Time for a closer look at Insimbi

Specialist commodity plays, cash-spinning small caps and deep-value opportunities are all the rage on the JSE again.

Yet the market seems determined to overlook a share that ticks all these boxes — Insimbi Industrial Holdings, which, for want of a better description, operates as an "above-ground miner".

The group certainly has had its share of poor timing. Insimbi listed in 2008 just as the subprime crisis smashed market sentiment, trying to place its shares between 80c and 115c each. At that stage Insimbi was largely a commodity-trading operation specialising in ferrous and nonferrous materials — an effective supermarket for the foundry industry.

There have been several acquisitions to diversify the operational base since, most notably the 2016 purchase of scrap metal specialist Amalgamated Metals Recycling for R284m. The group now offers a far broader operational spread across the ferrous, nonferrous, plastics and refractory industries.

That said, the outbreak of Covid put Insimbi firmly on the back foot, just as the business was looking ready for a powerhouse profit performance. According to last year’s annual report, the group estimated it generated, conservatively, R800m-R1bn less revenue and R75m-R90m less operating profit than foreseen for the financial year to end-February 2021 as a result of Covid.

The share slunk to under 60c by mid-2020, even reaching a low of 50c in December 2020. A year ago Insimbi was still trundling along at just above 60c.

The share has since rallied back to about 100c, driven first by the sparks of optimism in the financial report for the year to end-February, and later by a very solid interim showing to end-August 2021.

While it might be easy to argue that the easy money has already been made, there could still be considerable upside in Insimbi’s shares. The half-year numbers showed revenue up 48% to R3.1bn, with net profit increasing more than 10-fold to R46m. Cash generated from operations jumped 46% to R121m underpinning the interim headline earnings number of 11.22c a share.

The interim performance was buoyed by fair trading conditions across most segments. At the release of the half-year results in October last year, CEO Fred Botha said: "Our target industries and markets all seemed to have the wind in their sails and our core operations have performed well despite challenges in some segments. Volumes and revenues are back to — and even exceed — pre-Covid levels, and our products are in demand both locally and for export."

With metals markets still vibrant, it does not seem unreasonable to expect that Insimbi will continue to benefit from robust trading conditions through the second half.

But Botha cautions that Insimbi works in a sliver of a margin. "We are a simple business. We buy stuff, process it and sell it. We are highly cash generative, but our margins are thin, as we ultimately are traders."

Investors might expect a trading statement near the end of March. But it’s possible to pencil in potential earnings scenarios for the full year. It seems safe to assume that Insimbi should produce at least 10c a share in the second half, pushing full-year earnings to 21c a share. That would put the group on a five times earnings multiple, with the possibility of the dividend being resumed.

Aside from not being researched by the professional investor community, Insimbi unfortunately also has no real peer on the JSE, though commodity trading and mining giant Glencore is afforded a much headier 18 times earnings multiple. Australian listed metals recycler Sims trades on a 13.5 times earnings multiple.

But with companies like steel giant ArcelorMittal and aluminium group Hulamin set to benefit vastly from improvements in their respective commodity prices, a 10c a share estimate for Insimbi’s second half may well be on the light side. If the business manages to post earnings of closer to 25c a share, the share is trading on a forward multiple of just four times.

In terms of assessing the potential earnings range, one also needs to remember that Covid had a profound effect on Insimbi. The company engaged in a brutal cost-cutting exercise "which was necessitated by circumstances but which now has become a core discipline and focus area", said Botha. Last year the group’s workforce was trimmed by almost 20%.

Of course, with strong second-half cash flows Insimbi will look to cull its debt further, and, no doubt, mobilise a chunk of funds for share buybacks. There does appear to be a weak holder in the market, and perhaps one of the few institutional shareholders has a new mandate not to hold small-cap shares. A mop up after the release of the full-year results might be hugely helpful.

The temptation, though, is that Insimbi looks a prime candidate for making an offer to minority shareholders and a delisting. Executive management speaks for about 45% of the issued shares, and it could cost R300m-R400m to pitch a premium-priced offer to shareholders.

The owner-managers must be well aware that the share price has not followed the growth in top line and earnings over the past eight years. But Botha is philosophical: "I don’t watch the share price every day. But there are a lot of things we are considering. We will be going into the new financial year better placed to make decisions about our future. For the time being it’s about getting the margins thicker and getting cash flows up. We don’t want to get too far ahead of ourselves."