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?

Financial Mail - Investors Monthly - - Contents - Marc Hasen­fuss

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.

EL­LIES

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.

Pic­tures: THINKSTOCK

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