AN­THONY CLARK Cuts bring flicker of light to El­lies

It is in a bet­ter po­si­tion and, though still high risk, seems a ripe re­cov­ery stock

Financial Mail - Investors Monthly - - Guest Column -

The cost-cutting and clos­ing and planned sale of ex­cess as­sets will bring about R30m/year of sav­ings

Ihave been damn­ing in my com­men­tary on and opin­ion of El­lies Hold­ings since April 2013 — when the share price was at 940c and I rec­om­mended tak­ing prof­its — un­til my out­right sell rec­om­men­da­tion in Oc­to­ber that year, when it was at 714c.

But fol­low­ing the com­pany’s 2017 results an­nounce­ment re­cently and a frank man­age­ment meet­ing, I have up­graded my near four-year sell/avoid rec­om­men­da­tion to a spec­u­la­tive buy at 29c.

A bold move from an ar­dent critic, but a move that I feel is now jus­ti­fied.

How­ever, on a p:e of less that 4 and even with all noise stripped out and vary­ing covenant safe­guards in place, I do not rec­om­mend the stock for wid­ows and or­phans. The counter re­mains high risk.

Still, if man­age­ment’s com­ments can be be­lieved that El­lies’s prob­lems are now set­tled and it can move for­ward, the counter has spec­u­la­tive re­cov­ery at­trac­tions. I had a tar­get of 45c ini­tially, and then of 60c.

El­lies’s fall from grace was swift and spec­tac­u­lar. The wheels started to come off in 2013 when it be­came ev­i­dent that Me­ga­tron Fed­eral, for which El­lies paid R180m in 2008 — R105m in cash and the bal­ance in El­lies shares — was ac­tu­ally a “dog” busi­ness. This re­al­i­sa­tion by man­age­ment, and the can­cel­la­tion of the ab­surdly money-spin­ning Eskom en­er­gysav­ing con­tract in 2013, were the cat­a­lysts for the sink­ing of the com­pany into a fi­nan­cial abyss. The lat­ter was the main rea­son I is­sued my sell rec­om­men­da­tion in Oc­to­ber 2013.

It was clear to any close El­lies fol­lower that its party was over. Prob­lems and lack of con­trols in Me­ga­tron led to profit warn­ings, re­state­ments, im­pair­ments and ul­ti­mately the clo­sure of the in­fra­struc­ture busi­ness af­ter losses of hun­dreds of mil­lions of rand. It has taken two years to sort out the in­fra­struc­ture mess and Me­ga­tron debts and to place El­lies in a bet­ter po­si­tion. It now fo­cuses on its core busi­ness. Af­ter four years of well-de­served neg­a­tiv­ity and crit­i­cism of El­lies, I am pleased that it (may) now be on the right path to slow op­er­a­tional re­cov­ery.

In the 2017 results all the re­main­ing con­tam­i­na­tion from Me­ga­tron had been cau­terised. The results show that El­lies has wiped the slate as clean of past en­deav­ours as it can. Stock has been writ­ten down, costs cut, staff re­trenched and bet­ter man­age­ment sys­tems and lo­gis­tics put in place. All of this will help take El­lies for­ward. For the year, the com­pany, com­mend­ably, re­duced its head­line loss per share from 57.35/c to 7.45/c. The con­sumer busi­ness was prof­itable and made about R30m. My es­ti­ma­tion of the busi­ness is that since the un­rav­el­ling of the in­fra­struc­ture side from El­lies, the core elec­tri­cal con­sumer busi­ness has — as I have al­ways stated — a vi­able fu­ture. This seems clear from the results.

Debt has been resched­uled, and ac­cess to work­ing cap­i­tal gives El­lies breath­ing space.

The cost-cutting and clos­ing and planned sale of ex­cess as­sets will bring about R30m/year of sav­ings. This should lead to re­cov­ery in the busi­ness in 2018 as El­lies fo­cuses on its R1.3bn con­sumer divi­sion, which will be the new El­lies core — or re­turn to its core.

Of the con­sumer busi­ness’s rev­enue, 60% re­mains de­rived from satel­lite and al­lied ser­vices and prod­ucts. Much of the bal­ance is from the elec­tri­cal and light­ing prod­ucts divi­sion. New ini­tia­tives, such as cor­po­rate light­ing and so­lar, are about 1% of the busi­ness, though man­age­ment has growth ex­pec­ta­tions.

El­lies is head­ing into 2018 in fair shape. The weak con­sumer en­vi­ron­ment is a chal­lenge. How­ever, El­lies is now bet­ter placed to weather the cur­rent en­vi­ron­ment and re­build its busi­ness.

With the worst over, the busi­ness is on a level footing and El­lies at 29c, though spec­u­la­tive, now looks like a ripe mi­cro-cap re­cov­ery stock.

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