Value laden and at an in­trigu­ing junc­ture

Financial Mail - Investors Monthly - - Analysis - Marc Hasen­fuss

ENX Group is trad­ing well be­low its “real” value, as IM has stated pre­vi­ously. Of course, amid the pre­vail­ing in­vest­ment despair on the JSE, “real value” is per­haps a term that should be taken with a pinch of salt. Nev­er­the­less, ENX gen­er­ates high-qual­ity earn­ings backed by strong cash flows.

Net cash flow for the year to end Au­gust was about R2bn, or R11 a share. No wor­ries about ser­vic­ing debt lev­els here. The bal­ance sheet has also been clev­erly re-en­gi­neered so that a flex­i­ble bor­row­ings tem­plate can ac­com­mo­date the group’s growth am­bi­tions.

At this point ENX’s shares — trad­ing at an eight earn­ings mul­ti­ple on head­line earn­ings and 6.5 times based on ad­justed earn­ings — ap­pear to of­fer value for in­vestors will­ing to look past the cur­rent eco­nomic mire. ENX is also trad­ing only slightly above its in­trin­sic NAV of R11 a share, which ar­guably should not be the case when con­sid­er­ing the size­able “ser­vices” el­e­ment on the group’s busi­ness. In short, IM thinks ENX is cheap … very cheap.

But then we could prob­a­bly name a slew of other in­dus­trial coun­ters, from Ar­gent to York, that ap­pear in­sanely cheap mea­sured on earn­ings, cash flows and in­trin­sic NAV.

But there is a dif­fer­ence. Other in­dus­trial coun­ters might ac­knowl­edge a “value trap”, hop­ing that op­er­a­tional per­for­mance, the sale of non­core as­sets or share buy-backs will help nar­row the dis­count be­tween the share price and in­trin­sic value. ENX, on the other hand, re­cently ad­vised share­hold­ers that it was re­view­ing its op­er­a­tional struc­ture, and look­ing specif­i­cally to Eqs­tra Fleet Man­age­ment and Lo­gis­tics (EFML). This is on top of ex­ist­ing plans to exit the

small­ish wood and power-gen­er­a­tion busi­nesses. ENX is now work­ing on pro­pos­als for pos­si­ble di­vest­ment of EFML ei­ther as a whole or in part.

ENX’s lat­est divi­sional re­view shows the EFML seg­ment gen­er­at­ing R2.1bn in rev­enue and ad­justed profit be­fore tax of R197m. The fleet’s as­sets stand at R3bn, with in­ter­est­bear­ing debt at about R1.9bn.

These fig­ures should give some in­di­ca­tion of a price range that ENX might ex­pect for the fleet seg­ment.

While it may be dan­ger­ous to spec­u­late on a num­ber for the pos­si­ble pro­ceeds, it is safe to say that a “rea­son­able” of­fer for some or all of the fleet busi­nesses will help to de-gear ENX’s bal­ance sheet markedly.

ENX’s equip­ment seg­ment — con­sist­ing of fork­lifts, cranes and ma­te­rial han­dling — gen­er­ated al­most R3.2bn in rev­enue for an ad­justed profit be­fore tax of R219m, though this is a 12month ver­sus 10-month com­par­i­son. The smaller petro­chem­i­cal di­vi­sion man­aged around R1.6bn at the top line, with ad­justed profit be­fore tax a dis­ap­point­ing R56m (pre­vi­ously: R77m). This was driven pri­mar­ily by an over­stock­ing sit­u­a­tion with a large cus­tomer.

There were some pos­i­tives, though. ENX re­ported growth in Exxon­Mo­bil vol­umes, and the chem­i­cals hub grew in sales and mar­gins as new prod­ucts were rolled out.

If one imag­ines ENX sans its fleet man­age­ment (as well as wood and power) busi­nesses, the prospects for the equip­ment seg­ment need to be care­fully gauged.

One thing is clear … the fork­lift di­vi­sion has the ca­pac­ity to hoist prof­its markedly when the econ­omy is trundling a lit­tle faster. The petro­chem­i­cals busi­ness is still gain­ing trac­tion with its part­ner­ship with Exxon­Mo­bil, and it might be some time be­fore the real po­ten­tial of this ven­ture flows through to the bot­tom line.

There must be plenty of pos­si­bil­i­ties to part­ner with or ac­quire in the broader petro­chem­i­cal sec­tor.

All in all, ENX is an in­ter­est­ing and value-laden in­dus­trial play at an in­trigu­ing junc­ture. IM reck­ons that at cur­rent prices in­vestors should be load­ing up.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.