The wholesale electr ical and lighting provider posted mixed interim results for the period ending December. The e ncouraging performance of the lighting division − which saw revenue advancing 23% and operating profit 16% over the previous corresponding period − was tempered by the performance of t he much l arger electrical division, which accounts for 81% of revenue.
The division’s revenue declined by nearly 10% to R890m, with the c o mpany c i t i n g a “l a c k o f reticulation spend by Eskom and the paucity of major infrastructure projects” as reasons for the decline. This saw operating profit in the unit fall by nearly 12%, despite a slight improvement in the gross margin. The performance of t he t wo divisions almost netted off one another − headline earnings per share (HEPS) fell ever so slightly from 24.88c to 24.79c.
This l e aves i nvestors i n a predicament. At R6.10/share and f actoring f ull- year earnings of R0.50 (which is the same as last year), new i nvestors would be buying the company on a price-toearnings ratio of 12.2 times, but which in the short term appears to offer no growth. The company also does not have a full-time CEO, with financial director Billy Neasham filling in following the departure of Byron Nichols in October last year.
But the company is in a good financial position, with a strong balance sheet that has no long-term interest-bearing debt of any kind; and R130m of cash on hand suggests the company could well use the depressed environment to pursue more acquisitions. If it ’s possible to buy (much l arger) construction companies like Group 5 on 8 ti mes earnings at the moment, it would suggest there s h oul d be s ome compel l i ng opportunities for ARB to purchase smaller players in its niche.
But the evaluation of the company also needs to be seen in the context of what else an investor can spend their money on. Outside of the construction and infrastructure space, there are more compelling opportunities in my opinion, so from my point of view, ARB is a Hold.