The case for Insimbi (ISB):
ISB trades in ferrous and nonferrous metals, collecting and sorting iron and steel as well as aluminium, copper, zinc, stainless steel, lead, nickel, brass, tin and bronze.Exports account for more than 65% of the scrap-recovery revenue.
In 2015 Insimbi made an important move in diversifying operations by acquiring Polydrum, a blow-moulding business that manufactures plastic containers for the chemical, agricultural and food industries.
But the real game-changer came late IN 2016 when scrap-metal specialist Amalgamated Metals Recycling (AMR) was acquired by Insimbi in a R284m transaction.
The AMR deal terms comprised a R200m cash payment to the vendors with R100m funded by senior debt and the balance of R100m funded by a placement of Insimbi shares. The vendors were also be issued 50m new Insimbi shares at 100c/share . Another R34m cash payment will be made for the associated AMR property.
The deal was struck on a trailing earnings multiple of less than six times and earnings before interest and tax of only three and a half times. Even if net profit this year falls back to the R40m posted in the 2014 financial year, Insimbi would have acquired AMR — which has stretched its operating margins from 2.84% to almost 4.5% in the past three years — on a forward earnings multiple of seven times.
A recent investor presentation by Insimbi showed that AMR generated R1.94bn in the year to end-February 2016 with operating profits coming in at R85m on a margin of around 4.5%. Net profits for the period were R53.5m.
Insimbi says there is operational leeway, with smelter capacity utilisation in the group set to be increased. An increase in exports could also help fatten margins with offshore sales attracting a 20% premium over local sales.
If AMR’s year to end-February results are taken into account then Insimbi becomes a R3bn/year revenue business with an after-tax profit of R80m. In other words, new-look Insimbi should be capable of generating around 20c/share — perhaps 25c/share in a strong year — in the new financial year. The interim results for the 6 months ending August 2017 demonstrates that ISBis well on its way to achieving this. Dividend was up 100%.
At the current R1.15 ISB is trading at a PE of 4.8
Comments from the CEO with respect to the interim results:
The first half of FY18 has been satisfactory and in particular, the second quarter, was outstanding.
The conclusion of the Amalgamated Metal Group Holdings ("AMGH") transaction at the end of last year is
now contributing positively to all aspects of the business. In the final results for 2017, we were
only able to include two months of the AMGH trading in Insimbi's consolidated results. We are happy
to confirm that this business has met and exceeded our expectations as at the time of making the
acquisition. The integration has been seamless and the synergies are being exploited beyond
anticipation. From a commercial perspective, the AMGH transaction was concluded when Copper was at
$4400pmt while it is approximately $6600pmt at the time of writing. Aluminium, chrome and iron ore
prices have shown a significant upward trend since the last Insimbi report and seem to be recovering
on the back of strong global demand.
Edited by Bullhunter, 10 January 2018 - 11:11 PM.
