Finweek English Edition - - FRONT PAGE - BY VIC­TOR VON REICHE Se­nior In­vest­ment An­a­lyst, Can­non As­set Man­agers

Rolfes is a well-es­tab­lished name in South Africa and in­ter­na­tion­ally, which dates back to 1925. To­day, the com­pany is a di­ver­sif ied spe­cialised chem­i­cals busi­ness. The ac­qui­si­tion of agro­chem­i­cals man­u­fac­turer AgChem (2011) and wa­ter pu­rifi­ca­tion com­pany PWM (2013) has bol­stered the group’s growth tra­jec­tory, which is partly il­lus­trated in the ac­com­pa­ny­ing graph.

In­terim re­sults to end De­cem­ber 2013 were dis­ap­point­ing, with head­line earn­ings per share (HEPS) down 6% on the back of in­creased ex­penses from the PWM ac­qui­si­tion, dif­fi­cult lo­cal trad­ing con­di­tions and op­er­a­tional is­sues on the pig­ment plant. How­ever, a re­ver­sal of op­er­a­tional dif­fi­cul­ties at the pig­ment plant and an in­crease in ex­ports of 35% over the com­par­a­tive pe­riod is tes­ta­ment to man­age­ment’s aim to mit­i­gate lack­lus­tre lo­cal eco­nomic con­di­tions.

The group’s am­bi­tious ex­pan­sion drive will see it in­vest­ing into new and ex­ist­ing prod­ucts and ge­ogra­phies, but the im­me­di­ate fo­cus is on new prod­uct devel­op­ment and in­creas­ing ex­ports to North Amer­ica, Africa and Eastern Europe. Man­age­ment es­ti­mates that R100m of work­ing cap­i­tal will be re­quired over the next few years to achieve this goal, which will be funded by a com­bi­na­tion of long-term debt and share­holder cap­i­tal. Most of this in­vest­ment will go to­wards qua­dru­pling the ca­pac­ity of the pig­ment plant.

The group is also in­volved in an ex­cit­ing part­ner­ship with the Univer­sity of Pre­to­ria to de­velop or­ganic plant growth pro­mot­ing rhi­zobac­te­ria (PGPR). This is in line with world sus­tain­able agri­cul­tural trends that aim to sup­ply greener agri­cul­tural prod­ucts. This rep­re­sents sig­nif icant blue-sky po­ten­tial that is not re­flected in the share price.

No­tably, the busi­ness ex­hibits many of the 15 at­tributes to which Phillip Fisher al­luded in his book Com­mon stocks and un­com­mon prof­its when look­ing for com­pa­nies with sus­tained long-term growth po­ten­tial. Man­age­ment’s strat­egy of fol­low­ing a com­bi­na­tion of or­ganic and ac­quis­i­tive growth will be a pow­er­ful driver to en­sure this po­ten­tial is re­leased. The busi­ness model also lends it­self to economies of scale, as new prod­ucts are added to ex­ist­ing pro­duc­tion fa­cil­i­ties and pro­duc­tion is scaled up. Im­por­tantly, the val­u­a­tion looks com­pelling and we be­lieve that at cur­rent mar­ket prices the com­pany is sig­nif­i­cantly un­der­val­ued. We con­ser­va­tively es­ti­mate an in­trin­sic value of 600c/share, with nor­malised earn­ings of 50c/share priced on a 12 times earn­ings mul­ti­ple.

Rolfes is still a small com­pany, with a mar­ket cap of R400m and op­er­at­ing in­come of a bit less than R100m. How­ever, it owns valu­able in­tel­lec­tual prop­erty which should en­sure sus­tained long-term earn­ings gains as it drives top-line growth through a com­bi­na­tion of or­ganic and ac­quis­i­tive ac­tiv­i­ties while main­tain­ing healthy mar­gins. The case for Rolfes is strength­ened by a man­age­ment team that demon­strates a record of sen­si­ble cap­i­tal al­lo­ca­tion. Rolfes rep­re­sents a good long-term in­vest­ment, with the in­vest­ment case bol­stered by the fact that man­age­ment has a sig­nif­i­cant in­ter­est in the busi­ness, en­sur­ing an align­ment of in­ter­est with share­hold­ers.

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