A FAIR MAR­GIN OF SAFETY

Finweek English Edition - - INVESTMENT -

Re­sults from en­gi­neer­ing com­pany ELB Group show sales up 50.3% while HEPS ac­tu­ally slipped to 121.7c from the pre­vi­ous pe­riod’s 124.4c, as costs pretty much matched the rev­enue in­crease. How­ever, what catches my at­ten­tion ev­ery time the group re­leases re­sults is its cash po­si­tion – with cash and cash equiv­a­lents at R583m while the group has a mar­ket cap of some R1.4bn. In other words, pretty much a lit­tle over a third of the share is un­der­pinned by cash. This has long been the trend of ELB Group, al­though a few years back cash was closer to R800m while the mar­ket cap was some R1bn, but the group still of­fers a fair mar­gin of safety with the cash pile. is­sue here is a con­tract in the DRC that has fallen apart over pay­ment dis­putes and cost over runs. Small com­pa­nies are al­ways very sus­cep­ti­ble to the risk, or re­ward, of sin­gle con­tracts while a larger com­pany could still be hit by such a con­tract dis­pute and it would have other prof­itable con­tracts to help cush­ion the blow. The big­ger pic­ture here is that the stock now trades at 30c with a re­ported tan­gi­ble net as­set value (TNAV) of 87.8c for the pe­riod end­ing Au­gust 2013. But of course we have re­peat­edly warned about the risks of TNAV and I would ex­pect to see that value plum­met­ing with the next set of re­sults.

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