By Craig Martin
ARB Holdings Ltd (ARH) was founded in 1980 (34 years ago) by Alan Ronald Burke, now non-executive Chairman for the group, (his initials making up the name). It is a company that is at a really nice size, with revenue just over R2bn, trading on a market-cap of R1,5bn. It is at that size where some asset managers who operate in the small-cap space should sit-up and take notice.
One of the great things about this little business is that it has always been extremely cash generative and has consequently sat on a nice chunk of change every year. The last reporting period (to end of June 2014) indicated net cash resources of R198 million. The company has a history of paying great dividends and last year gave a total shareholder return of 50%.
The company can essentially be divided into electrical wholesaling (+/- 83% of revenue and 68% PBT(profit before tax)) and lighting supply (+/- 15% in terms of revenue, 19% PBT). There is also the Corporate division which holds the property portfolio (15 properties – independently valued at R163m) and generates revenue from IT and other services.
Clearly, the largest part of the business is the Electrical Wholesale business, of which the group owns 74% with the balance being owned by BEE partners, Batsomi Power. This part of the group currently operates 19 branches, spread across all 9 provinces, with approximately 600 staff and 6,500 customers. Most branches under the ARB Electrical Wholesalers (Pty) Ltd trade under the ARB brand, but one of the more recent acquisitions, namely Elektro Vroomen has maintained their brand identity.
On 2 January 2012, ARB acquired 60% of lighting importer and distributor, Eurolux. This company operates out of Cape Town and Johannesburg, employs roughly 250 staff and has clients spread across the country, including other electrical wholesalers, DIY and hardware stores. This acquisition was criticised by some at the time who thought that other electrical wholesalers might stop purchasing from Eurolux because of the association with ARB, but instead it has turned-out to well.
There has also been an attempt to form a company in order to house its product for which it has the proprietary rights to distribute in a seperate entity, namely CEDS – Consolidated Electrical Distrubutor (Pty) Ltd. To this extent, one of the first products for which CEDS has exclusive distribution is the CHINT range, which offers well-priced industrial electrical equipment manufactured in China.
Through this company, ARB have been able to gain access to unique products that they hope to have specified in tender documents. These include new five-year exclusive distribution agreements with CTC Global and Fushi Copperweld.
The biggest competitor across all sectors that ARB Electrical Wholesalers (Pty) Ltd operates is the largest electrical wholesaler in the country, namely Voltex, which is part of the Bidvest group. Voltex has more than 50 wholesale outlets across the country, but much like ARB, they also have specilised distributor divisions that also supply to other wholesales, namely Waco, Cabstrut and Atlas Cable Suppliers. The most significant competitor in the lighting space (competing with Eurolux) is Radiant Group (Pty) Ltd, which is part of listed company, South Ocean Holdings Limited.
Traditionally, more than half of ARB’s sales has been from cable, but this has moved to less than half of revenue, partly due to the addition of lighting in the mix and secondly as a result of pressure from competitors. Unfortunately, cable also has the smallest margins and is therefore not the most significant contributor to the profits. The smallest contributor to revenue is lighting, but this is also the area with the highest margins and I believe that growing their share of the lighting market will assist with overall margins going forward.
A key factor in ARB’s Financial Statements has always been its Balance Sheet and its impressive ability to generate cash. When the company came to market it raised R170m from new shareholders and immediately paid down R120m worth of debt.  In the last set of annual results, it had R197,6 million in ungeared cash. In addition to that, it has 15 fully-paid properties worth R163 million. The NAV of the company is at 303.2cps, meaning that it is currently trading at 2.1x book.
ARB has also enjoyed four consecutive years of both top and bottom-line growth Growth in earnings has come mainly from improved margins through purchasing power and operational efficiencies. The company has also made some acquistions, most notably Eurolux, which we think they picked-up for a bargain price. Industrial Cable Supplies was acquired on a multiple of 4 and ElktroVroomen and Paragon were also acquired for mainly their stock values. In fact, management have never believed in paying for goodwill, especially as they would often rebrand acquired wholesalers.
These acquisitions certainly assisted in achieving the recent growth and some credit the previous CEO, Byron Nichles for these successful acquisitions. Nichles has a background in corporate finance and was considered a master negotiator. He left ARB at the end of October to run Bearing Man Group (BMG), within the Invicta stable.
The current CFO of ARB Holdings, Billy Neasham, is acting as CEO. I would be disappointed if management did not continue growing through acquisitions and I suspect that Billy Neasham will stay on as CFO and the person they find for the permanent position as CEO will probably be able to move the group into a broader direction. It was indicated by the company at analyst presentations that they see themselves as “wholesalers” – not just “electrical” wholesalers. Therefore I would expect that the strategic direction might take ARB into entering other markets, perhaps plumbing, hardware or something along those lines.
Keep in mind that we appear to have experienced low activity in construction over the past four years. I expect that the next four years will see somewhat better construction activity, which should bode well for ARB.
ARB currently has a dividend payout policy of 40%. They have also been known to make special distributions in addition to the normal dividends. In fact, in September, they paid out a final dividend of 17.09c, plus a special dividend of 8.5c. This was higher than the 20c total dividend I was expecting for the year, and I suspect that in 2015 a total pay-out of more than 25cps will not be amiss. Â That would represent a yield of 3,9% on the current 640c share price.
ARB’s shares are currently 68% held by Directors and Management, so technically the free-float is around 32%. However, there are a number of institutional fund managers who already hold the share and as a result the share sometimes trades less than R1m per week. This illiquidity presents some risk to holders with a shorter-term outlook on the company.
An examination of ARB’s performance relative to the All Share over the past five years, shows significant outperformance. ARB would have given you capital appreciation of 248,4% (not including dividends) against the All Shares 80,1%.
If you consider that the historic PE is less than 13 and the dividend yield is just shy of 4%. It is trading at just over 2x book, of which a lot of net value is cash and paid-up properties. I think this offers value. I am very confident in management’s ability to consistently grow earnings and generate cash. To this end, I would recommend ARB as a reliable share for investors looking for good yield with potential capital appreciation. If you haven’t considered it for your long-term portfolio – you probably should.
