Down but not out, despite risky conditions

Sentiment for perennially profitable household appliance distributor Nu-World Holdings has gone on the fritz after the release of poor interim numbers, with the market having little sympathy for tough trading conditions under persistent power outages in the key South African market.

Interim earnings were more than halved to R33m, or 155c a share, with the core South African operations reporting a steep decline in profit from R47m in the same period last year to just R15m. The international operations which span Australia, Brazil, the UAE Hong Kong and Lesotho fared much better, with profits dipping slightly to R18.2m from R20.8m previously.

While the R15m profit generated by the South

African operations would be viewed as disappointing, it does represent an improvement from the second half of the 2022 financial year, when it appeared the local operations actually ran at a small loss.

South African sales dropped 26%, with Nu-World directors reporting that all sectors of the business came under “huge strain”. Naturally, high inflation and rising interest rates constrained consumers’ real disposable income, and with confidence levels down, the consumers who were shopping curbed their spending.

The directors state loadshedding is a huge headache, not only causing a downturn in consumer sentiment but also curtailing retail sales (something KAP Industrial also experienced in relation to its mattress business).

It is slightly worrying that Nu-World reports that LED

TVs have shown an unprecedented decline in volumes arguably, loadshedding directly reduces household demand for new TVs.

There is some good news regarding small domestic appliances and white goods, with directors reporting strong sales in newertechnology items despite load-shedding. Unfortunately, on the furniture side certain stock items were not replenished, as high(er) freight costs rendered these uncompetitive. The situation has since changed, and the company has placed orders with its suppliers in the second half.

It is interesting to see that Nu-World directors do not provide an outlook commentary for the second half of the 2023 financial year. Undoubtedly, it won’t be pretty and perhaps, being traditionally the weaker trading half, markedly worse than the interim showing. Load-shedding has not abated, fuel prices will add to costs and the high interest rates won’t be spurring discretionary spending in the foreseeable future.

If Nu-World can manage 100c in second-half earnings, the share sits on a forward multiple of nine. That’s not by usual standards too demanding a rating. But it is IM’s view that with consumer confidence low and loadshedding darkening the national mood, there is a good chance that Nu-World’s share price might drop past its 12month low of R20 in the months ahead.

While most investors might think it best to stay well clear of consumer-centric businesses for the time being, IM believes Nu-World is now a share to watch closely.

The company has been around since 1987, and investors would be hardpressed to find a point in its 36-year tenure on the JSE when a dividend was not paid. The business has been through tough times before many times and always trucked on.

One reassuring aspect of the interims is that Nu-World generated R205m in operational cash flows, which is equivalent to close to R10 a share. What is also worth noting in the interim numbers is that NAV is reflected at R69.27 a share. If a smidgen of goodwill is stripped out, IM estimates tangible or “hard” NAV at R63 a share, nearly triple the current share price.

In fact, Nu-World’s net cash holdings of R531m equivalent to R24 a share are worth more than the company’s market value. Put another way, the market is putting zero value on NuWorld’s operations, which have consistently generated profits for the past 3½ decades.

This is a brutal prediction by the market either that Nu-World’s experienced executives will run the company into the ground or that the current calamitous economic situation will grind the business down to dust.

IM very much doubts that either dire scenario will play out. What would be more prudent would be for NuWorld to use its strong balance sheet to mop up any weak shareholders in a share buyback. Then again, why won’t the main shareholders consider making a premiumpriced offer to minority shareholders and take the business private?

If Nu-World does dribble below R20 in the dark winter months, IM would recommend snaffling some stock on a long-term view of a recovery in consumer spending and easier economic conditions.

The business has been through tough times before