Financial Mail

In a good position to perform after lockdown

- Anthony Clark

was trading at R10.16, which gives it a market value of more than R12bn.

Only parts of the company’s business continued operating during the tight phase of the Covid-19 lockdown. East African and Australian operations remained open, and IM understand­s both territorie­s have shown some growth. The closure of the mainstay retail stores and the ceramic industries’ manufactur­ing sites would have hit Italtile hard. IM estimates a cash burn of about R70m a month.

In a less restrictiv­e phase of lockdown, stores will still need to adapt to a new operating environmen­t, such as a limited number of customers in shops due to social distancing requiremen­ts. Sales will be reduced — but Italtile is confident its superior online platform will gain additional traction.

Capital expenditur­e in Italtile’s new tile and sanitarywa­re operations will be deferred and new store openings delayed. Inventory has been pared, further reductions are planned to release R150m, and excess property is expected to be sold to release another R100m. Italtile also intends to source more of its products domestical­ly.

The company caters for all price points — from Italtile at the top end, a revamped and refreshed middle-market CTM and Top-t at the lower end — so the company is well placed to adjust to the new consumer environmen­t.

With a solid balanced sheet, a clear post Covid-19 strategy and a management that is engaged in share buybacks, Italtile remains our preferred building supplies stock.

taltile has for some time been IM’S preferred company in the JSE’S brittle building materials sector.

In September 2019 we recommende­d a long Italtile, short Cashbuild play. It was a profitable trade, as Cashbuild subsequent­ly heavily underperfo­rmed. In February we reiterated Italtile was the stock to follow in the sector, and being long on it remained profitable.

Then Covid-19 swept SA and the JSE succumbed to a bloodbath of selling. Hardly anything was immune. Both Italtile and Cashbuild were hit; the latter was savaged. But they have recovered from their latemarch lows. The performanc­e in the year to date is: Italtile 22.4% and Cashbuild -30.3%.

Each counter has its strength and each is a leader in its market segment. Each has a strong balance sheet and sits on acres of cash, which will protect it after the lockdown.

IM continues to prefer

IItaltile for the post Covid-19 environmen­t. Its product range is predominan­tly in the refurbishm­ent and upgrade segment. House- building post the pandemic may be slow to restart, which will probably hamper Cashbuild. House sales could also be sluggish. So it seems safe, at this juncture, to assume more emphasis will be placed on “fixing up and refurbishi­ng” an existing property rather than moving. This plays into Italtile’s strength.

What’s worth rememberin­g is that Italtile has invested in a state-of-the-art online product and sales visualisat­ion platform. This could prove a strategic masterstro­ke. In an ongoing Covid-19 world more sales may occur online as some consumers could shun the traditiona­l full-on retail experience.

Italtile’s higher-value products are easier to market, convert and sell online than lowvalue bricks and cement.

At the time of writing Italtile many companies globally to manufactur­e it. The chloroquin­e hope quickly evaporated, but not before Ascendis had scrambled up to a intraday high of 229c in April — a 690% rally.

The market soon realised the froth was unjustifie­d, and the stock drifted back to, at the time of writing, 98c (still a nifty 240% return from its March low). IM believes that is a fair price for this volatile counter. If second-half results match the interims, Ascendis is on a forward earnings multiple below two times.

Significan­t challenges remain, but IM is confident these can be surmounted. New CEO Mark Sardi believes Ascendis is a good company with a bad balance sheet.

The balance sheet is indeed straining. The rand’s blowout against the dollar and euro is a double-edged sword. Ascendis’s R5bn euro-denominate­d debt will have increased in rand terms — but hopefully so will offshore earnings. It’s worth noting that 58% of total interim revenue was derived offshore — but 70% of continuing operating profits was generated in hard currencies.

The key, in the short term, is for Ascendis to gain an “amend and extend” agreement from the banks that hold the debt. This will give Ascendis valuable breathing space and enable management to conduct asset sales to repay debt.

The smaller European businesses should be exited during 2020. IM forecasts their total value at around R1bn.

Re-engaging potential buyers on Remedica remains the best hope for debt reduction.

IM believes management would prefer to keep some of Remedica’s offshore revenue base to augment the domestic operations. This would enhance its post-debt valuation.

The road ahead will be bumpy. But management has clearly articulate­d the recovery strategy, debt has been reduced and operationa­lly things look satisfacto­ry. So if, ultimately, a smaller Ascendis is created, the current price probably balances the risks with some decent medium-term upside if the restructur­ing is effective and efficient.

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