By Chantal Marx, Pritu Makan, Sithembile Bopela, Hashmeel Suka, Jalpa Bhoolia & Zimele Mbanjwa
Grindrod (GND)
Grindrod is an industrial service holding company, operating primarily in the freight (road, rail, sea and air) and logistics sectors across more than 20 countries (including South Africa). Through various associates, subsidiaries and joint ventures, the group provides a wide range of quality services and integrated solutions facilitating cross-border trade and cargo transport.
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Some of the company's largest customers operate in the mining, agriculture, and energy sectors. Most of its core revenue is derived from the handling and transportation of hard (metals and minerals) and soft (grains and sugar) commodities, also known as dry bulk. In addition to this, the company handles and processes shipping containers, break-bulk and even vehicles.
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Investment into the port of Maputo (via the Maputo Port Development Company, MPDC) has continued to pay off. The port is suitably located as a gateway to the sub-Saharan Africa region and is near the Gauteng industrial hub as well as the Mpumalanga and Limpopo mining areas. Operations at this port are expected to provide unwavering support to the business amid ongoing port infrastructure challenges in South Africa.
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The impressive FY23 result was underpinned by strong revenue and operational performances from both the Ports & Terminals and the Logistics businesses, with healthy cargo volumes complemented by improved efficiencies and rigorous cost controls.
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The group has sufficient cash resources (cash & cash equivalents: R2.1 billion) and a healthy balance sheet (gearing: 47.5%) to accommodate growth opportunities that may arise within the market. In particular, we see scope for Grindrod to benefit from port and rail liberalisation in South Africa.
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Management remains committed to investing for the future (FY23 expansionary capex: R500 million) and this should contribute to stronger gains going forward. This is complemented by improved management focus after a period of divestment from so-called non-core operations.
Grindrod is trading on a forward PE ratio of ~6.2 times and an expected dividend yield of ~5.8%, which is quite attractive. We believe that market conditions (particularly in SA) will remain favourable to the core business over the near term.
Dipula (DIB)
Dipula is an internally managed, South Africa-focused REIT that owns a portfolio of retail, office, industrial and residential rental assets, with most of its assets located in Gauteng. Strategically, Dipula remains focused on innovative, diligent asset management and prudent balance sheet management to deliver consistent and sustainable financial returns.
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The company has a defensive portfolio with a bias towards convenience, rural and township retail centres. Most of its income is derived from A-grade tenants, with government and local authorities being the largest tenants (in terms of income contribution) followed by several blue-chip retailers.
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The portfolio has a strong track record since listing in 2011 (key metrics remain solid with further improvements expected) with management remaining agile and repositioning the portfolio to capture opportunities as market dynamics shift.
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The group is continuously reducing its risk through a range of value-add strategies. Dipula also remains focused on innovative, diligent asset management and prudent balance sheet management to deliver consistent and sustainable financial returns.
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The group is also focused on sustainability, which includes the rolling out of solar and the installation of energy efficient lighting, water saving and refuse recycling. This helps reduce any disruptions to trading and is supportive of footfall and tenant sales.
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The company's debt profile is relatively healthy with a conservative loan-to-value ratio of 35.7%, with further improvement expected as management plans to use a portion of the proceeds from recent disposals for debt repayment.
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The fund is internally managed, providing further control and efficiencies. This bodes well for governance and compliments the group's overall goal of delivering steady and sustainable growth over the long term.
Despite the tough underlying macroeconomic environment, Dipula's defensive retail, industrial and residential portfolios position it well to navigate the expected economic headwinds and a volatile office sector. In terms of the different sectors, the group has seen some green shoots in the office sector as companies return to offices in varying degrees, however, a significant improvement in this sector is highly correlated to economic growth. Demand for retail space remains robust as tenants continue to expand their locations. The industrial sector remains strong with the lowest vacancies recorded. Affordable residential rental occupancies are expected to remain high in the short to medium term due to high interest rates and low disposable incomes.
Dipula is trading on a forward distribution yield of ~12.8% and a 42% discount to NAV, which appears attractive. We like the quality of the portfolio (particularly the defensive convenience retail centres), the experienced management team, and overall operations.
AECI (AFE)
AECI provides a diversified portfolio of products and services to customers in the mining, water treatment, plant and animal health, food and beverage, infrastructure, and general industrials sectors globally. The group maintains a strong market position across its businesses which are managed through four growth pillars, namely Mining, Water, Agri Health, and Chemicals.
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It is highly exposed to the mining and agriculture industries and their inherent cyclicality and an expected rebound in the mining capex cycle will provide positive tailwinds. Moreso, the company has diversified its earnings base to reduce cyclicality over time.
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In the face of heightened competition internationally, continued geographic diversification into the rest of Africa, Indonesia and South America will help de-risk the business from relying on (and having exposure to) weak SA macros, providing an offset.
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A global slowdown in the traditional drivers of industrial commodity markets, macro weakness as well as customer destocking have led to lower market demand and in turn, weaker prices. AECI's Chemicals business has been weighed by this lower demand and pricing pressure, however, this is expected to improve as pricing normalises and expansion in ex-SA territories gains traction.
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We expect the company to benefit across the board from a general uptick in government and private sector spending, particularly in water infrastructure as a decades-long underinvestment by the private sector is reaching a crisispoint. The group is well positioned given its comprehensive water treatment, process chemicals and equipment solutions to customers in the Public, Industrial and Mining sectors across the continent. Management is also focused on expanding its water treatment technologies across mines in broader Africa, while complying with environmental and sustainability mandates (reducing total water usage and intensity).
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Recent full-year results were mixed but showed a mostly positive performance on the balance of factors. The bottom-line was softer due to the impact of the elevated interest rate environment driving increased finance costs due to restructuring efforts and working capital requirements, but well guided for.
Debt reduction and overall strengthening of the balance sheet as well as better management of working capital are management's key areas to focus on near term. This, coupled with a clear roadmap for disposing of noncore assets, will underpin the group's strategic goals of doubling the profitability of the core mining and chemicals units by 2026 and further the internationalisation of the mining business to become a leading global supplier of explosives, detonators, and mining chemicals. Water is still a small part of the business (~5% of revenue and EBITDA), but we are positive of strong growth in this space medium to long term.
AECI is trading on a forward PE of 6.0 times, a sizable distance from its fair value range. Compared to its peers, the stock remains attractively priced.
Afrimat (AFT)
Afrimat has grown through acquisitions and has evolved into a multi-commodity, mid-tier mining and materials company, which is able to produce and supply a wide range of products including Construction Materials (aggregates, bricks, blocks, pavers, ready-mix concrete and more recently cement), Industrial Minerals (lime and lime products), and Bulk Commodities (iron ore, anthracite and manganese). It also supplies mining services which include drilling and blasting, and mobile crushing and bid preparation services. Afrimat has a wide-ranging geographic footprint, with its end market being both local and international.
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The strategy to diversify between commodities and revenue streams, coupled with stringent capital allocation, has enabled the group to weather economic and commodity shocks.
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Afrimat's agile nature allows it to service major infrastructure and construction projects for public sector and government-owned enterprises, as well as small private sector contracts.
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Afrimat boasts an exceptionally experienced executive and operational management team that has a superb track record in acquiring, assimilating, and then growing businesses.
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The most recent acquisition of Lafarge South Africa, is set to create value for Afrimat through the significant operational synergies of its construction materials business with the well-established operations and product offerings of Lafarge. The group will benefit from increased national market share, operational efficiencies, and increased product volumes.
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The balance sheet remains strong, the group remains profitable, and is sufficiently cash generative. An exacting focus on capital allocation and cash conversion has ensured the group's ability to be a consistent dividend payer over the years.
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For the interim period ended 31 August 2023, Afrimat reported resilient results with the group benefitting from its diversified portfolio that acted as an efficient hedge against volatile operating conditions. In the trading statement for the year ended 29 February 2024, management guided for an increase of between 21% and 26% in headline earnings per share (HEPS).
Going forward, we expect Afrimat to benefit from construction activity related to the continued shift to renewable energy infrastructure. Its Future materials metals segment should also benefit from the secular shift. Closer public - private sector collaboration in the repair, maintenance, and expansion of South Africa's logistics, electrical and water infrastructure (e.g., Operation Vulidlela) should be a major medium to long-term driver. Lower cost of capital once interest rates start to go down may also bode well for the company as more leveraged construction projects pick up pace.
Afrimat is trading on a forward PE of 8.4 (times and EV/EBITDA of 4.7 times, which seems compelling given its expected growth trajectory and optionality related to the Lefarge acquisition. Relative to its peers, it trades at a sizable discount.
AdvTech (ADH)
The ADvTECH Group is one of the largest diversified education, training, and placement groups in South Africa. Brands in the company's impressive portfolio include Varsity College, Vega, Crawford Schools, and Trinity House.
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The company holds a strong position in the private education market - this is a defensive sector which is expected to continue growing over time.
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Historically, the bulk of Advtech's revenue is annuity driven, which improves forecast accuracy.
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The tertiary sector has started to do very well as brand awareness and the need for alternative options outside public university become more prominent.
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Schools generally have very low levels of bad debts. While it is a little bit higher in the Tertiary space due to drop-outs, it is still relatively low compared to other services industries.
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The business is focused on centralising shared services at a head office level, which will continue to remove duplicate costs from the business.
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The year-end results (to December 2023) were solid and well received by the market. Growth was driven by higher enrolments and moderate fee increases across all parts of the education division together with enhanced operating leverage. The resourcing division continued to benefit from positive momentum in rest of Africa business, which offset a pullback in SA that was adversely impacted by disposals and a tough trading environment. The consistent growth trend and continuing strong cash generation, together with a robust balance sheet and reduced borrowings, has also given the board the confidence to increase the dividend at a significantly higher rate than the growth in earnings.
The group's strong financial performance and solid balance sheet are evidence of a sound business model, with management remaining focused on key market drivers as well as strategic initiatives surrounding effectiveness and efficiencies.
ADvTECH is trading on forward PE of ~13.3 times, which still appears fair within the sector. The group remains uniquely positioned to leverage off its brands, structures, systems, and financial strength to benefit from the growth in demand for education that is anticipated to continue in SA and rest of Africa longer term.
