In February I was asked to pick a selection of stocks — a proverbial power portfolio — to hedge against Eskom’s inability to supply sustainable electricity.
Stretching the brief somewhat, I included industrial conglomerate enX, which holds a small power solutions cluster under New Way Power (NWP). In results to end-August 2022 the load-shedding regime had switched NWP from a R37m loss to a profit of R10m off a 24% jump in revenue to R397m. While that represented a flicker of hope, at the time I suggested NWP was probably too small to really move the needle at enX.
Even without the Eqstra business (set for disposal in the next 12 months), a new-look enX had (much) bigger continuing operations in lubricants and chemicals. In fact, at that point, NWP represented less than 10% of enX’s turnover and less than 5% of profit before tax. I did, however, note in my February article that though NWP was small for enX to be tagged an “Eskom hedge”, “sentiment can change quickly in the prevailing power predicament”. And so it came to pass.
This must be one of the more inspiring turnarounds I have seen for a while
NWP — which, for the record, designs, manufactures, installs and maintains diesel generators and offers temporary and renewable power solutions through solar, hybrid and grid alternatives — is now the biggest profit contributor at enX. This must be one of the more inspiring turnarounds I have seen for a while — perhaps even more impressive than the King and I turning around a 6-0, 3-0 deficit against a rampant Fish Hoek in the recent tennis league season.
Recently released full-year results to end-August showed NWP raking in a reassuringly chunky R85m in aftertax profits, coming off a 72% jump in revenue to R683m. Only a few moons ago NWP was still trading in the red! On the other hand enX’s lubricants and chemicals segments, which are both more than twice the size of NWP on a revenue basis, showed aftertax profits of R70m and R71m respectively in the year to end-August. If we can pessimistically presume that load-shedding will be a fixture for the next few years, enX’s operational profile has an interesting new look.
One might even ask whether a less-than 5 earnings multiple is still applicable. For now, another sumptuous special dividend will be the main draw for punters, and then it might still be some time before the small-cap aficionados start assessing enX without its Eqstra core. With scepticism still rife in the local investment community, punters will probably be inclined to deem any burgeoning alternative power play a passing fad, even if there is still an overriding sense that efforts to recharge a flickering Eskom might not quickly gain traction.
There will also be fiercer competition as more players pile into alternative energy supply, which could take their toll on what are now healthy margins. Certainly Reunert, which has a much bigger alternative power offering than enX, is not, to my mind, getting the market rating associated with a growth share plugged into South Africa’s one economic sweet spot.
Still, enX says NWP’s trading into the new financial year is “robust, with load-shedding-induced opportunities”. The group also notes improved pricing on data centre power units, as well as a good order book. The move to supply photovoltaic systems (which kicked off in late 2021) appears to be gaining momentum. One to keep an eye on, methinks.
Having finally taken some long overdue adult decisions about personal finance (my old colleague Bruce Cameron would be rolling his eyes), I feel a little more in touch with the broader insurance sector
Having finally taken some long overdue adult decisions about personal finance (my old colleague Bruce Cameron would be rolling his eyes), I feel a little more in touch with the broader insurance sector. That said, I’m not sure the lower short-term premiums that I so valiantly struggled for can compensate for the ire of both my wife and my son at having their eccentric driving habits monitored by a recording device.
Sensible move
One little deal that did not catch huge headlines last week was specialist life assurer Clientèle’s R1.9bn acquisition of 1Life Insurance. I initially thought Clientèle might be looking at Assupol. But buying 1Life, a direct distribution operation focusing on the entry-level mass market, seems to make a heap of sense.
Merging their operations creates a mass market juggernaut with a combined embedded value of R7.8bn and almost 1.5-million contracts. Interestingly, 1Life vendors are happy to be settled in scrip at R16,25 a share, a sizeable premium to an R11 share price and much closer to Clientèle’s embedded value a share.
Telesure Investment Holdings, the sellers, will secure more than a quarter of the enlarged entity’s issued shares — a heck of a vote of confidence in the success of the merged business.
For the record, 1Life held a NAV of R1.7bn at the end of June this year, while profit after tax came in at almost R153m. Clientèle’s shares have been slightly weaker in recent days and could offer an opportunity for long-term investors if the trend continues.
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