A disastrous delay
Imade a painful mistake recently in accumulating a few ELB Group shares at about 850c — before the engineering services and equipment specialist issued a shocking trading update a few weeks ago. I made the rookie mistake of thinking the market had got it wrong in marking down ELB — a business I have come to know as a solid operator whose (mostly) consistent profits are backed by a well fortified balance sheet — too harshly.
Those characteristics might not have changed, but ELB’S fortunes are in tatters after it took a severe beating with its recently awarded Gamsberg zinc project. I certainly had no inkling things were going awry at Gamsberg, with neither the last annual report nor the interim report to end-december 2018 even making mention of Gamsberg, let alone signalling potential hitches. The 2017 annual report did note briefly that the award of the Gamsberg project at the end of 2016 was a “significant” contract that would deliver positive returns to the business over its lifecycle. Well, I don’t think the brains trust at ELB ever envisaged the Gamsberg project obliterating NAV from almost R28 a share to less than 900c a share in just six months.
That’s a serious dent, and the kind of value erosion that will badly spook sentiment. What has caused all the problems at ELB is, in short, a delay in the final performance testing on the Gamsberg zinc project. The intricacies of this costly delay have not been clearly relayed (yet) — but this has stanched ELB’S cash flow and put the cash-hungry engineering services hub under “severe working capital constraints”.
The bad news is that only on final commissioning of the Gamsberg project might there be evidence of the muchneeded cash flow pouring through.
Officially, ELB notes the negative impact on cash flow is being addressed with the group “working closely with the project client, its bankers, insurers, other financial institutions, suppliers and customers to resolve the cash flow constraints as soon as possible”.
In short, a lot hinges on finalising outstanding issues at Gamsberg so that project creditors can be settled — but also on the successful restructuring of components of the group as well as negotiating additional financing facilities with banks. I wonder if the restructuring might include selling off prize operations. Presumably, a rights issue is another consideration — though the share price is well off the reduced NAV number and dismayed shareholders may not be falling over themselves to pump in fresh capital at this delicate juncture.
I know it’s easy to get despondent in the prevailing market, but I simply can’t see ELB swiftly extracting itself from the complications around the Gamsberg project. In a more vibrant construction and engineering market, I might have punted ELB as a takeover target. But under current circumstances I seriously doubt suitors will be banging down ELB’S doors. In fairness, let’s recognise that the group has been around for a long time and survived some tricky trading periods.
Barrier of safety
Trellidor, the safety products specialist that listed in 2015, has the balance sheet to back up management’s statement that “several synergistic acquisition opportunities are being considered”, hopefully opportunities that offer complementary diversity to the security barriers core. Trellidor is only lightly geared, with decent operational cash flows to support financing endeavours if suitable acquisition targets are identified. Not surprisingly, the group has also committed to continue buying back its own shares which, for what is essentially a services and brand-strong business, are underpinned by an NAV of more than 200c a share.
If Trellidor has a better second half than last year, the share is offering a modest forward multiple of between six and seven. With a market capitalisation of less than R450m, there might well be a few predators rattling the security gate at the head office.
I don’t think ELB envisaged the Gamsberg project obliterating NAV from almost R28 a share to less than 900c