Strong balance sheet, perennial profitability

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