The market, so the saying goes, is rarely wrong.
But it might be one of those rare exceptions when the market roundly ignores a 37-year-old track record of profitable performance, a conservatively managed balance sheet and regular-as-clockwork dividend payments.
Readers would be hard-pressed to find a year in nearly four decades of being listed on the JSE that Nu-World Holdings didn’t turn a profit and fork out a dividend. Notwithstanding that enviable track record, the market effectively places a valuation of R170m (800c a share) on Nu-World’s consumer goods distribution operations that generated net operating income of R57m and bottom-line earnings of 147c a share.
Admittedly, the latest interim period to end-February might open Nu-World up to more sceptical scrutiny than before. At face value, the quality of earnings could be questioned since the group experienced negative cash flow of R68m. That’s a startling reversal from the cash flows of R165m in the previous interim period and R199m for the financial year to end-August 2023.
Cash flow is the lifeblood of any organisation, and a business shifting mainly household appliances should be generating reassuring amounts from its sales.
Attention should be paid, then, to the 16% jump in Nu-World’s inventory levels to R633m — caused by the well-documented blockage of goods in transit at South Africa’s major ports and railways.
To preclude any frustrating stock shortages, the group opted to pre-order and ship stock up to two months early to prevent any late receipt in its warehouses.
This is tricky, with consumer habits for household items fickle at the best of times. Nu-World’s directors advise, though, that procurement controls have improved to ensure correct stocking levels based on current sales requirements. This has been done in conjunction with a concerted effort to flog slower-moving product lines to ease the warehousing requirements.
The decline in the bottom line over the past few years will raise questions about the business model
As long as Nu-World can shift this higher level of inventory in the traditionally slower second half, there should be a marked swing in the cash flow statement.
The local market, however, looks iffy — interim turnover was down almost 7% to R664m, with television set sales going on the blink (presumably as more people consume online content on laptops and phones).
While the general consumer squeeze (higher interest rates, higher unemployment, fuel prices) dampened discretionary spending on household items, there was also a major impact from load-shedding.
On the appliance side there were some flickers of hope after the introduction of new hi-tech appliances and white goods, while the liquor segment reported strong growth from a wider product offering and specialist products.
The biggest dose of good news was in the offshore operations — Australia, Brazil, Dubai, Hong Kong and Lesotho — which managed an almost 7% hike in sales to R305m and a 5.3% increase in after-tax income to R19m for the interim period.
Nu-World directors explained that the increase in revenue was primarily due to opening new markets and expansion in the division’s existing markets. Hearteningly, they indicated that they are working to increase market penetration in many regions, and have appointed additional sales and marketing personnel for the task.
With the international units now shifting towards a third of revenue and a much bigger chunk of profit, there is some encouragement to be taken from the directors’ opinion that “our international business will continue to grow and expand”.
In the prevailing climate it’s difficult to see Nu-World posting much more than 300c a share for the full financial year — not with additional economic uncertainty with a general election around the corner.
It’s worth remembering that peak earnings for Nu-World were reported in 2018 when the group notched 869c a share and paid a dividend of 327c a share. In 2021 earnings came in at about 650c a share, but the decline in the bottom line over the past few years will raise questions about the business model, no matter the prevailing weak economic conditions.
A potential forward p:e of about nine isn’t overly cheap for a small-cap counter on the JSE. Still, the value proposition at Nu-World remains compelling, with NAV reflected as R72.58 a share — more than double the current share price. If intangibles of R630m are stripped out, IM calculates intrinsic NAV as about R70 a share, with the diminished cash pile of R454m representing more than R21 a share.
Nu-World is an intriguing play across several fronts. First, a local economic recovery in the medium term would increase the top line and offer an opportunity to fatten margins in the South Africa-based operations.
Second, if South Africa only trundles along, hopefully cash flow can be prudently redirected to fortify the offshore positions — which could, and probably will, benefit from a weakening in the rand.
Third, there must be opportunistic investors pondering whether the long-serving executive team are ready to hand over the management reins to a new directional shareholder that can bring fresh strategic impetus to proceedings. Certainly, predators won’t be put off by Nu-World’s price proposition.
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