Independent investment analyst Mark Ingham has run detailed numbers on JSE-listed Imperial Holdings and likes what he sees. The group run by Mark Lamberti will show us later this month that it has managed tough economic conditions well and is likely to maintain a dividend payment that yields an attractive 4% plus at the current share price. But an even bigger attraction is the potential for it to follow its own version of the recent Bidvest/Bidcorp unbundling which generated a big bonus for shareholders. – Alec Hogg
This special podcast is brought to you by Easy Equities, Mark Ingham, an independent Analyst and the man we turn to at least twice a month to give us an update on good investment opportunities has been running his slide rule. I don’t know if you’ve even got one of those, Mark, but over Imperial, Mark Lamberti, your namesake’s group.
Yes, indeed. In fact, you mentioned slide rule, Alec. When I was a lot younger we still, in fact, had slide rules and sometimes they can be pressed into service, when the electronic gizmos fail us.
I’ve been looking at Imperial Group very carefully because it is one of those companies that have been at the top of the tree. I remember I was actually in Monaco with Bill Lynch when he won the World Entrepreneur of the Year. It was an incredible achievement by a South African, the only time it’s happened for a South African. That was in 2006, but after he passed on things have been a bit different at that group. We had his successor, Hubert Brody, who did a really good job in consolidating things and then Mark Lamberti came in more recently and has been following a different line.
Yes, very much so and I think a very proud history there with Bill Lynch, I think those of us who analysed the company for many years and have watched its progress remember Bill with fondness. He did tremendous things through the seventies, eighties, and the nineties and deservedly, I think one of the recognised top business people in this land, an immigrant to South Africa who arrived with not terribly much, but made good and Imperial today is one of the leading logistics and vehicle retail groups in the country and indeed spreading its wings around the world.
It is a company that is subject to business cycles, the ups and downs of interest rates and of course the vehicle market which goes through various peaks and drops and we’re in that lower point of the cycle now, and I think possibly the group, as an investment is perhaps one of those maybe slightly underrated industrial companies on the exchange and so I’ve been doing some number work on it. I think in the context of some of the new strategic initiatives that Mark Lamberti has brought about, looking at it on some of the parts basis and getting to a value that is somewhat higher than what the share price is at the moment.
They do have interim results coming out later this month, 21st of February, what are you anticipating will come in those numbers?
We’re looking at core earnings down by about ten percent, with EBITDA down probably single digits. I think that’s not a bad outcome, given the fact that they are in tough trading times, so earnings will be down a bit, but that’s a fairly good achievement in the context of where we are and I think you will see the balance sheet in fairly good shape too. They have been realising some assets, there’s been a fair amount of tidying up in recent months, some real estate assets have been realised for cash, minorities in AMH and Midas have been bought out and as I mentioned there’s been a structural reorganisation of the company, so I think at the results we’ll probably get further insight from Mark on progress in that regard.
Just dwell a little on that, if you would. The sale of some of the assets, in fact, cleaning up the balance sheet, they did sell MiX Telematics, which I know Hubert Brody was terribly excited about, a company listed on NASDAQ, obviously, Mark Lamberti had a different view of it.
Yes, I think when Mark Lamberti came in, he became CEO, effective March 2014, he succeeded Hubert Brody. Mark has run a keen eye on the business (I think a fresh perspective is always healthy) and he felt that for the group to go into the future maintaining many of the strengths that it had and indeed still has, but really looking at it and saying, “Well, what is a thoroughly modern Imperial going to look like and indeed is the structure optimal, given the environment that we’re operating in and the growth ambitions that we have?” After much deliberation, the group was rejigged and I think it sets the company up potentially for two separate listings along the lines of the Bidcorp from Bidvest, which is very successful and unlock value for shareholders.
Certain assets, as you correctly refer to, Alec, such as MiX Telematics and one or two other assets, you know were relatively small in the context of the group and in so far as the new strategic imperatives were concerned, it didn’t fit in properly. So, those have been sold off and as I mentioned, there’s real estate that’s surplus too requirements that’ve been realised too. What we have now, as we speak are two distinct operations, one of which is Imperial Logistics and the other is Motus Corporation, which comprises the vehicle retail and related assets, including financial services.
Those two as you mentioned earlier could go the way of Bidvest and Bidcorp. Before we get into that detail, you said it was successful with Bidvest and Bidcorp, people who bought the shares in anticipation, have they made a good return in the Brian Joffe example?
Yes, if you look at the two operations, if you look at Bidvest at the moment, at about R150, if you look at Bidcorp at about R230, that combined gives you R380, call it R400 which is a very tidy premium to what the combined Bidvest Group, including the food assets was trading at prior to the deal last year and so I think that’s a very good example of a company having a good, hard look at itself, a very successful company, Alec, you know very well and Brian of course being one of the top business people in this country too, but not standing still, having a good, hard look and saying, “Can we do better?”
I think that’s the sort of thinking that Mark has been bringing to bear at the group and saying, “Well, possibly the assets would form a better grouping in their own silos”. There isn’t a hell of a lot of synergy overlap if you will, between the logistics business and the vehicle retail businesses. So having two focused entities ploughing their own furrows, it certainly makes sense and in terms of the financial work that I’ve done, you get a fairly neat split from a market capitalisation point of view between the two distinct entities.
Well, that’s good, so that’s the upside or potential upside, the surprise if you like, or maybe even a bonus for shareholders buying today, but if it doesn’t happen are you still comfortable that at today’s share price around the R169 level, offers value at Imperial?
Yes, I think where we are at the moment, if we take the current share price; you’re on a forward PE of about 10.8, the dividend yield is about four percent on a gross basis, which is a very handy yield. I think it’s fairly priced, just back to my earlier comment about interest rate sensitivity, this was one of the companies that was affected by Nenegate in late 2015, and we did see the stock down to approximately R100 earlier in 2016. So very much in line with the turmoil we saw in the markets at that time, long bonds spiking up by 200 basis points and Imperial in tandem with other interest rate sensitive stocks, banks particularly, was affected by that, but I think as some stability came through during the course of 2016, we saw that share price recover quite sharply and I think it’s probably fairly pitched at the moment, at these levels going back to your point that if an unbundling does not occur, it’s fair value at these levels, but I wouldn’t necessarily be chasing the stock.
So you’re actually buying the stock at 2016 prices, at the price level that it was at before that knockoff from Nenegate and South Africa being what it is, this is clearly one of those shares that will eventually recover no matter what gets thrown at it by the politicians, so maybe it’s one to do your homework on and then keep it in the back drawer, you know what is in there, you know what it’s worth and if there were to be a shock, go in and  grab.
If we did have one of those black swan type of events and we had a repeat of the turmoil (we of course wish to have a stable outlook and we would not like a repeat of that). I’m hopeful that that won’t occur, but I think if we did have another shock to the system, there’s no doubt that this is one stock that probably would be impacted, not because of the company per se, but because of the macro factors that would be prevailing, but in that situation, if you did get a correction downwards along the lines that we just mentioned, then it’s one of those stocks that opportunistically you would want to pick up, for the simple reason, it’s a resilient business, it has some sound management, great leadership.
I think over the cycles through thick and thin, from when Bill was running it through to Hubert and now Mark, this is a company that’s gone through tough times, survived tough times, and indeed prospered, so I feel that this is one of those undervalued situations. I think analysts are always challenged to try and find stocks that perhaps aren’t especially loved, but which can deliver fairly sound numbers over a period of time and I think we also need to remember that this is a company that has typically paid a good dividend and there are a number of investors out there who I think would see the merits of this type of company and the relative income stability that it can also provide. Bear in mind that in terms of that yield that I’ve just mentioned, I have factored in that the dividend would probably come off in tandem with earnings this year, but notwithstanding that, still offering a fairly decent return.
What kind of dividend yield are you working into your numbers?
At the moment on a forward basis, I’ve got it at 4.2 percent and so that sort of number would incorporate approximately a ten percent decline in the annual divvy this year.
Over four percent is pretty juicy, given where interest rates are trading.
Well, that’s right. If I assume a ten percent decline in line with earnings this year, that’s approximately 715 cents as the divvy, that’s not bad in relation to the other options that you have out there.
You did mention, and of course the Nenegate shock that came to the system did affect interest rate sensitive stocks. This is a company that has a lot of debt, R16bn in debt, doesn’t that worry you?
I think we need to distinguish what type of debt. A lot of it is asset-backed, and particularly with respect to the real assets that they have on their balance sheet, trucks and cars and so forth. If you take vehicle rental, for example, that typically is a geared structure, Barloworld is exactly the same, so the balance sheet ebbs and flows with the fleet that you have, so it’s not what I would refer to as debt-debt, it’s part of, I think a well-managed capital structure that a business model of this type would have. I have factored those debt calculations into my value of the company and as a rule of thumb you end up with a net equity value for the logistics business that’s excluding nett debt of approximately R9bn.
That would give you an enterprise value of approximately R25bn, an equity value of between R15-16bn, which would equate to close to R80 per share. Then if you take the vehicle retail business separately and back out debt, you start with an enterprise value of R25bn roughly in line with logistics at a slightly high equity value simply because the net debt is slightly lower. That would give you an equity value in the R19-20bn region, almost close to R100 per share. Then if you look at other assets and you look at other associates at fair value, you could probably look at another asset or 2.5 on that or approximately R13 per share. So, in terms of the capital structure, I feel fairly comfortable and it’s not out of line with what we’ve seen in the past.
Adding those numbers up very quickly in my head gets you quite a long way above the R169 that Imperial’s trading at the moment.
Yes, you know I think as a rule of thumb, it’s not an exact science valuing a company, but you’re getting close to R200 per share, which is R30 or so north of where we are at the moment. That would give you respective PE ratios on logistics, 11.9 approximately ten times for vehicle retail and financial services and it results in EBITDA ratios respectively at 5.8 and five times. Those sort of multiples are very competitively pitched against other companies and indeed you could maybe argue that I’m erring on the side of caution here, but it does indicate that there’s a little bit of fat between where we are at the moment and what the company could actually be valued at going forward.
From a longer-term perspective an appealing part is that this is a company that’s managed to compete internationally. I visited the operations on the Rhine, courtesy of an invitation from Hubert Brody a few years ago and was very impressed with the way that not only they’re competing there, but in fact, grabbing market or gaining market share, how big is the offshore component now, of Imperial?
You’ve got a business that is growing abroad. They just recently bought Palletways in Great Britain. That is a specialised pallet logistics business that operates in a number of countries through Europe and I think that was a very good deal, so that will affect the half-year numbers. South Africa this year from a revenue point of view, will just be over half total group revenue. Then you have Europe, Australia, Latin America, about a third of group revenue, and then Sub-Saharan Africa will be over ten percent.
Already you can see that this is a company that almost by stealth is rapidly going global and I think in that light and given the strategy that the company is actually pursuing, clearly given the market shares that they have in South Africa, there isn’t much scope for them to expand within the existing sphere and so I think you have good cash generation assets in South Africa, well established in their respective markets, but that gives you a good platform on which to build your business out of South Africa, not necessarily fleeing South Africa, but I think it’s a prudent, strategic move to actually spread your risk and particularly to spread your currency exposure too. Bear in mind that they import cars like Kia and Hyundai, they’re very exposed to the currency, it’s difficult to pass that on, so spreading the mix of currency makes sense.
Over some years, they’ve built up a financial services arm, Regent Insurance being the most obvious part of that, but Lamberti doesn’t really want to be there anymore. Are you expecting that there’ll be some shakeup on that side?
Yes, the non-South Africa ops of Regent have been sold to Hollard. The competition commission did prohibit the sale of the South African business, so it’s with the competition people at the moment and the tribunal will have the final say, but in terms of the funding side of things, that will remain for the time being. I think if we go back to Bill’s days, he saw it as quite important to capture a number of parts of the value chain associated with vehicles. It wasn’t just selling and maintaining the vehicles, but it was providing funding for them and also to have them insured. He really came through with this approach of capturing different bites of the cherry throughout the vehicle value chain and he did that very successfully.
Alright, so let’s sum it all up here. We have a valuation with unbundling of R200 plus, we have a share price of around R169, so if the unbundling comes through, good news indeed and certainly all things seem to be pointing in that direction. You have an entrepreneurial expert in Mark Lamberti, who in fact created Massmart, who is now at the helm and is shaping up the group for better things into the future and it is also expanding internationally which would be a big plus for the company. At this share price though, is it one that you’d be happy to put the money of widows and orphans (I mean I’m sure you would have been at R100 after Nenegate), but are you comfortable there or would you be waiting?
Given the current political environment and uncertainty on that, you may want to keep your powder dry for a little longer. We would hope that there aren’t any nasty surprises and that they’ll be relative, their stability in some of the key portfolios of government, but I am cautious in general, and not specific to this particular company, Imperial, but I am quite cautious at the moment. I’ve pretty much said to clients, “I think it’s a good time to keep your powder dry. Be quite cautious of certain categories of stock and not least those linked to interest rates and the sentiment that prevails around that towards the macros of the country and the stewardship of the country”. With that in mind, I’m of a view that, let’s wait and see, there’s no rush, but I think in a relatively stable environment, if we can have that then this is certainly one of those stocks you would want to take a look at and put on your radar screen to purchase.
Independent Investment Analyst, Mark Ingham talking to us there about Imperial and this special podcast was brought to you by Easy Equities.
