ARB Holdings: An unappreciated electrical wholesaling jewel

By Alec Hogg

MOOI RIVER – A good friend involved in a listed industrial group put me onto one of the exciting stocks to be featured in our show tonight. As you can’t beat an endorsement from a competitor, when he started waxing lyrical about Durban-headquartered ARB Group my ears flickered. OK, not really, but when you’re around horses as much as I am, you feel like their habits rub off.

Having had a look at ARB’s financial statements for the year to end June, I get what my friend is on about. ARB is a 32-year-old business founded out of an empty container box by controlling shareholder (50.3%) Alan R Burke (ARB – geddit). It retains many of the great strengths of a family controlled business like no borrowing, a sustainable growth trajectory, a conservative board of directors and a squeaky clean balance sheet. Although Burke is no longer involved in the day-to-day operations, he still serves as non-executive chairman and with his controlling block can ensure no foolishness is allowed. Very comforting for outside investors.

The shares were listed on the JSE in November 2007, catching the tail-end of construction boom. ARB raised R370m from investors at an issue price of 530c. The stock peaked at  565c, valuing the business at R1.33bn. The price tumbled during the next couple years to just 120c, valuing the business at R280m. Talk about Mr Market swinging from manic to deep depression.

The smart money has moved in during the past couple years with ARB’s shares rising steadily to their current 330c translating into a market value of R775m. In that no-man’s-land where there are not enough shares available to get the big institutions excited, but plenty enough for small investors to fill their boots. Which, at the current price, they should be doing.

ARB is a solid business that’s performing well. At the end of June it had R266m cash in the bank (with, I repeat, no debt). Around a third of that cash was today set aside for the purchase of 60% in one of the group’s suppliers, high quality lamps and lighting importer Eurolux which has itself been around since 1991. The two companies have a long relationship  and highly complementary businesses. This is the kind of  sensible deal you’d expect of a company where the founder still have the major say (it’s cash-based so doesn’t dilute existing shareholders; and the target company’s management are incentivized by retaining 40% of the equity). You wouldn’t expect otherwise when the chairman can Burke can rely on experienced industrialists on his like Boel Pretorius (ex Reunert) and Ralph Patmore (ex Iliad and Group Five).

Be very interesting to hear on radio tonight whether our experts share my upbeat view on the stock. But with continued growth expected this year securing at least last year’s 25c distribution to shareholders, ARB’s shares offer a tax-free yield of 7.6% with the probability of capital growth to come. Definitely one for your short-list.

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