Get in while the growing’s good

The more excitable smallcap punters initially took a shine to ENX Group, which was built out of the remnants of the old Aurora woodworking equipment business by strategic investor Wild Rose Capital.

Near the end of 2015 (remembering there was a 10for-one share consolidation and more recently the unbundling of mining services business eXtract) the group’s share price was around R25 on the JSE. These days the shares trade closer to R13, attractive for a longer-term view.

Results for the six months to end-February make for interesting reading, with revenue topping R3.6bn with earnings before interest and tax (EBIT) shifting up 38% to R354m.

The revenue spurt in tough trading conditions might cause some fretting around destructive margin sacrifice. But ENX’s EBIT margin was only slightly down at 26.5% (previously 28.8%) and the operating margin was held close to 10% (11%).

Cash flow from operating activities came in at R888m, R936m if working capital requirements are stripped out — equivalent to 490c/share and 517c/share respectively.

The strong cash flow generated by operations is critical since ENX still carries a considerable debt burden inherited from the “transformative” acquisition of Eqstra. Finance costs topped R205m in the interim period — R171m on a net basis.

Dividends will not be considered in the foreseeable future, but ENX is making progress in diminishing the debt drag.

CEO Steven Joffe says ENX reduced net debt and reentered the debt capital markets to strengthen the balance sheet and position the group for growth. “We now have the option to invest in our existing businesses or opportunistically as new prospects arise.”

After the close of the interim period, ENX entered into a R315m 3.5-year note-specific liquidity facility and raised R260m in the debt capital markets through an auction conducted in mid-April.

This means the cash balances as at February 28 and the funds received from the bonds raised allowed ENX to redeem R565m of maturing debt during April.

Joffe says the group’s debt funding position has been strengthened with a more prudent maturity profile and sufficient liquidity to address capital repayments to the end of August 2019.

Even the recapitalisation and unbundling of eXtract appears to be going to plan.

Joffe says the Extract repayment is well ahead of the original anticipated timing.

So capital constraints experienced by the Eqstra full main- tenance leasing businesses in the past have largely been released. Now this key business can focus on building up its leasing book.

ENX also acquired two small forklift businesses in the UK. Joffe says they complement current operations.

It won’t be easy going for ENX in the next 18 months. But the business looks robust enough to churn decent profits, and the operational streamlining should ensure ENX can generate strong profits and cash flows when the economy turns for the better.

On a simple multiple basis, ENX — which posted 77c/share in headline earnings and 87.5c/share in adjusted headline earnings — looks modestly priced against other large industrial services businesses.

Assuming — conservatively — a full-year earnings number of just 150c/share, then ENX is on an undemanding forward multiple of around nine. This could be the time to buy … before growth really starts.