An investment case for Reunert

Ahead of Reunert‘s annual results, expected on 20 November, BusinessTech assesses the investment potential for this South African technology group.

Reunert’s group of companies include ICT group Nashua, Nashua ECN, formerly ECN Telecommunications, Reutech, offering military electronics and radar products, and CBI Electric, an electrical and telecoms cabling business.

Reunert purchased ECN in March 2011 to make a play in IP based telecommunications services, adding converged voice and data capabilities to it’s subsidiary Nashua Mobile.

Reunert also recently merged two key business units, Nashua Communications and Nashua ECN.

On 8 November, the group indicated a decline in expected earnings for 2012 attributed the decline to the abnormal gain of R346.4 million from the sale of its investment in Nokia Siemens Networks South Africa in January 2011.

That transaction was excluded from the calculation of headline and normalised headline earnings per share in the comparable period in the prior year.

The group advised that it expects earnings per share for the year ended September 2012, to be between 17% and 22% lower than the 809 cents in 2011.

However, it noted that it expects that both headline earnings per share and normalised headline earnings per share will be between 7% and 12% higher than 598.3 cents and 590 cents, respectively, as achieved in the prior reporting period.

In full-year results for 2011, Reunert reported revenue of R10.92 billion and an operating profit of R1.39 billion. It also announced a final dividend of 253 cents, up from 220 cents in 2010.

Share price

Reunert’s share price over the past five years has endured a roller-coaster ride, from a high of R80.94 in November 2007, to a low of R34.25 in February 2009, and then climbing steadily to a peak of R79 at the end of last month. In trade on the JSE Friday (9 November), shares in Reunert traded at around R76, giving the group a market cap of approximately R15.24 billion.

Dividend appeal

Johan Snyman, an analyst at Renaissance Capital, says that Reunert’s investment case is not “overly compelling”, but adds that solid cash flows, a prudent approach to capital allocation and a generous dividend policy are in Reunert’s favour, relatively speaking.

The group has delivered the following total cash dividends since 2008: 319 cents, 253 cents (2009), 287 cents (2010), and 330 cents (2011).

Analyst verdict

According to Dirk Noeth, an analyst at Avior Research, Reunert has a reputation for being well-managed, with management opting to conserve cash and/or return it to shareholders rather than making large risky investments.

“They also have good track record of consistently delivering earnings despite difficult industry conditions.  The R34 price in 2009 was cheap in our view, with the market at that stage overly concerned as to the impact the business from a slow-down in infrastructure spend.”

That said, Noeth believes that the current share price appears high, with investors placing undue emphasis on dividends (c.4% yield) and stable near-term earnings.

He points out that Reunert’s defence business is expected to do well during the next two years, but contributions tend to be lumpy, with limited visibility farther out. He also highlights challenges faced in Nashua Mobile and the negative implications for cash generation.

“A move to dilute its reliance is good, but efforts thus far (ECN) are unlikely to make up for the expected decay in my view. The company is currently utilising available cash as finance for its Nashua Office business, which is likely helping it grow market share in an increasingly competitive market,” Noeth said.

Snyman believes that Nashua Mobile is a mature business with little upside potential, however, still a major cash cow for Reunert. Nashua accounts for 65% of Reunert’s total revenue, and 54% of its operating profit.

The analyst says that if necessary integrations are implemented with Nashua Mobile and clear business segmentation is performed, ECN Telecoms could become a profitable business for Reunert.

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An investment case for Reunert