BUY: Argent Industrial
Share price: 573c
JSE code: ART
The market has no love for "small" industrial conglomerates, which has meant Argent’s determined efforts to unlock value and build a new offshore growth story have largely been overlooked.
In the interim period to end August Argent’s specialist light industrial businesses that are based offshore (mainly in the UK and US) generated R288m in revenue, compared with the R606m from the local (mainly steel-based) operations. But the offshore hub is solidly profitable, with pre-tax profits at R54m, compared with just R2m from the local operations.
Understandably, Argent is looking to selectively dispose of local assets and invest in building a bigger offshore base.
The offshore hub looks set for further growth with recently acquired Partington Engineering, which manufactures trolleys for online shopping warehouse facilities, reporting a four-month order book.
Interim cash flow was a reassuring R141m (more than 200c a share) and the cash balance was R195m (more than 300c a share). Naturally buy-backs will be preferred over dividends as long as the Argent share price still badly lags the stated net asset value (NAV) of R17.46 a share.
IM has "hard" NAV (stripping out goodwill, right-of-use assets and intangibles) at R12.86 a share — which is still more than double the share price at the time of writing.
HOLD: PBT Group
Share price: 349c
JSE code: PBT
PBT is a solid enough technology services company. IM reckons the upcoming interim results should confirm that the group’s services remain in good demand, and that the market might need to revisit the modest rating it places on the shares.
But there might be a more immediate opportunity for a value unlock.
PBT holds around 9.6-million shares in Zuuse, an Australia-based company that offers construction payment management software-as-a-service solutions to the global construction and building operations sector. Recently IFM Investors, a huge Australian asset management firm, invested A$50m for a significant minority interest in Zuuse. Basically 35-million newly issued convertible preference shares — which convert into Zuuse ordinary shares on a one-for-one basis — were issued to IFM. This deal dilutes PBT’s effective stake in Zuuse from 6.7% to 5.3%. But the transaction gives a reference point for PBT shareholders to value the Zuuse investment. IM calculates the stake to be worth around R108m, when compared with PBT’s market value of R347m.
PBT deems its stake in Zuuse as noncore, so there might be an opportunity to exit the stake in the Australian business profitably. PBT does not need to rush such a deal. Consequently investors can afford to bide their time here.
SELL: Advanced Health
Share price: 32c
JSE code: AVL
Advanced Health, on paper, looks like a business model perfectly pitched in the affordability issue that has plagued the private health-care sector.
The group’s roll-out of its day hospitals, however, has not found the traction needed to generate operating cash flows that could underpin ongoing expansion. The company recently capitulated tellingly, in proposing the sale of the bulk of its SA clinics. Officially the aim is to "simplify the group structure, reduce operational and overhead costs and inject the necessary cash resources to ensure the continued solvency and liquidity of Advanced and the subsidiaries for the foreseeable future".
Reading between the lines, it’s going to be a hard slog for Advanced, with its better-established Australian operations providing cash flows for further endeavours. While the price tag for the deal is considerably larger than Advanced’s market capitalisation, the group’s balance sheet needs serous reinforcing — and the operating challenges in SA remain.
One might argue that a competitor has also stolen a march on Advanced by grabbling some key sites in the Western Cape and Gauteng. IM feels it will take Advanced fairly long to recover and re-build its business model. At present things seem unconvincing, and we would rather look at exit at current levels.
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