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
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.