Get in while the grow­ing’s good

Financial Mail - Investors Monthly - - Analysis - Marc Hasenfuss

The more ex­citable small­cap pun­ters ini­tially took a shine to ENX Group, which was built out of the rem­nants of the old Aurora wood­work­ing equip­ment busi­ness by strate­gic in­vestor Wild Rose Cap­i­tal.

Near the end of 2015 (re­mem­ber­ing there was a 10for-one share consolidat­ion and more re­cently the un­bundling of min­ing ser­vices busi­ness eX­tract) the group’s share price was around R25 on the JSE. Th­ese days the shares trade closer to R13, at­trac­tive for a longer-term view.

Re­sults for the six months to end-Fe­bru­ary make for in­ter­est­ing read­ing, with rev­enue topping R3.6bn with earn­ings be­fore in­ter­est and tax (EBIT) shift­ing up 38% to R354m.

The rev­enue spurt in tough trad­ing con­di­tions might cause some fret­ting around de­struc­tive mar­gin sac­ri­fice. But ENX’s EBIT mar­gin was only slightly down at 26.5% (pre­vi­ously 28.8%) and the op­er­at­ing mar­gin was held close to 10% (11%).

Cash flow from op­er­at­ing ac­tiv­i­ties came in at R888m, R936m if work­ing cap­i­tal re­quire­ments are stripped out — equiv­a­lent to 490c/share and 517c/share re­spec­tively.

The strong cash flow gen­er­ated by op­er­a­tions is crit­i­cal since ENX still car­ries a con­sid­er­able debt bur­den in­her­ited from the “trans­for­ma­tive” ac­qui­si­tion of Eqs­tra. Fi­nance costs topped R205m in the in­terim pe­riod — R171m on a net ba­sis.

Div­i­dends will not be con­sid­ered in the fore­see­able fu­ture, but ENX is mak­ing progress in di­min­ish­ing the debt drag.

CEO Steven Joffe says ENX re­duced net debt and reen­tered the debt cap­i­tal mar­kets to strengthen the bal­ance sheet and po­si­tion the group for growth. “We now have the op­tion to in­vest in our ex­ist­ing busi­nesses or op­por­tunis­ti­cally as new prospects arise.”

After the close of the in­terim pe­riod, ENX en­tered into a R315m 3.5-year note-spe­cific liq­uid­ity fa­cil­ity and raised R260m in the debt cap­i­tal mar­kets through an auc­tion con­ducted in mid-April.

This means the cash bal­ances as at Fe­bru­ary 28 and the funds re­ceived from the bonds raised al­lowed ENX to re­deem R565m of ma­tur­ing debt dur­ing April.

Joffe says the group’s debt fund­ing po­si­tion has been strength­ened with a more pru­dent ma­tu­rity pro­file and suf­fi­cient liq­uid­ity to ad­dress cap­i­tal re­pay­ments to the end of Au­gust 2019.

Even the re­cap­i­tal­i­sa­tion and un­bundling of eX­tract ap­pears to be go­ing to plan.

Joffe says the Ex­tract re­pay­ment is well ahead of the orig­i­nal an­tic­i­pated tim­ing.

So cap­i­tal con­straints ex­pe­ri­enced by the Eqs­tra full main- ten­ance leas­ing busi­nesses in the past have largely been re­leased. Now this key busi­ness can fo­cus on build­ing up its leas­ing book.

ENX also ac­quired two small fork­lift busi­nesses in the UK. Joffe says they com­ple­ment cur­rent op­er­a­tions.

It won’t be easy go­ing for ENX in the next 18 months. But the busi­ness looks ro­bust enough to churn de­cent prof­its, and the op­er­a­tional stream­lin­ing should en­sure ENX can gen­er­ate strong prof­its and cash flows when the econ­omy turns for the bet­ter.

On a sim­ple mul­ti­ple ba­sis, ENX — which posted 77c/share in head­line earn­ings and 87.5c/share in ad­justed head­line earn­ings — looks mod­estly priced against other large in­dus­trial ser­vices busi­nesses.

As­sum­ing — con­ser­va­tively — a full-year earn­ings num­ber of just 150c/share, then ENX is on an un­de­mand­ing for­ward mul­ti­ple of around nine. This could be the time to buy … be­fore growth re­ally starts.

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