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.