ARB Holdings is not a company that is top of mind among equity investors, even ardent small-cap followers. It’s a pity, as they are missing out on one of the market’s hidden little gems.
ARB’s game is distribution of electrical products ranging from high-voltage cables and overhead line equipment to accessories and light fittings used in the building trade.
It has not been an easy environment to operate in, particularly since Eskom turned off its rural electrification capex tap in early 2014. But this has not stopped ARB from producing impressive growth figures.
Over the past five years the group has delivered average annual revenue growth of 14.6%, headline EPS (HEPS) growth of 14.3% and dividend growth of 21.9%.
ARB topped this in its year to June, upping revenue 15.8% to R2.5bn and HEPS 15.4%.
The dividend was lifted 10%, with a special dividend boosting the rise to 43%.
Diversification has played a key role in ARB’s success.
"In 2008 we realised we had to change our business model to reduce the dominance of power cables," says ARB CEO William "Billy" Neasham.
ARB had been built on power cables since its founder, Alan Burke, opened the company’s "doors" to business out of a container in Richards Bay in 1980.
At the time of ARB’s listing in 2007, about 80% of its revenue was derived from power cables and related overhead line equipment.
Since 2008 ARB has grown its electrical goods wholesale footprint aggressively, trebling the number of branches from six to 18. Provincial representation went from four to nine.
Another key move was into electrical lighting products in late 2011, when ARB acquired a 60% stake in Eurolux for R81m. It has been a big factor in ARB’s diversification, with lighting products now accounting for 24% of revenue and 27% of operating profit.
Parallel with its entry into lighting products, ARB moved into the direct retail market in 2011, opening two ARB Connect stores, a number that has since grown to 21. The stores, which are located in shopping centres, target smaller electrical contractors and the domestic market.
Neasham is upbeat on prospects for ARB Connect, especially in the Johannesburg market.
"With only one store in the city we are very underrepresented," he says. "There is a huge opportunity. We must just find the right sites."
Other positive lights are also glowing for ARB, not least the potential that Eskom will begin upping capex after securing €698.9m in guarantees from the Multilateral Investment Guarantee Agency.
"It will give us opportunities as [it rolls] out projects again," says Neasham.
The pick-up in capex by municipalities in the run-up to August’s elections has made for another positive. "There has been a carry-over in spending since the elections," says Neasham.
All in all, there is enough going for ARB to drive another mid-teen rise in HEPS in its current financial year, says Anthony Clark of Vunani Securities. He is one of regrettably few small-cap analysts monitoring ARB.
The company could have another growth trick up its sleeve: acquisitions.
"We have always said we are keen on acquisitions of from R100m to R400m," says Neasham. "They are easier for us to integrate."
The family-owned electrical goods retailers that ARB is coming up against in its advance into retailing are possible targets, says Neasham.
There could be sitting ducks among them.
"Many are surviving by the skin of their teeth," says Clark.
Funding modest acquisitions does not represent a challenge to ARB. An ungeared balance sheet and a net cash position of R243m at the end of June ensure that. Cash generation, says Clark, is also "impressive".
For all its positive merits, ARB’s poor marketability has limited its rating to a forward p:e of a humble 8.5, with a 3.9% historical dividend yield.
It makes it a share for patient small-cap investors.