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