Value laden and at an intriguing juncture
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.