Too good to be true, or a case of long-term value?

Financial Mail - Investors Monthly - - Analysis - Marc Hasen­fuss

Shares in La­bat, an em­pow­er­ment counter that has largely been for­got­ten by the main­stream mar­ket, have in re­cent months been revved up af­ter pro­pos­als to ac­quire lo­gis­tics spe­cial­ist Rein­hardt Trans­port.

Af­ter drift­ing un­der 10c in 2014 as var­i­ous deal-mak­ing ef­forts floun­dered, La­bat shares rapidly shifted to over 120c — a 10-bag­ger for those lucky re­tail pun­ters dab­bling in the share at the end of last year.

The mar­ket seems to be­lieve that La­bat has snagged an op­er­at­ing as­set able to drive cash flows, new deals and div­i­dends.

The pos­i­tive mar­ket re­sponse is sur­pris­ing, since La­bat, which jet­ti­soned the bulk of its op­er­a­tional as­sets a decade ago, has pre­vi­ously en­dured a num­ber of false starts in deal-mak­ing en­deav­ours aimed at se­cur­ing a new op­er­a­tional en­gine.

There have been near dis­as­trous dal­liances in min­ing (Aurora), a quick look-see in the Namib­ian gas sec­tor as well as an aborted trip into the rail in­dus­try.

But not only does the mar­ket ap­pear con­vinced of Rein­hardt’s prow­ess in ac­cel­er­at­ing prof­its, there is also spec­u­la­tion that the busi­ness will pro­vide a plat­form to chase down com­ple­men­tary ac­qui­si­tions in the lo­gis­tics sec­tor. CEO Brian van Rooyen has in­di­cated that two pos­si­ble trans­ac­tions are in the pipeline.

Still, there are big is­sues to get one’s head around.

For in­stance, look­ing at the sta­tis­tics ac­com­pa­ny­ing this story, it seems im­pos­si­ble that a puny lit­tle com­pany like La­bat can latch onto the Rein­hardt deal — worth about R645m.

It seems too good to be true. But a few im­por­tant mat­ters are not re­flected in the sta­tis­tics.

The key con­sid­er­a­tion is that La­bat, listed for around 20 years, still en­joys strong BEE cre­den­tials — some­thing that is a non­nego­tiable for a lo­gis­tics busi­ness that deals mainly with larger lo­cal min­ing com­pa­nies.

Another im­por­tant off-bal­ance sheet item is that La­bat has ac­cess to a R1,2bn eq­uity-linked draw-down fa­cil­ity from in­ter­na­tional in­vest­ment house Global Emerg­ing Mar­kets (Gem). In­ter­est­ingly, La­bat is not re­sort­ing to the Gem fa­cil­ity for the Rein­hardt trans­ac­tion, though hav­ing this line of credit avail­able al­most cer­tainly pro­vided se­cu­rity when it was ne­go­ti­at­ing with the lo­gis­tics com­pany’s ven­dors.

In­stead, the Rein­hardt deal will be set­tled partly with new La­bat scrip, with 60m shares placed with the Rein­hardt ven­dors at 150c/share and the bal­ance in cash and debt. Around R325m will be raised in debt, with the cash set­tle­ment stem­ming from a plan to is­sue 240m new La­bat shares to new in­vestors at 150c/share.

The price of the new shares is­sued to ven­dors and new in­vestors comes at a fair pre­mium to La­bat’s rul­ing share price, but in re­al­ity rep­re­sent a rather mod­est 8,7 times the latest earn­ings from Rein­hardt.

Judg­ing by his­toric trad­ing per­for­mances, which In­vestors

Monthly has had sight of, Rein­hardt looks a sturdy busi­ness with gross mar­gins rang­ing be­tween 40% and 50% and a profit af­ter tax mar­gin above 5% in the past two fi­nan­cial years.

Rein­hardt’s earn­ings fore­casts look com­pelling, though it’s al­ways worth remembering that profit pre­dic­tions are haz­ardous at the best of times.

Nev­er­the­less, Rein­hardt, which turned over R1,5bn in its past fi­nan­cial year, pen­cils in net profit af­ter tax of R107m.

This, based on around 560m shares in is­sue, would equate to around 19c/share for the 2015 fi­nan­cial year. The 2016 fi­nan­cial year tar­gets roughly 25c/share grow­ing to around 40c by 2020 with div­i­dends kick­ing off in 2017 at 10c/share.

The fore­casts are worth men­tion­ing be­cause of La­bat’s re­luc­tance to draw down on its Gem fa­cil­ity, which in essence would re­sult in tranches of shares be­ing placed with Gem clients.

Ad­mit­tedly, La­bat has to en­sure it does not di­lute its BEE cre­den­tials with a big is­sue of shares, but the com­pany might be hop­ing to draw down on the large Gem fa­cil­ity when its share price has more fully taken in the fun­da­men­tals of the Rein­hardt busi­ness and deal flows plus div­i­dends are in the equa­tion.

De­spite La­bat’s surg­ing share price, the cost of a ticket to ride might still rep­re­sent ex­cit­ing long-term value.

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