JOHANNESBURG – Electronics manufacturer Ellies Holdings assured shareholders on Tuesday that it was “actively engaged” with the group’s funding challenges, following a 68% drop in headline earnings per share (HEPS) for the year ended April 30 2014.
While revenue climbed 5.5% to just more than R2 billion for the year under review, net profit after taxation fell 68.2% to less than R72 million. HEPS slid 68.3% to R23.46.
“Some would call it a perfect storm,” Ellies CEO, Wayne Samson told Moneyweb’s SAFM Market Update host, Siki Mgabadeli. “We’ve had a pretty tough year; we’re hoping things turn around in the next year.” Samson highlighted the growth in revenue, particularly in light of the large gap left by Eskom’s Residential Mass Rollout (RMR).
RMR provides households with free energy saving and load managing devices to reduce residential peak demand. A significant contributor to Ellies earnings in 2013, participation in RMR did not materialise in 2014.
Among other “opportunities that did not materialise during the year” was Digital Terrestrial Television (DTT), the rollout of which has been further delayed. DTT would see South African broadcasting migrate from its current bandwidth-eating analogue format, to a more efficient and bandwidth-light digital format.
Samson said Ellies spent R40 million on manufacturing plants and machinery to roll out DTT migration and was ready to start producing antennas. In addition to DTT delays, Ellies said that the uptake of South Africa’s new HD satellite TV, OpenView HD was substantially slower than expected.
These pressures drove profit before interest and tax (PBIT) in the consumer division lower by 62.7% to R93 million.
Lavan Gopaul, chief investment officer at Trademar Futures, said that a contracted consumer wallet meant that aside from the project disappointments, Ellies did not get the spend it hoped for on the retail side. He said the market has been trading the stock with expectation of lower earnings and the share price has come down substantially over the past six months, but could fall further.
“This is a stock I’m not particularly bullish on. But if you’ve got a long-term outlook, you might see good returns on some of the projects paying off, particularly when DTT takes off,” Gopaul said.
Long-term view needed
Despite the infrastructure division reflecting a decline in PBIT of 36.8% to R51.9 million, Ellies is confident that recent investments in renewable energy and water infrastructure will pay dividends, particularly in light of large contracts awarded to Renewable Energy Independent Power Producers (REIPP).
In May 2013, the group acquired 100% of Botjheng Water Proprietary Limited for a R7 million cash payment upfront and the R3 million balance over a 12-month period. On February 1 2014, it acquired 50.01% of African Solar Power Proprietary Limited, for which Ellies directors expect to pay R1 million based on the solar company’s profit projections over the next two years.
During the year under review, the infrastructure division shifted from shorter-term contracts to higher value, longer-term contracts. The contract debtors’ book grew from R150 million to R420 million as a result and Samson said this was where the most significant funding pressure could be felt. He said Ellies would have to find different ways of funding contract debtors, either by ring fencing the business or finding alternative ways of financing it.
Keith McLachlan, fund manager at AlphaWealth, said while “blue-sky initiatives” such as Eskom’s RMR provided optionality in the share, the core of Ellies remains its consumer goods and services (CGS) segment. “I would critically consider the CGS, and to a lesser extent infrastructure, segment as both the short-term depressor of results and the long-term driver of the group’s fundamentals,” he said.
“The long-term fundamentals of where Ellies is positioned are positive, though there is significant execution risk in the Group getting there. Funding and cash flow remain an eternal concern for me, but the brand, distribution, intellectual property and offering across the Group is also very appealing,” McLachlan commented.
Samson said the group might have to consider higher prices or rationalisation of costs to increase margins.
ELI closed 6.98% lower at R2.93 a share.