Reunert has weathered excess capacity and produced commendable bottom-line growth, while still holding onto the cash from the disposal of Nashua Mobile’s subscriber bases, which is earning decent interest income. The group is sitting on a cash pile of R2,7bn with an unlevered balance sheet.

Management says the funds will be aimed at de-risking operations by diversifying currency income streams. It generates 83% (FY 2014: 84%) of revenue from South Africa.

While we feel there are other value-enhancing possibilities such as a special dividend or a share buy-back programme, it does seem conducive to buy related businesses at a bargain.

This is particularly so given the deteriorating business environment for its sectors, which rely heavily on both public and private capital spending. According to a Moneyweb report, corporations are not spending cash, with the top-100 JSE-listed companies sitting on a record R403bn.

This is not surprising given the poor investment climate characterised by a low-growth economy, commodity price crunch, power outages and unreliable water supply. And government is fidgeting with its much-hyped R1 trillion infrastructure roll-out.

Reunert’s revenue growth of nearly 7% is commendable given the cyclical nature of its businesses and its heavy reliance on capital expenditure. Most of Reunert’s close peers have been beaten down, registering negative growth during the 2015 reporting season. Exports to Asia and the rest of Africa grew, while Europe shrank marginally and other markets remained flat. The 50% drop in attributable earnings emanated from the recognition of profit from a discontinued operation (Nashua Mobile subscribers) in the prior year.

Otherwise, attributable earnings from continuing operations rose 146% to R952m. Costs were well contained, boosting the operating margin to 14,1% from 7,5%.

The board declared a gross final cash dividend of 302c/share (FY 2014: 275c/share). Including the interim distribution, the annual dividend adds to 407c/share (FY 2014: 370c/share), translating into a healthy dividend yield of 6%.

The company has maintained good metrics over the years. It is trading on a price:earnings multiple of 12, which compares favourably to close peer Altron (negative), its industry (15) and the all share index (19). Its dividend yield has bettered its peers over the past four years and its yield, now at 6%, beats Altron’s 4% and the all share index’s 3%. Reunert’s average return on equity of 23% and return-on-assets of 15% over the past four years is also superior to Altron (3% and 1%). Reunert has a net ungeared position whereas Altron has a net debt:equity ratio of 49%.

Sectoral fundamentals remain bearish but we are encouraged by the growth Reunert experienced despite demand-side challenges. The group has secured a number of new long-term contracts in applied electronics that are expected to start paying off in FY 2016. These have a hard currency exposure and are expected to bolster operational performance, given the rand’s weakness.

Furthermore, its cost-containment exercise should continue to expand margins and the cash holdings create a platform to take advantage of value-enhancing opportunities.

Since 2010, Reunert’s share has struggled, increasing only 25% while the all share index has almost doubled. Overall, prospects are not very exciting and we believe the counter is trading within its intrinsic value but with reasonable upside potential should the macro picture improve.

Bull factors
–Sizable cash pile can be used for value-enhancing strategies
–Drive to grow a multi-currency earnings stream

Bear factors
–Overcapacity due to lack of capex and government infrastructure spend
–Because of lagged contract pricing, falling copper prices put pressure on margins for transactional sales

Nature of business
A portfolio of businesses in the fields of electrical engineering, information and communication technologies and defence and allied technologies. Reunert’s operations are divided into three divisions: CBI Electric, Nashua and Reutech. The group operates mainly in South Africa with minor operations in Australia, Lesotho, the US and Zimbabwe.

Disclosures

The analyst has no financial exposure to the instrument discussed. The opinion represents his true view.