Rolfes paints a pretty picture

It’s not your average chemical company.

This article was first published in the latest issue of the Moneyweb Investor. To read the magazine click here.

rolfes-recomm rolfes-table

We remain bullish on Rolfes, which has transformed itself from just being a pigment business into a diversified specialised chemical business. Even after a strong rally that started in June, its market valuation, with a price:earnings (PE) ratio of seven, still doesn’t fully capture the growth promise that the stock now offers. Our model shows a fair value for Rolfes should be around R4.69/share, 24% ahead of its spot price.

Rolfes has instituted a number of good initiatives. It discontinued its loss-making resins business, disposed of lower-margin businesses in the agricultural and chemicals divisions and is expanding its higher-margin agriculture and water interests through minority buyouts and acquisitions. This has left the company with highly profitable businesses capable of consistently posting good growth numbers. The market, however, doesn’t seem to have fully credited the company for these value-enhancing developments.

The group also took a bold step last year in moving into the food chemicals market with the acquisition of Bragan Chemicals, an importer and distributor of chemicals used in the food industry. The acquisition comes with higher operating margins than Rolfes’ existing operations. Apart from diversifying Rolfes’ sector exposure, it also provides opportunities to supply its product range to Bragan’s customer base. 

These events have bolstered Rolfes’ growth trajectory. We expect the operating margin to expand to around 10.5% (FY15: 7%) and headline earnings per share to be between 60c and 65c in FY17. Average earnings growth of 15% should be achievable over the next three years. Our projections imply a rolling one-year PE of 5.8, which we think undervalues this company substantially. Stocks usually trade on low PEs due to a poor profitability profile, poor prospects, a high risk profile or poor track record. Rolfes doesn’t seem to exhibit any of these qualities. Its past performance has been decent when compared with its peers, whose over-dependence on the mining industry has seen them faltering since the collapse of commodity prices.

Rolfes share price (rebased)


Rolfes reported a 20% jump in revenue for the year to end-June as the inclusion of nine months’ income from Bragan more than offset the loss of revenue from the discontinuation and disposal of the low-margin product lines. Operating profit climbed 72% to R137 million (FY15: R80 million) at a margin of 10.1% of revenue. The group issued new ordinary shares for cash to fund the Bragan acquisition and to buy out minority shareholders of Agchem, which resulted in a 37% increase in the weighted average number of shares. This diluted growth in headline earnings, which grew 39% to 53.2c/share (FY15: 38.2c/share). Bolstered by the improvement in the gearing ratio to 35% (FY15:41%), the board declared a dividend of 6c/share (FY15: nil).

Rolfes management intends to continue pursuing strategic acquisitions and organic growth opportunities in the chemicals and related products markets. It will target acquisitions that will enhance its international footprint as well as sectors with high barriers to entry where a business possesses intellectual property, infrastructural development capabilities or product registrations. Given the group’s net debt of 35% of the book value of equity and a supportive shareholder base, the growth ambitions are achievable.

That said, the bulk of Rolfes products are sold into the manufacturing, mining and industrial markets which are under pressure. That will certainly make it difficult for Rolfes to grow from existing operations but we expect the following to drive further margin expansions. 

  • Only nine months of Bragan Chemicals income was included in this year’s financials and in FY17 revenue and margins will benefit from the full inclusion. Bragan’s higher margins are likely pull up Rolfes’ overall profit margins.
  • The backward integration in the agricultural procurement unit and vertical integration of the logistics capabilities of the industrial and water divisions were instrumental in the improvement of margins of these divisions in the current financial year. We think more cost savings and margin benefits will come through in FY17.
  • Rolfes has room to extend its product basket and range of services and pursue new clients. All these aspects are embodied in the expansion strategy.
  • Consolidation of acquisitions and further streamlining of divisional structures will drive further margin expansions.
  • Expansion into non-South African markets. Rolfes CEO Lizette Lynch says the company will start distributing  its products in Egypt, Ethiopia, Tunisia and Brazil during FY17. This provides the company with exciting growth opportunities and geographic diversification.


Assuming average annual earnings growth of 15%/year over the next three years, a conservative continuous growth estimate of 1.5% and a highly punitive discount rate of 14.04%, our discounted cash-flow model arrives at a fair value of R4.69/share. Based on that we maintain our buy recommendation.




Bull Factors

  • Bragan acquisition has potential to bring in new customers, new markets and cross-selling opportunities
  • Diversified revenue streams across domestic and export markets
  • Strong customer base with leading positions in niche markets

Bears factors

  • Weather conditions affect agricultural division’s earnings
  • Patchy or slower-than-expected growth in manufacturing and mining sectors

Nature of business: Rolfes is a diversified manufacturing technology holding company. It manufactures and distributes the following products:

  • Organic and inorganic colour pigments for the coatings, plastics, vinyl, leather construction and ink industries, and pigment dispersion and pastes for coatings and plastics applications (through Rolfes Colour Pigments International);
  • Specialty chemicals for the coatings, plastics and construction industries (through Rolfes Chemicals); and
  • Pure beneficial silica for the metallurgical, filtration and construction industries (through Rolfes Silica).

Disclosures: The analyst has no financial exposure to the instrument discussed. The opinion represents his true view. For Intellidex’s full disclaimer, methodologies and definitions please click here.


You must be signed in to comment.




The Budget Speech explained
Moneyweb’s 2020 national budget offering, including infographics and audio ratings, as well as past budget coverage....

The Investor Issue 48
Separating out the noise from useful information in the markets is not easy. The trick to staying the course is to keep an eye on ...

The Investor Issue 47
Some people intuitively understand that investing for future gain is a long-term process that cannot be rushed. The management of ...

The Investor Issue 46
While US innovation soars and its tech listings continue at a ferocious pace, SA has no real plan for how to embrace the 4th Indus...

The Investor Issue 45
As the investment world falls more and more in love with the simplicity that ETF investing offers, index providers are realising t...

The Investor Issue 44
Company financial statements are the last line of defence for investors wanting to protect their investments. But these cannot alw...

The Investor Issue 43
What makes one CEO great and another mediocre? The Moneyweb Investor ponders this and other leadership questions in the latest iss...

The Investor Issue 42
Stagnant economic growth and questionable economic policy is hampering the development of mid-sized - and investible - businesses ...

The Investor Issue 41
If you are one of those people who invests more energy into your credit card or medical aid rewards programme than you do your ret...

The Investor Issue 40
Volatility in global markets is higher than it has been in years, giving investors the jitters. Some 'experts' are suggesting a re...

The Investor Issue 39
From lessons from Buffet to building your own crypto-portfolio (a risky endeavour by anyone's standards), this issue of The Moneyw...

The Investor Issue 38
They say the art of investing is to ignore the short-term noise and focus on attaining long-term goals. That's true, but that does...

The Investor Issue 37
Getting the economy on the correct footing requires that everyone pulls their weight. Our writers this month have gone above and b...

The Investor Issue 36
The past year is littered with train wrecks like Steinhoff, SAA and Eskom. But there is real sense of ‘back to business’ in So...

The Investor Issue 35
Stock markets are soaring, but productivity is not. Innovation continues, but leads to fewer new jobs. And the great and the good ...

The Investor Issue 34
South Africans are fed up with corruption, or anything that has even a whiff thereof, as JSE rockstar Naspers is currently experie...

The Investor Issue 33
As the year races towards its close, investors will be forgiven for feeling a little breathless. The British WWII propaganda phras...

The Investor Issue 32
Anyone would think that getting an economy moving is rocket science. It's actually not. It requires single-minded commitment. Whil...

The Investor Issue 31
We examine the opportunities of forex trading, the best unit trusts, e-commerce at Richemont and more. ...

The Investor Issue 30
Despite what the astrologers say, there are no shortcuts when it comes to successful stock picking. Fundamental analysis counts. T...


Follow us:

Search Articles: Advanced Search
Click a Company: