Down but not out of con­tention

There is po­ten­tial on th­ese two shares — for those who can make the right judg­ment calls

Financial Mail - Investors Monthly - - Guest Column - AN­THONY CLARK

Iwas asked by the ed­i­tor for up­dates on two stocks that have been beaten up by the mar­ket in 2018. One is con­sumer elec­tri­cal and satel­lite ser­vices provider El­lies Hold­ings, a mi­cro-cap with a mar­ket value of R118m and trad­ing at 20c at time of writ­ing, down 48% year to date. The other is agri­cul­tural in­vest­ment fund Zeder In­vest­ments, now on a 20% dis­count and a share price of 470c. It has suf­fered via its large hold­ing in Pi­o­neer Foods, and Zeder has fallen 31% in 2018.

El­lies Hold­ings’ fall has been epic. Listed on the JSE’s Alt-X mar­ket in 2007 at 200c a share, El­lies ran to 990c by 2013. But in 2013 it was be­com­ing clear the wheels were fall­ing off.

What caused the calamity was the re­al­i­sa­tion that a large Eskom con­tract would not be re­newed; and signs of early cracks at the R180m in­fras­truc­ture 2008 ac­qui­si­tion of Me­ga­tron.

Piles of debt, blood­cur­dling losses from Me­ga­tron and a weak con­sumer en­vi­ron­ment nearly sunk El­lies be­tween 2014 and 2017. A re­prieve by its bankers and the ap­point­ment of turn­around spe­cial­ist Adrian Bock as FD in 2016 (and later CEO, though he an­nounced in June that he was leav­ing at end2018) helped El­lies sta­bilise, cut costs and re­align its strat­egy. It moved back into two pe­ri­ods of earn­ings and prof­its in 2018.

El­lies re­ported HEPS of 8.07c a share for April 2018, plac­ing the stock on an earn­ings mul­ti­ple of 2.5 times with good prospects in place for fi­nan­cial 2019.

A new CEO was ap­pointed in Au­gust 2018. Shaun Prithivi­rajh will look to align the con­sumer busi­ness with the needs of modern con­sumers. That could al­low El­lies to of­fer far more ser­vices to its con­sumers in the in­ter­net and fi­bre sec­tor rather than just ex­ten­sion leads, re­mote blasters and DStv in­stal­la­tions.

This is a bold move for El­lies. With a mar­ket value of R118m, this re­aligned strat­egy is the “last roll of the dice”. There is some fi­nan­cial flex­i­bil­ity (with debt re­duced), which could open the way for small bolt-on deals.

On such a mod­est earn­ings mul­ti­ple, El­lies is a steal. I can’t see the earn­ings mul­ti­ple fall­ing be­low two times in fi­nan­cial 2019, es­pe­cially given dis­cus­sions I’ve had with the com­pany. But it is a highly risky play. In­sti­tu­tional in­vestors will stay clear — but this may give pri­vate clients a chance to latch onto the con­tin­u­ing re­cov­ery.

Zeder In­vest­ments, part of the PSG Group, is the flag­ship agri­cul­tural in­vest­ment fund in SA with an as­set value of R9.9bn. In its 12-year listed life Zeder has

Piles of debt, blood­cur­dling losses from Me­ga­tron and a weak con­sumer en­vi­ron­ment nearly sunk El­lies

oc­ca­sion­ally traded at a premium to its as­sets, and at its worst traded at a 40% dis­count. Now, at 470c, it trades at a 20% dis­count to the sum of its parts.

Much of the re­cent weak­ness in the Zeder share price has been de­rived from two key is­sues.

Zeder has a large stake in JSE-listed Pi­o­neer Foods which ac­counts for 43% of Zeder’s sum of the parts value or 60% of its cur­rent mar­ket cap­i­tal­i­sa­tion.

Pi­o­neer Foods has been its stum­bling block for the past three years. Pi­o­neer’s re­sults have dis­ap­pointed, with weak earn­ings and profit warn­ings. This has re­sulted in it be­ing down 60% from R210 in 2015 to a cur­rent R80 a share.

That has had its ef­fect on Zeder’s as­set base, given the dis­pro­por­tion­ate weight­ing of Pi­o­neer Foods to Zeder’s fund.

Sec­ond, the 2016-2017 drought cast a pall over many of Zeder’s agri­cul­tural in­ter­ests such as Capes­pan and Kaap Agri.

But the drought now ap­pears to be over. A re­cov­ery in the agri­cul­tural sec­tor is fore­cast in 2019, which will ben­e­fit many of Zeder’s in­ter­ests.

What re­mains un­cer­tain is Pi­o­neer, where a weak and highly com­pet­i­tive con­sumer en­vi­ron­ment ham­pers earn­ings. With­out a Pi­o­neer Foods share price re­cov­ery, I can­not see Zeder ma­te­ri­ally re­cov­er­ing. How­ever, the stock bounced re­cently when fruit and lo­gis­tics busi­ness Capes­pan sold its 9.23% stake in a Chi­nese fruit en­ter­prise, gain­ing a hefty R1.2bn for the mi­nor­ity stake.

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