Micro-cap Argent Industrial has been a favourite of IM for some time and, of late, has been a stellar performer.
IM has consistently recommended the counter from July 2020 (466c), November 2020 (511c) and as recently as February this year (849c).
Argent’s year-to-date share price has risen 46% and in the past 12 months by 156% with the counter currently trading at 1,064c a share.
The company, deeply unloved by institutional funds but with a cult following among private investors, has been dramatically transformed over the past three years as management restructured the sprawling miniconglomerate.
The restructure was long overdue as Argent had sputtered with inconsistent performances, and the market also perceived the absence of a convincing strategic imperative.
A focus on maximising value for shareholders helped Argent dispose of excess property assets, exit and sell many low margin businesses and recycle some of the cash raised into niche and profitable UK acquisitions. Its rand hedge qualities are now about 70%.
The changes led to a surge in underlying earnings as well as a markedly improved balance sheet and operational outlook.
What’s more, Argent embarked on an aggressive share buy-back programme. The best use for its excess cash was into its own shares — remembering Argent’s last-stated net asset value (NAV) was R17.47 a share.
The company has bought back 26% of its outstanding shares and has authority to continue buying to 40%. But IM does not believe this share buy-back programme will be fully undertaken.
We think the company may decide to place a share buy-back floor price on the stock as the ultimate backstop and pay excess cash out via the resumption of shareholder dividends.
A trading update issued by the company on May 6 indicated full-year HEPS to March 2021 would rise by between 54.6% and 74.6%, giving an indicative range of 206c-233c a share. The stock promptly ran up 13% — suggesting the market was perhaps underestimating the earnings upside for the full financial year.
In the 2020 financial year, Argent reported headline earnings of 133.4c a share. The full 2021 earnings guidance will be the sixth consecutive year of earnings growth for Argent.
A number of factors precipitated the leap in like-on-like earnings. Some won’t be repeated but we still forecast growth in earnings into 2022, though more slowly. From a solid first-half base, Argent benefited in the second half from the cost containment and savings undertaken as Covid hit in early-2020.
It also helped enormously that many of Argent’s products benefited from the stay-at-home/work-from-home scenario that has unfolded in the past 12 months.
In the UK the home building and DIY boom increased demand for Argent’s garden and fencing products. Its acquisition of Partington, a specialist trolley manufacturer for online warehouse businesses like Amazon, benefited from increased sales throughput from online sales. Also, its mobile fuels transport business Fuel Proof made the most of pandemic conditions with businesses needing to back up fuel supplies.
In SA, Xpanda, Argent’s home security business, also performed well given the new stay-at-home mentality. The domestic shortage of steel raised prices in a tight supply market — aiding margin expansion and profits at Argent’s Phoenix steel trading units.
On mid earnings for the 2021 results, Argent is trading on a forward p:e of less than five, hardly demanding, despite the heady run in the share price the past few months. This illustrates just how deeply undervalued the counter was in 2020 when the stock was trading at half current levels.
Things might get tighter in the new financial year, but IM remains confident of an uplift in 2022 and pencils in headline earnings of 260c a share.
The ongoing benefits from share buy-backs and any R/£ weakness will further enhance the recommendation. Rand strength in Argent’s second half probably shaved about R5m off profits.
With an NAV of 1,747c a share and a hard (tangible) NAV of about R14.50 a share, Argent remains a value play despite the sharp rise in the share price. IM sees value in the stock up to R14, and maintains a BUY recommendation.
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