ARH – Time to return more cash to shareholders

ARB Holdings (ARH) is my favorite boring wholesaler of cables. The business model is simple. They import and/or manufacture cables and lighting and then distribute these directly to construction companies, contractors and other operators in the construction industry. The barrier to entry is relatively high, as they have distribution licenses for certain products in the lighting division, have the land and real estate to keep bulk cables in stock, as well as relationships to source them economically at scale.

The share price, like everything else in the South African small cap market, has taking a pounding dropping from around R6.50 two years ago to R4.20 today. The market cap is R1.1bn, with the company ungeared and a net cash position of R148m.

When ARB acquired lighting company Eurolux, they issued a Put option tied the the ARB share price. As the value of the share price changes, the option’s value is adjusted on a mark-to-market basis and these fluctuations confuse earnings and make them difficult to compare. Ignoring the put option, operating profit for the 6 months is down 15% to R92m. But HEPS is only down 12.8%, as a result of share buybacks. This means that they earned 33c or 66c annualised, placing the company on an undemanding PE of 6.2.

The results were impacted by the electrical division, which is struggling with no new work from Eskom. This division will continue to struggle as the unbundling and squabbling over Eskom will likely take several years. However, the division continues to generate cash and whilst construction currently has a bad reputation, activity in the sector is ongoing. ACSA announced a large expansion to the OR Tambo International Airport, Balwin keeps churning out apartments, Vedanta is building Zinc mines at Black Mountain, The Leonardo is about to become the largest building in Africa, the Northern parts of Durban are being developed at a lighting pace and all this activity taking place in a depressed economy requires cables and lighting. Eskom, too, will race to keep existing infrastructure functional and government will cough up the cash, so cash flow is likely to continue in the short and medium term, with growth in the longer term.

The lighting division is growing earnings and will increasingly do so with the Radiant acquisition at an opportune time in a depressed market.

The company continues to generate substantial cash of around R150m per year. This is easily sufficient to cover both the normal and special dividends of R0.25 and R0.10 that have been paid in recent years. A continuation of this policy would put the company on an 8.5% dividend yield. I am of the view that they should maintain both dividend streams. In addition, at these depressed prices it will be pleasing if they continue to buy back shares. It may even be worthwhile to consider introducing some gearing into the company in order to buy back shares with a current cash yield that is significantly higher than the expected cost of debt.

SSS – Why I sold my shares

Stor-Age Property (SSS) are the new-REIT-on-the-block in South Africa. During their listing in November 2015, I picked up some shares, as I was impressed with the business model of self-storage. In self storage, there is virtually no counter party risk from a tenant, as you can simply pawn his possessions to cover outstanding rent and the business is extremely resistant to economic cycles. I was also impressed with management’s rapid expansion plans and they have delivered both in terms of asset growth (organically and via acquisitions) and in dividend growth.

Since their initial growth in South Africa, they have made a fast and aggressive move into the UK, by acquiring Storage King a Self-Storage business operating there. The initial acquisition has resulted in a split of 28% of their assets being in the UK and over 40% of their profits coming from that country. The much lower cost of debt means that higher returns on assets can be achieved then in South Africa. Therefore, it is not surprising that the rate of expansion in the UK has accelerated significantly, with two further acquisitions announced within a week this month. They are buying the Storage Pod for R213m at a yield of 6.5% and Viking Self Storage for R224m at a yield of 6.7% (the latter’s yield was not provided and had to be back calculated).

After this second round of UK acquisition, the company will make close to 50% of its profits from the UK. This is a country that will struggle for years with the Brexit hangover, has stagnant economic growth, has burned many other South African companies fingers and – most importantly – will likely see a declining currency, declining property prices and rising interest rates. In my view, this is the worst place to be buying property at the moment.

Furthermore, in order to finance this acquisition they have already concluded a placement of shares in an accelerated bookbuild, raising R585m. The company issued equity yielding 8% dividend to finance acquisitions yielding 6.6%.  Of course, the yield of the UK acquisition can be enhanced by using leverage, but if that is the case, why are they are raising more capital then what is required for these two deals?

Given this heavy focus on the UK and the suspicious issuing of high yielding equity for the purchase of lower yielding y, I have decided to divest my holding in SSS. This money is better invested in my favorite REIT, Grit Realty.

BWN – The cheapest company on the JSE?


When I first wrote about Balwin Properties (BWN) in 2016, they were planning to sell approximately 2000-3000 apartments per year and I predicted that they would have earnings of around R1.50/share which would hopefully underpin a healthy share price and dividend. Part of this prediction has spectacularly backfired. The BWN share price is down 70% and they have stopped paying a dividend. Nevertheless, management have followed through on many of their key promises and I believe the company is well positioned to continue earnings, improve cash flow and patient shareholders should be handsomely rewarded at current depressed prices.

When Balwin listed in 2015, they needed money to acquire a large tract of land in Midrand to secure a 10-15 year development pipeline, they intended to grow outside of Gauteng, they were planning to deliver apartments to a stand alone rental business by 2019/2020 and they were planning to sell around 2500 apartments by year. Management has delivered on all these promises despite a stagnant economy.

In their business update published on 14 March 2019, BWN suggest that they will sell approximately 2350 apartments in the 2019 financial year. They have also already pre-sold 1000 for the 2020 financial year. I am not at all surprised by this. In February, I visited the Blyde in Pretoria, sub-Sahara Africa’s first crystal lagoon. It is an astonishing development that appeals to the middle-income family (see photos). The scale is also fascinating. They expect to develop over 3000 apartments in this development alone. And access to the lagoon will make all these apartments appealing to buyers.

On my travels in December and January, I passed Balwin developments in Cape Town, Somerset West and Umhlanga, all popular fast growing nodes, showing that they have extended their popularity beyond Gauteng. I am confident that the popular crystal lagoon will be repeated in other areas in due time. BWN has established and owns a 25% share in Balwin Rentals, which will absorb certain developments over the next decade, earmarked specifically for rental. The first 252 apartments were sold to the partner, suggesting that only 10% of sales were to this entity at a slightly lower margin of 30%.

Despite delivering on their listing aspirations, the company share price has drifted to a point where it is ridiculously cheap. Stephen Brookes bought R1m of shares at the end of February at R2.50/share showing his belief that the company is undervalued. The market cap of R1.1bn is the same as half year revenue. Earnings are likely to be 95c, putting the company on an approximate forward PE of 2.5. Cash flow has improved and they expect to have R300m on hand. That is approximately 25% of the market cap in cash. Excluding cash, the company is trading on a PE of just over 2.

The fund manager Keith McLachlan argued that construction companies are uninvestable, as the margins are thin and due to risk that one failed construction contract could develop into a ruinous one (see Group 5). However, with current margins at 33% and targeted margins of 35%, I do not believe that this risk applies to Balwin. Furthermore, even if they fail to sell their apartments, they can simply roll them into their residential rental portfolio which they have previously set up.

They have land for a secured pipeline of over 46,000 secured. This will keep them going for the next 20 years, without the major outlay of further land acquisitions. The company is carrying an NAV of R5/share, twice the current share price. Surely, Balwin is the cheapest stock on the JSE and patient investors will be rewarded.

ILU – How I saved R3000/month by selling a property at a loss

I have a buy-to-let flat in Centurion, which I have previously written about a few years ago. As anyone with rental property in Gauteng will know, the market has been tough. In fact, in the four years since I have owned the place, rent and agent commissions have remained the same, whilst levies and rates and taxes have increased annually. This means that, when I bought the property, I was paying in approximately R1100/month, four years later, I am paying in R1700/month. This is in those months, where there has been no broken stove or damaged tiles, or faulty electrical wiring.

I bought the property for R640,000, but with attorney fees and bond registration costs, it was closer to R670,000. The yield at purchase was approximately 6.8%. I have now accepted an offer for R635,000, but after agents’ commission, I will receive R608,000, an approximate loss of 10%. Due to the higher rates and levies, the yield for the buyer is lower than my yield on purchase.

I owe R490,000 (I put down a large-ish deposit), which means that I will take out almost R120,000 in equity when the deal has closed. My intention will be to take this money and put it straight into Indluplace (ILU). The company, which owns and rents 9,600 residential units across 170 buildings in South Africa.

Not only will this decision absolve me of single counter party risk, such as the tenant not paying, but I will also be trading into a yield of 13.5%. Indluplace are also struggling in the tough rental market and have experienced severe problems at a complex in Witbank, which they rented to Kusile contractors, therefore they have forecast a reduction in dividend of 3-10% for the coming year. At a worst case, this puts them on a yield of 12.2%.

Better yet, Indluplace is trading at an NAV of R10.10/share, a 40% discount to the current share price. This means that I am literally buying a share of 9600 apartments – just like the one that I sold in Centurion – for 70% of their going price. This would be like buying my Centurion apartment for R450,000.

Yields are higher because Indluplace has a lower cost of debt, they can afford to manage their rentals in bulk, reducing the management fees, and can keep a maintenance team on staff. By putting R120,000 into Indluplace, I expect to receive approximately R1200-R1300/month in dividends (paid twice per year). Therefore, I have traded an expense of R1700 into an income of R1300, by selling my rental property at a loss.

This was done without factoring in any gains in the ILU share prince. In the mean term, I expect that the ILU share price will revert back to its NAV, in the long term, the NAV should grow with inflation at least. Will I wait for these events, I am happy to sit on my 12% yield.

Nu-World: The Old Guard continues to perform


Today I attended the Nu-World (NWL) AGM at their head office in Wynberg near Sandton. The office is a no-frills warehouse complex from the 1980’s and probably dates back to the time of the company’s listing in 1987. The CEO and chairman, the Goldberg brothers, both also date back to the listing and have therefore been at the helm for 32 years. As they listed at R1/share and are now trading at around R44/share and paying dividends over R3/share, they have created significant shareholder value over the period.

The business, like the AGM, is an unpretentious affair. No-one wears ties, the muffins are from Shoprite, “not those fancy Woolworth things”, in the words of the CEO, Jeff Goldberg. The meeting took place surrounded by fans, toasters, fridges and various other household appliances that the company distributes and warehouses.

In the current environment of constrained consumers and high unemployment, it could be expected that a company selling fast moving consumer goods would struggle. However, Nu-World’s EPS and dividends per share were both up strongly in the 2018 Financial Year.

Let’s face it, when our fridge, TV, fan or washing machine break, we have to get a new one. These are essentially non-discretionary items, once we have become accustomed to them. Nu-World, as a distributor, are ambivalent as to how we buy these items. Whether on Flipkart in India, Amazon in Australia or at Makro in South Africa, they make their margin on the importation and distribution.

The company is also sheltered from the South African economy, as 25% of the turnover and 38% of income now comes from outside South Africa. Fast growing markets of India and South America are in the mix and management expects offshore contributions to increase further in the future.

Despite the defensive nature of this business and the strong growth in earnings against the odds, the company trades at extremely attractive multiples. Its PE is 5, it pays 7.5% dividends and trades at a discount to the NAV of R52.35. The company is virtually ungeared. Management owns approximately 10%.

I confronted management with the very poor cash conversion of the business, where in 2018 cashflow was negative and most profits were consumed by Working Capital and remained in Inventory. They assured me that measures were being implemented to reverse that and we can expect a significant improvement in this regard in the upcoming half-year results.

Another, more longer term, concern is the composition of the board which is entirely composed of older men. As women and young people are more likely to be the end consumer of the company’s products, it is hoped that the board will be strengthened with a few different people, with potentially different opinions in the future. Nevertheless, it is difficult to be too critical of a board and executive management that has created significant value and that continues to have a firm grasp both on the business and the market.

Nu-World has just over 1000 shareholders, most of whom are probably delighted both with the recent increase in share price and the healthy and growing dividend. One of these content shareholders is me. I will be buying more shares after experiencing first hand how management reflects its frugal mindset with its no-frills head office, hands on approach and positive view of the future. At current valuations, the upside looks promising and a 7.5% dividend is a good incentive to wait for this upside to materialise.


Metrofile – Why I expect earnings to grow and the dividend to shrink temporarily


Metrofile is a business directly in my sweet spot. It is boring, it is ready to grow in Africa, it carries an attractive valuation, generates buckets of cash and pays a healthy dividend. In keeping with their boring nature, MFL recently produced decidedly unspectacular results for the 6 months to December 2017. Earnings were pretty much flat after adjusting for the once-off profit from the sale of a small subsidiary. They earned 15.6c/share for the period. After reading through the results, I have come to the conclusion that their earnings are likely to increase in the second quarter for the following reasons:

  • The expended R45m on expansion capital. Assuming that these projects were justified on an IRR of at least 10%, this should add about R4.5m to annual earnings or about 0.5c for the next 6 months.
  • Despite tough political conditions in Qatar, they grew revenue from Africa and the Middle East. When Qatar turns around, which it is already showing signs of doing, this will continue to grow earnings from this area. Let’s give it a 10% growth from that area or 0.3c.
  • They bought Secure Data Solutions (SDS) in Kenya for approximately R280m, with an annual EBTDA contribution of approximately R28m. This is a pleasing acquisition, as it grows their footprint onto Africa, where much growth for this business is likely to come from, given the constraints imposed by bureaucracy across the continent, coupled with a very positive outlook for Africa in the medium term. Importantly though, the deal will be earnings enhancing from the outset. Assuming a cost of debt of 8% for Metrofile, this deal should contribute approximately R6m to earnings, which is equal to 1.5c per share per year, or 0.7c for the next 6 months.
  • Metrofile shares are trading at bargain prices. Chairman Chris Seabrook showed what he thought of the value, when he recently purchased R52m worth if shares at R3.50/share. The business is also taking this opportunity to buy back shares, something that undervalued South African businesses do not do enough. In the first 6 months of the year, they bought back 5m shares at R3.99/share. This means that they bought back 1.2% of the company. All other things being equal, this alone should result in an increase in earnings of 1.2%, which is equal to 0.1c/share for the next six months.
  • Management writes the following in the results. “Metrofile remains well placed in the forefront of an industry that is evolving rather than shrinking. Metrofile anticipates a stronger second half earnings.” I love it when companies I own are that positive about the future of their business. I will give them an extra 0.5c/share for the optimism.

These factors add up to growth in earnings for the second half of 2.1c, total earnings of 17.7c, putting the share on forward earnings of 35.2c or a PE of 10.

Whilst this is excellent news, I also think the dividend will reduce slightly. The group previously announced that they would increase dividends until they had reached targeted debt levels of at least 1.5 times EBITDA. With the recent acquisitions and expansion capex, debt is at approximately 2.5 times EBITDA, indicating that management has more than achieved its debt targets. This, in turn, means that we can expect dividend cover to revert back to the historical level of 1.5. I therefore expect dividends to be about 11-12c for the second half, putting Metrofile on a forward yield of 6-7%.

L4L – Do I stay long in Long for Life?

Long for Life (L4L) recently announced their intention to acquire the entire outstanding shares of Holdsport (HSP). HSP was trading at around R57-R60/share prior to the announcement of the deal and L4L’s revised offer is 12.1 L4L shares for each HSP share. At the current L4L price of approximately R6.20-6.50/share and assuming the acquisition gets all required approvals, HSP shareholders stand to make approximately R75/share – a juicy 25% premium. As I hold some HSP in my portfolio, I am pleased with the premium, but I am now faced with the dilemma of whether to continue holding the shares in L4L or whether to sell them and re-invest the money elsewhere.

What is L4L?

Long for Life is a listed investment vehicle started by industrialist and capital allocator extraordinaire, Brian Joffe. After his retirement from Bidvest, this company is Joffe’s retirement project. L4L listed in March this year at healthy premium to cash with no assets and has since inked three transactions. If all three of these are successfully concluded, the company will consist approximately of the following:

A market cap of approximately R5bn comprised of

  1. R360m invested in bottling and plastics business Inhle (net tangible asset value of R53m)
  2. R116m invested in beauty retailer Sorbet (net tangible assets R5m)
  3. R3,200m invested in Holdsport (net tangible assets R900m)
  4. R1,500m in cash

The Pros

  • Capital allocation: Kevin Hedderwick and Brian Joffe have both built up large fortunes and have healthily rewarded shareholders in their previous companies. These men should have the ability and capacity to recognise value and establish synergies.
  • Good deal: I owned HSP, because they are a good company, at a great price in a sector that is likely to grow significantly in the coming decades. Clearly the L4L capital allocators see the same value and they are investing in a company that is very cash generative and provides a scalable platform for synergies.

The Cons

  • Dividends: One of the main reasons that I owned HSP was the healthy dividend, with a yield of over 5%. L4L is unlikely to pay a dividend, therefore reducing the cash flow from my portfolio.
  • Fees/incentives: Typically, equity holding companies of this type richly reward management with % fees based on assets managed (think Zeder or Reinet). Fortunately, L4L does not follow the same greedy structure. Nevertheless, management is extremely well paid for essentially a portfolio management role and directors all got in at R4/share prior to the listing. Lucrative share bonuses are awarded based on growth rates in share price, which is a reasonable compensation for this type of business, but depends on where you draw the line in the sand. In summary, whilst remuneration is high, it is better than many other companies and not out of line.
  • Overpaying: All three of the first deals are significant overpayments in terms of tangible asset values, introducing a healthy amount of goodwill into the books. Synergies at this stage are also not clear. Particularly the Sorbet and Inhle deals appear to be richly priced, when compared to market peers and the current SA consumer environment.

In conclusion

L4L’s management team have proven that they can create value. They are assembling a portfolio of assets in a period where the consumer is stretched, which should ensure that they are buying these companies at reasonable prices and preparing for an inevitable upturn in sentiment in the future. However, given the current environment, L4L appears to be paying relatively high prices for these acquisitions and they are using over-priced shares that are trading at significant premium to cash and tangible assets for these deals.

For this reason, I will sell my shares in L4L after the conclusion of the HSP transaction, as I expect the share price to trend towards NAV in the future.

SSK – Too cheap to ignore


Construction is a difficult business. It is essentially commoditised, that is we do not really care, who builds something for us, as long as they build it cheaply. Therefore, margins tend to be thin, costs need to be controlled, staff turnover is high, safety is a constant challenge, the business is labour intensive and requires large amounts of working capital. In addition, the industry is highly cyclical and is yet to emerge from the last trough, the post-Football World Cup hang-over. This is not an industry that I would typically invest in.

Diversified construction major Stefanutti Stocks Holdings (SSK) is in the middle of this challenging industry, in a South African market that is reluctant to invest in a political environment that remains unconducive to investment. The company, is well diversified into all facets of the industry, with operations in marine, civil, structural, mechanical, steel, buildings, mining, petroleum in South Africa, Southern Africa and the Middle East.

From the latest annual results, it is evident that times are tough: revenue is down 8%, margins are contracting and they make reference to overall cost deflation in the industry. The financials are marred by impairments for businesses that were acquired during the boom time, fines from the competition commission and forex losses resulting from a strengthening Rand.

However, when we ignore the perfect storm that has hammered current results, when we start digging through all the once off items, we start to come across several metrics that show a healthy, if not flourishing, company that is trading at fantastic bargain prices:

  • This is a huge company. They did R10bn in revenues last year. This tends to be forgotten at the current market cap of only R630m.
  • If we adjusted some of the once-off items in the earnings, we get a company that is trading at a PE of 4.
  • They have a pile of cash at R1.1bn. Yes, that is about 1.7 times their market cap in cash. In fact, the business remains VERY cash generative. They have operating cash flow of almost R400m. The means it’s trading at less than two times cash flow.
  • They are trading at 43% of their current TNAV. Yes tangible NAV. In theory they should be able to liquidate their assets, pay off their debt and then pay almost two times the value of the business as a special dividend. But, why would they do that, if they are making so much additional cash each year?
  • They have an order book that means that even at current margin, cash flow can be maintained. It stands at about 1.4 times annual revenue. About 30% of work is outside RSA and this is likely to grow, as those economies mature and make the best of their demographic and resource advantages.

In summary, this is a company that hiring and growing into Africa, that is generating healthy cash flows and that stands to benefit from the pent up demand for infrastructure in Africa. The company is also extremely cheap and I am therefore doubling down my position in the business.

TAS – Digesting the Press Release


Taste Holdings (TAS) is a frightfully frustrating company. They have some great brands and are positioned in a market with excellent long term growth prospects, particularly in sub-Saharan Africa. Yet management are frustratingly cryptic in their press releases, often lack transparency and have the little investor wondering, whose interests management really has at heart. I previously wrote about their suspicious acquisition of loss-making franchise stores from their own management team. The 4 April press release entitled “Taste – group to focus on food in the future” appears to be another master piece of suspicious information.  Let us slowly, piece meal digest this press release:


  1. They are intending to sell their jewelry division.


This seems like a smart move. As they explain, the two businesses require different levels of focus. The jewellery business is likely to have little growth, high margins, good cash flows and requires a good degree of gearing. In other words, it is a cash cow, that requires a specific type of management. The focus is on high income consumers, on operating costs and requires limited innovation.


The food business is in a growth phase, requires entrepreneurial thinking, expansion and is hamstrung by debt. The focus is on lower income consumers, on expansion and on achieving scale.


Jewelry and franchise fast food were always a strange combination of businesses, but they are also at different stages of the business cycle and require a very different approach from management. I have previously written on the strong fundamentals that support increased dining out in the future and I support this renewed focus on the food business. A focus on lower income consumers is also more appropriate for a business looking to expand rapidly in southern Africa.


  1. They have not disclosed a price yet

Whilst I fully support the intention to sell the jewelry division, they have not disclosed the intended selling price. In the last Annual Report (Feb 2016), the division produced roughly half of the group’s revenues at R570m, an EBITDA of R70m and a pre-tax Profit of R43m. The division had assets of R416m and liabilities of R212m.

It is difficult to value this division, but, as it generates half the revenue, as a starting point, it could be considered worth half the TAS market cap, i.e. R390m. That would put it on 9 times pre-tax profit, or 0.7 revenue. Another good reference is when TAS bought Arthur Kaplan for R85m in cash in late 2014, that was on a multiple of 0.4 revenue and 5 times pre-tax profit. By those metrics, the jewelry division should be worth approximately R220m.

  1. They are offering shares to existing shareholder to reduce debt

Existing shareholders are being offered 80m shares at R1.50/share, putting R120m in the kitty to “reduce debt”. On the last interim balance sheet, TAS had R480m in debt. R210m of this is within the jewelry division and would presumably be sold together with the business, which leaves a net debt of R270m. If the clawback adds R150m, is the jewellery division only worth R120m? Or where is the other R100m going?

80m shares is an effective dilution of 20%. In my opinion there appears to be little justification to dilute shareholders by one fifth, to pay down debt, that should be covered by the sale of the jewelry division alone.

  1. They have a big daddy shareholder(s) – who doesn’t want to buy the whole company

Finally and most interestingly we learn once again about a consortium controlled by Protea Asset Management and Conduit Capital, which in May 2016 acquired 31.4% from Brimstone and other investors. This consortium now controls around 35% and is likely to go above this with the subscription to the claw back offer underwriting of the rights issue. Importantly, they have asked for exemption from being forced to make an offer for the entire company when they exceed this threshold.

Let’s add in management’s stake at 17% and somebody called Khrom Investment, who announced a 5.2% stake on 6 April 2017 without further explanation and we have 57% of the company tightly held. I like strong supportive shareholders, who believe in the business and see value at current prices – with TAS I just wonder whether other minorities are having their interests protected.

So how do I feel about the events described in the announcement? I like the focus on food, I like the elimination of debt, I like the big shareholders pushing through their vision and clearly seeing value in the food business. I don’t like the lack of transparency in the press release, I hate the implied lack of value of the jewelry division and, after previous corporate activity, I have trouble trusting management.

The big test for this company will be to see to whom and at what price they are selling the jewelry division. If it gets sold to an independent party for R200m-R250m, then tuck into the new owner’s and strategy, if it gets sold for R100m to an undisclosed buyer or some shady offshore fund, then run for the hills.

MDI – A ridiculousy low PEG ratio

The rumour has it that when Danie Pretorius bought his first second hand raise bore rig in 1986, he was fixing it up at his home, but, as it was too large for his yard, it was protruding out onto the street of his Fochville suburb. 30 years later, Danie owns 53% of a R2.5bn company and Masterdrilling (MDI) is set to continue growing for years to come.

The company now owns 105 raiseboring rigs and is expanding into conventional exploration drilling as well as blind boring. Their fleet of raiseboring rigs is the largest in the world and their expertise and innovation in this niche industry is second to none.

In their recently announced results for the year 2016, MDI declared profits of R2.10/share and a maiden dividend of 30c. This puts the share on a Price Earnings multiple of 8.5 and a dividend yield of 1.7%. Most importantly though, earnings grew by 20%, after growing 30% in the September 2016 half yearly results and 31% in the 2015 financial year. As is often the case for these rapidly growing companies, we analysts can apply a PEG ratio, by dividing the PE multiple by the company’s growth. Generally, anything under 1 is considered excellent. For instance a company that is growing at 20% should trade at a PE of 20 (like Google parent Alphabet). MDI’s PEG of 0.43 is ridiculously cheap.

A more careful inspection of earnings, however, reveals that all of last year’s growth was derived from exchange rate benefits, against the backdrop of a difficult mining industry environment, the company actually stagnated in dollar terms. I work in the mining industry and the market is definitely showing signs of turning. MDI are brilliantly positioned for this increase in mining capex with their truly global presence. They have just established footprints in DRC, Tanzania and Sierra Leone to supplement their African platform in established mining jurisdiction such as Zambia and South Africa. When this is coupled with a strong presence in South America in the mining hubs of Brazil, Chile and Bolivia, an ongoing contract in the USA and a shareholding in Swedish Bergteamet Raiseboring Europe AB, it becomes clear just how well this company is positioned for the next upturn in the market.

With a cost base that is mostly in Rand, they should remain globally competitive and continue growing for years to come.

The use and application of the raiseboring and blindboring technologies is growing strongly. They are non-explosive excavation methods that are safer and cheaper than conventional drill & blast mining. Increasingly, their use is also growing outside of mining into infrastructure projects, such hydropower plants, tunnelling and storage.

Due to MDI’s unique global position in this growing niche market, it is difficult to compare it to a peer group. Redpath, is the world’s largest shaft sinking company. It is privately held by a German family holding company, ATM Holding, the same company that recently took a 25% stake in South Africa’s other shaft sinking champion, Murray & Roberts. Redpath is rumoured to be valued at $1.1bn, while M&R carries a valuation of R7.5bn, approximately 3 times the value of MDI.

Given MDI’s competitive advantages and growth profile, it may not be too far-fetched, to consider that this company could one day be the size of Murray & Roberts. They are managed by a driven individual, who has a large vested interest in the future performance of the business and continue to operate in a growing niche. If the mining industry turns upwards in the next few years, and the MDI multiple expands as the company continues to deliver, I am convinced that this company can easily increase in price by 2-3 times from the current level. MDI remains incredibly cheap.