Ellies will recharge its fortunes.
IM believes there is still much tinkering to be done at Ellies before shareholders start seeing tangible benefits to the bottom line, especially seeing that any profits will be markedly diluted by the additional number of shares in issue. Still, it’s well worth noting that key insiders and a respected boutique investor are set to take up a chunk of the rights offer. Vunani Securities small cap analyst Anthony Clark, widely considered to be the expert on Ellies, recently warned that an unsuccessful rights issue could see the share price drifting as low as 65c. Clark argued: “I’m avoiding the rights issue . . . The risk of further capital issues and poor trading updates as well as earnings dilution is too much risk for me.”
IM reckons Ellies — possibly in a different shape and maybe with a new strategic investor — will eventually be able to turn around. But there could well be a chance to snap up stock at much cheaper levels in the months ahead.