Ex­cel­lent value

Finweek English Edition - - Companies & markets - MICHAEL COUL­SON

COM­PA­NIES THAT PRO­VIDE out­sourced ser­vices have been JSE favourites in re­cent years, but Ex­celler­ate, which has traded broadly be­tween 90c and 60c since 2005, has not at­tracted as much at­ten­tion as some of its peers. This may be be­cause it isn’t rep­re­sented in the hot staff place­ment area, com­pounded by big losses in its food trad­ing busi­ness in fi­nan­cial 2005.

Ex­celler­ate is strongly de­cen­tralised. Di­vi­sions are run on an en­tre­pre­neur­ial but ac­count­able ba­sis and much em­pha­sis is placed on cross-sell­ing and in­ter-group syn­er­gies. There are six di­vi­sions: house­wares (trad­ing as Gold­en­marc, Louis Smiedt, Hyper­trade and Fer­rengi); food (Alpine Im­porters and Fruti Flow); park­ing man­age­ment, se­cu­rity and re­lated busi­nesses; clean­ing and ser­vices rental (Sterik­leen); con­sumer ser­vices (Levingers); and cater­ing (Food­serv).

The group phi­los­o­phy is to in­vest only in com­pa­nies that re­flect its core com­pe­ten­cies in out­sourced ser­vices, trad­ing and dis­tri­bu­tion, with the em­pha­sis on cus­tomer-cen­tric­ity, spe­cialised mar­kets, de­cen­tral­i­sa­tion and a su­pe­rior team.

Be­tween 2002 and 2006 (the year-end is June 30) rev­enue rose from R249m to R509m. Op­er­at­ing profit, R17,8m in 2002, peaked at R29,4m in 2005. Over the same pe­riod, HEPS went from 6,3c to 8,7c, but in 2006 the food trad­ing prob­lems slashed th­ese fig­ures to R11,1m and 5,1c re­spec­tively.

How­ever, the in­terim re­port to De­cem­ber 2006 shows a good re­cov­ery. Down­siz­ing of the food trad­ing di­vi­sion trimmed six-month rev­enue from R289m to R273m, but op­er­at­ing profit in­creased from R12,6m to R16,2m, the whole gain com­ing from trad­ing & dis­tri­bu­tion. The im­prove­ment was car­ried through down the line, cul­mi­nat­ing in HEPS of 6,4c (4,2c). Ex­celler­ate pays no div­i­dends, re­tain­ing all avail­able funds to fi­nance ex­pan­sion and run down debt.

In De­cem­ber, share­hold­ers ap­proved a deal for BEE part­ner Aken­ton Ser­vices (Pty) Ltd to take a 25% stake in the op­er­at­ing sub­sidiaries.

In the in­terim re­port, Ex­celler­ate says re­struc­tur­ing along even more de­cen­tralised lines has been com­pleted. A cul­ture of strong growth and cash gen­er­a­tion has set in.

There’s no fore­cast for the sec­ond half, but if the first half is merely re­peated, an­nual HEPS of 12,8c would of­fer a for­ward p:e of 7,0 at the cur­rent 90c. NAV is 56c, more of an as­set un­der­pin than is the case with many ser­vice com­pa­nies. It’s al­ways pos­si­ble that the de­cen­tralised approach could bring an­other dis­as­ter like that in food trad­ing, but on bal­ance Ex­celler­ate looks to of­fer ex­cel­lent medium-term value.

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