Invicta, ENX Group, Labat Africa, Investec Australia Property Fund, AB InBev
It’s probably an opportune moment to revisit acquisitive small cap ENX Group. The company has become a bit of a market darling since new CEO Paul Mansour — and a couple of smart partners who were fresh from making a mint in the casino sector — revamped the old Austro listing.
After peaking at 255c in February last year the ENX share has bobbed around uncertainly. The price returned to 249c in November last year, but has since dribbled down as the market reassesses the effect a markedly weaker rand will have on profitability (and potential deal-making).
At the time of writing the share was anything but stable at 195c, and there seems every chance — small cap sentiment being so fickle these days — that ENX could shift lower. IM’s upside assessment is based on the 195c share price, but our recommendation is to remain watchful and look to accumulating ENX scrip at lower levels.
There is not the most convincing fundamental underpin at 195c — at least compared with the very modest earnings multiples that now adorn so many industrial counters in the JSE. Of course, the premium in the share price is the possibility of value and growth enhancing acquisitions.
It’s early days, and not that easy to gauge the full potential of the energy and fuel businesses that have been brought into the
ENX fold. But the year to end August results certainly suggests there is some operational traction with a gross profit margin of 29% and an operating profit margin of 6%. The company discloses the pretax return on average tangible net operating assets is a respectable 19%.
A divisional breakdown shows the key power segment achieved an operating profit margin of 9% — which is encouraging if investors reckon the thin margins in the fuel division (R3m profit from sales of R310m) will fatten up as more operating assets are brought onboard.
ENX’s Private Power Sales obviously played into a sweet spot when Eskom was undergoing its disruptive load shedding programme.
The fuel segment only included recent acquisition Centlube’s contribution for nine months. But the business looks promising, generating nine month revenue of R210m and adjusted Ebitda of R8m.
If a hefty R13.7m loss of foreign exchange transactions was stripped out then Centlube’s Ebitda would have come close to R22m.
The big challenge for ENX in financial 2016 is dealing with the markedly weaker rand exchange rate. Directors concede a “sustained and rapid decline versus our trading currencies will increase input costs which we may not be able to pass on to customers or may result in a decline in volumes.”
But currency pressure might also allow ENX to negotiate acquisitions of stressed competitors at better prices. In this regard it will be interesting to see what is brought to book in the months ahead — considering the company indicated at financial year-end that its acquisition pipeline looked “promising”.
For what it’s worth, ENX directors noted at the end of last year than the first quarter of trading (September through to November 2015) had been positive with the order book in the power segment regarded as healthy.
The next financial period will also include recently acquired diesel generator business Genmatics for the full 12 months of trading. Directors have indicated that early trading in this key acquisition has exceeded expectations.
Developments at oil business Centlube also bear watching in 2016. The company has recently completed the ExxonMobil take-on phase, and should manage to grow volumes markedly.
Directors remain adamant Centlube will become a material contributor to group revenue and profitability in the years ahead.
Overall, ENX finds itself at an interesting juncture where the mettle of management will be tested operationally and strategically. The interim results will be telling, and perhaps reinforce our BUY recommendation.