Is it time to plug into El­lies?

There is hope for plenty of work when the new TV broad­cast tech­nol­ogy comes into op­er­a­tion

Financial Mail - Investors Monthly - - Front Page - AN­THONY CLARK An­thony Clark is a small- to mid-cap fi­nan­cial and in­dus­trial an­a­lyst at Vu­nani Se­cu­ri­ties

The stock ex­change per­for­mance of for­mer stock mar­ket dar­ling El­lies Holdings could be likened to the tra­vails of Pres­i­dent Ja­cob Zuma; both saw a pocket of glory in the run up to the 2010 Soc­cer World Cup and both since then have been on the skids.

As SA’s largest in­staller of DStv sys­tems and hav­ing a well-known elec­tri­cal ac­ces­sories brand, El­lies rode the World Cup to its ad­van­tage and used its ris­ing share price to move into the (then) hot sec­tor of power in­fra­struc­ture by ac­quir­ing Me­ga­tron Fed­eral for R180m in 2008. In hind­sight, this was a bad move as El­lies could not sup­port the vast work­ing cap­i­tal de­mands of the in­fra­struc­ture divi­sion.

The suc­cess of the World Cup, the prof­its from in­fra­struc­ture and a “juicy” deal dur­ing the Eskom power sup­ply cri­sis brought su­per prof­its. The paras­tatal paid com­pa­nies a suc­cess fee for ev­ery megawatt saved from the grid.

Eskom soon cot­toned on to the fat prof­its com­pa­nies were mak­ing off the first phase of the res­i­den­tial en­ergy ef­fi­ciency pro­gramme (REPP) and phase 2 saw much greater com­pe­ti­tion and keener mar­gins. But it post­poned phase 2 of the REPP in late 2013 and the “kicker” that El­lies had been hop­ing for in its FY14 re­sults failed to ma­te­ri­alise.

The wheels started to come off the El­lies bus shortly there­after. The first profit warn­ing was is­sued in De­cem­ber 2013. Sev­eral more profit warn­ings and weak earn­ings en­sued and by the end of 2014 El­lies was trad­ing at around 120c, a rapid de­scent from its 700c a year prior.

Plung­ing prof­its and weak­ness in its in­fra­struc­ture divi­sion brought a cash crunch at El­lies, with ris­ing debt, soar­ing in­ven­to­ries and work­ing cap­i­tal is­sues. El­lies made its first rights is­sue in late 2014 to raise R115m and a sec­ond to raise R180m in mid-2015, both at 110c/share.

The pro­ceeds were used to re­pay debt and pro­vide work­ing cap­i­tal for the busi­ness. At the time of the sec­ond rights is­sue, El­lies an­nounced plans to split into two units — El­lies Con­sumer and El­lies In­fra­struc­ture.

That process has been go­ing for on a year. The main rea­son for the de­lay is that man­age­ment wants both coun­ters to be listed on the JSE’s main board, but at present their prof­itabil­ity and size only make them suit­able for Alt-X sta­tus. That would not go down well with cer­tain in­sti­tu­tional share­hold­ers who have no man­date to own Alt-X coun­ters.

With the share price hov­er­ing at a new low in the 60c range at the time of writ­ing, and hav­ing raised more than R300m of new eq­uity at 110c/share, El­lies has “burnt” share­hold­ers who fol­lowed their rights.

With a tan­gi­ble net as­set value of 130c/share at the time of its im­proved in­terim re­sults for the six months to Oc­to­ber 2015, one could ar­gue there is re­cov­ery value in El­lies. But that does not paint the whole pic­ture.

Hav­ing cleaned the decks at the in­fra­struc­ture divi­sion and with the core con­sumer divi­sion chug­ging along, first-half 2015 re­sults showed a smaller HEPS loss. But chal­lenges re­main; in­fra­struc­ture con­tin­ues to need cap­i­tal and sep­a­ra­tion of the two op­er­at­ing units will prob­a­bly re­quire El­lies In­fra­struc­ture to seek fur­ther cap­i­tal on its list­ing. This is a risk.

El­lies Con­sumer is prob­a­bly the busi­ness to be in af­ter the sep­a­ra­tion. It’s a solid op­er­a­tion and has po­ten­tial to ex­pand its prod­uct base. The long-de­layed dig­i­tal ter­res­trial trans­mis­sion mi­gra­tion will put new tele­vi­sion re­cep­tion aeri­als and set-top boxes in mil­lions of homes to con­tinue to re­ceive the SABC chan­nels. This is El­lies’ bread and but­ter, and gov­ern­ment plans to spend bil­lions to sub­sidise this process. This will pro­vide years of po­ten­tial work for El­lies.

But 2016 will be an­other fi­nan­cially tough year. The split needs to oc­cur and in­vestors will need to see the terms and con­di­tions of the listings and as­cer­tain if there is any fur­ther cash call; I fear there will be.

Ex­ist­ing El­lies share­hold­ers who have en­dured the share price col­lapse have lit­tle choice but to hang on. The real money to be made in El­lies will be for new in­vestors plung­ing in on signs of re­cov­ery and the sep­a­rate listings. I ad­vise “caveat emp­tor”.

The pro­ceeds were used to re­pay debt and pro­vide work­ing cap­i­tal for the busi­ness

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