Strong bal­ance sheet, peren­nial prof­itabil­ity

Financial Mail - Investors Monthly - - Analysis -

T he pos­si­bil­ity of dam­ag­ing eco­nomic up­heaval prob­a­bly makes pun­ters much less in­clined to stare too long at the fi­nan­cial state­ments of small-cap com­pa­nies — even those coun­ters where value oozes from ev­ery line. Smaller com­pa­nies at the whim of dis­cre­tionary con­sumer spend­ing might also be snubbed — and dou­bly so if some of the brands be­ing ped­dled are im­ported.

Pre­sum­ing there are still small-cap pun­dits who are not en­tirely dis­tracted — or ter­ri­fied — by the po­lit­i­cal ruc­tions, IM would urge read­ers to ex­am­ine the in­terim re­sults of Nu-World Hold­ings to end-Fe­bru­ary.

IM picked Nu-World in Novem­ber when the share price was about R30. The share has moved up since then, but it still of­fers plenty of up­side on a trail­ing earn­ings mul­ti­ple of six times and a yield close to 5%.

Such a dis­mal mar­ket rat­ing would an­tic­i­pate a poor sec­ond half, or be re­flec­tive of a com­pany that has per­formed er­rat­i­cally over the long term. But nei­ther case seems to ap­ply to Nu-World.

It has been listed since the late 1980s and, as far as IM can as­cer­tain, has not skipped a div­i­dend for 25 years. That feat is shared by only a handful of “Class of 1987” list­ings — Medi­clinic In­ter­na­tional, Com­bined Mo­tor Hold­ings, Spur Corp and

Bowler Met­calf (which all have bet­ter mar­ket rat­ings).

Nu-World’s in­terim com­men­tary does not give any for­ward-look­ing state­ments about sec­ond-half trad­ing. But that might well indi­cate con­fi­dence about a sat­is­fac­tory sec­ond half, as Nu-World’s con­ser­va­tive man­age­ment would surely have flagged any po­ten­tial bumps in the road.

What is the mar­ket miss­ing? The lat­est in­terim earn­ings came in 63% higher at 345c/share. Last year’s in­terim earn­ings of 211c/share stretched to 451c/share for the full year to end-Au­gust. If we dis­count the chances of NuWorld en­joy­ing a stronger sec­ond half, we can con­ser­va­tively pen­cil in full-year earn­ings of about 650c/share. That puts it on a for­ward earn­ings mul­ti­ple of less than 5.8 times and — pre­sum­ing earn­ings will cover the div­i­dend 2.5 times — a po­ten­tial yield of close to 7%.

In other words, the share looks an ab­so­lute sit­ter.

In terms of de­ter­min­ing the qual­ity of Nu-World’s earn­ings, the in­terim state­ments show cash gen­er­ated from op­er­a­tions at R147m, or 653c/share. The net cash flow, strip­ping out div­i­dends paid, the in­ter­est bill and tax­a­tion, came in at R69m, or more than 300c/share.

The bal­ance sheet is lightly geared, with am­ple ca­pac­ity to grow or­gan­i­cally and ac­quis­i­tively — the lat­ter op­tion be­ing men­tioned since ad­ven­tur­ous in­vestor Wild Rose Cap­i­tal last year took an in­flu­en­tial stake in the com­pany. Whether Wild Rose is wait­ing for buried value to bloom or plans to in­tro­duce a more ex­pan­sion­ary strat­egy at Nu-World re­mains to be seen. IM sus­pects the lat­ter.

Nu-World states a NAV of R43.63/share, but IM es­ti­mates the tan­gi­ble NAV (ex­clud­ing in­tan­gi­bles and good­will) at about R38/share.

In­vestors are star­ing at a peren­ni­ally prof­itable firm with a strong bal­ance sheet, de­pend­able cash flows and gen­er­ous div­i­dend pol­icy trad­ing at a dis­count to its hard NAV.

Ad­mit­tedly, lo­cal trad­ing con­di­tions may war­rant an el­e­ment of jaun­diced sen­ti­ment. But the in­terim re­sults show Nu-World’s off­shore thrust is gain­ing trac­tion. Its orig­i­nal foray into Aus­tralia has been com­ple­mented by moves into In­dia, Pak­istan, Sri Lanka, the Mid­dle East, Africa and Latin Amer­ica. Off­shore rev­enue of R440m only ac­counted for 28% of to­tal in­terim turnover — but the R30m earned by the off­shore op­er­a­tions rep­re­sented a chunkier 41% of bot­tom line.

The lo­cal/off­shore ra­tios will be in­ter­est­ing to gauge at the Au­gust year-end, with the re­cent rand move­ments against ma­jor cur­ren­cies likely to make a marked dif­fer­ence.

In a word: buy. ● Marc Hasenfuss

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