Argent Industrial — Cash flush

Research: Industrials

Argent Industrial — Cash flush

Argent Industrial (Argent) is primarily a steel-based beneficiation group, bolstered by offshore investments in both existing and new ventures, and by promoting exports. Its strategy of moving away from solely South Africa (SA) to the UK and US has established a solid diversified foundation for sustainable growth locally and internationally. Consequently, there has been a CAGR in headline earnings per share of 33% over the past five years, with 76% of this growth derived from regular business operations and the remainder fuelled by a steady share buyback strategy. Net cash of ZAR403m is equivalent to ZAR7.40 per share, or 35% of the current market value. The stock trades at a P/E of 4.9x (compared to international peers at 8.5x) and offers a dividend yield of 5.4%.

Industrials

Argent Industrial

Cash flush

Basic materials

QuickView

28 June 2024

Price

ZAR21.3

Market cap

ZAR1,159m

Share price graph

Share details

Code

ART.SJ

Listing

JSE

Shares in issue

54.4m

Business description

Argent has 24 operating units throughout SA, the UK and the US. Manufacturing and trading in steel and steel-related products are the company’s main activities. Argent covers a wide spectrum of products including concrete building products, mobile and static bunded fuel storage and dispensing systems and bespoke trolleys.

Bull

Net cash equivalent to 35% of share price.

Trades at 4.9x P/E (43% discount to peers).

Dividend yield of 5.4%.

Bear

Steel trading remains a sizable part of business, with continued downward pressure on margins in a highly competitive SA market.

De-industrialisation of South Africa with continued decline in manufacturing and capital spend.

Political and labour instability in South Africa almost driving further diversification.

Analyst

Hennie Vermeulen

+44 (0)20 3077 5700

Argent Industrial (Argent) is primarily a steel-based beneficiation group, bolstered by offshore investments in both existing and new ventures, and by promoting exports. Its strategy of moving away from solely South Africa (SA) to the UK and US has established a solid diversified foundation for sustainable growth locally and internationally. Consequently, there has been a CAGR in headline earnings per share of 33% over the past five years, with 76% of this growth derived from regular business operations and the remainder fuelled by a steady share buyback strategy. Net cash of ZAR403m is equivalent to ZAR7.40 per share, or 35% of the current market value. The stock trades at a P/E of 4.9x (compared to international peers at 8.5x) and offers a dividend yield of 5.4%.

Margin driven by diversification

In 2017, SA-sourced revenue exceeded 95% and the SA pre-tax profit contribution stood at 70%, while these now account for only 51% and 37%, respectively. Thanks to higher margins from the UK and US, Argent’s overall operating margin improved from below 5% to almost 14% in FY24. Moving some of the company’s business activities outside SA and securing more lucrative margins on manufactured products have compensated for the traditionally low steel trading margins.

Diversification doubles as natural hedge

Argent’s diverse manufacturing portfolio serves as a hedge against mixed demand trends. Although many of its SA products are sensitive to factors in the building and construction sector, diversification within these business units provides additional security as they directly engage with both end-consumers and businesses. Other products are influenced by security aspects and, with the constant threat from crime, the demand for physical security items appears stable. Internationally, the need for fuel storage solutions and security items could boost sales, and the level of rail activity in the US could ensure steady demand for its speed control retarder systems in railyards.

Share buyback proves to be value enhancing

Since 2016, Argent has implemented a share buyback strategy as a method of capital distribution to shareholders, spending ZAR268m by FY24, of which ZAR208m (78%) was applied over the past five years. This reduced its issued shares from 91.8m to 54.4m (-41%). The buyback yield reached a high of 22.7% in FY20 and has since decreased to 3.0%. Additionally, the company distributes dividends as part of its cash distribution policy, maintaining a cover ratio of approximately 4x.

Historical financials

Year
end

Revenue
(ZARm)

PBT
(ZARm)

EPS
(ZARc)

DPS
(ZARc)

P/E
(x)

Yield
(%)

03/21

1,966.0

175.8

217.9

0

10.5

n/a

03/22

2,432.7

252.6

339.2

42

6.3

2.0

03/23

2,459.4

292.8

411.3

95

5.2

4.5

03/24

2,544.2

342.4

438.5

115

4.9

5.4

Source: Company financial reports

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General disclaimer and copyright

This report has been prepared and issued by Edison. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

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The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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