Truck­ing in funds to keep the pack press­ing ahead

Financial Mail - Investors Monthly - - Analysis - Larry Claasen

La­bat Africa is un­recog­nis­able as the cash shell it once was, only a few years ago. The em­pow­er­ment in­vest­ment group not only ex­pects to re­port “sub­stan­tially im­proved” re­sults for the year to end Fe­bru­ary, it has also seen its share price, which had dropped as low as 8c over the past year, rocket to its cur­rent price of R1.40.

La­bat as­cribes its chang­ing for­tunes to the con­tri­bu­tion com­ing from its newly ac­quired spe­cial­ist trans­port busi­ness, Rein­hardt Trans­port Group (RTG), for R645m in Au­gust.

RTG is a solid busi­ness. It is ex­pected to boost La­bat’s rev­enue from R12m to R1.5bn and to cat­a­pult op­er­at­ing profit from R1.5m to R209m. La­bat has since deep­ened its hold­ing in the trans­port sec­tor. In De­cem­ber it an­nounced it was buy­ing Elf Trans for R45m and Trans­mac Truck­ing for R50m. The group said be­fore the lat­est ac­qui­si­tions that it was look­ing to make about five — one a year over the next five years.

La­bat has been able to pull off th­ese deals be­cause it has ac­cess to fi­nan­cial sup­port from New York-based al­ter­na­tive in­vest­ment group Global Emerg­ing Mar­kets (GEM), which has US$3.4bn in fund­ing. Ac­cord­ing to La­bat’s lat­est an­nual re­port, GEM has made $100m avail­able to help it

“fund fu­ture ac­qui­si­tions and suit­able trans­ac­tions”.

Its prospects look re­ally solid, but it was not al­ways this way. La­bat, which is run by for­mer rugby boss Brian van Rooyen, had ba­si­cally run out of op­tions as it strug­gled to find a use for its ma­jor as­set, Sames (South African Mi­cro Elec­tronic Sys­tems), SA’s only sil­i­con chip man­u­fac­tur­ing fa­cil­ity.

In its day, the ul­tra clean pro­duc­tion fa­cil­i­ties owned by Sames were con­sid­ered world class. But it could never re­ally com­pete with ri­val fa­cil­i­ties in the Far East.

With few op­tions left, in 2010 La­bat be­came the re­verse list­ings ve­hi­cle for min­ing group Aurora Em­pow­er­ment Sys­tems, which was run by Pres­i­dent Ja­cob Zuma’s nephew Khu­lubuse Zuma and for­mer pres­i­dent Nelson Man­dela’s grand­son Zondwa Man­dela. This takeover did not work out and a fol­low-up plan to turn the Sames fa­cil­ity into a phar­ma­ceu­ti­cal man­u­fac­tur­ing plant also fell flat. The fa­cil­ity has since closed, pro­duc­tion was moved to China and the prop­erty (in Pre­to­ria) was sold for R18.8m.

It would have been easy for the board to just shut up shop and move on. But the em­pow­er­ment group has been around for 20 years, and Van Rooyen — an un­flinch­ing fighter who did not think twice about go­ing head-to-head with rugby supremo Louis Luyt — was not go­ing to give in just yet.

The deal with Aurora might not have worked out, but it got Van Rooyen in touch with GEM, which at the time was look­ing to back it. Van Rooyen not only man­aged to keep GEM in­ter­ested in La­bat, he also got it to fund its ac­qui­si­tions.

This ac­cess to fund­ing is clearly a game changer for La­bat. It also makes valu­ing the group tricky. Ac­cord­ing to La­bat, with the pro forma in­clu­sion of RTG’s num­bers, it should have a PE of about 7.75, an ROI of 14.58% and an NAV of 78.89c/share.

This is a no­table turn­around, con­sid­er­ing that with­out RTG its NAV is -83c. The group is clearly on the up, but with $100m in the kitty, and know­ing its prospects can still rise, it is hard to de­ter­mine its value.

GEM in­vests in coun­tries like Brazil and Turkey that have been down­graded to “junk” sta­tus. Con­sid­er­ing there is a dan­ger SA could lose its in­vest­ment grade, this is a plus, as many global funds rules pre­clude them from hav­ing hold­ings in coun­tries that have been de­moted to a non-in­vest­ment grade.

Though valu­ing the group on its up­side is dif­fi­cult, given that it has a se­cure form of fund­ing and has some solid busi­ness in its fold, at R1.40 and a PE of un­der 8 it looks like a buy for in­vestors even af­ter its share price has al­ready rock­eted.

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