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I wrote a similar online article in 2018 – title was a bit more moderate but changed due this continued strange divergence between profit growth over 5+ years with sharevalue reduction over same period. Just in case the reader think I am overly optimistic it is useful to consider an interenational assessment of ALH share valuation by an international analyst company. I personally believe their valuations both in terms of DCF and PE rations are simply too optimistic, but it does give an indication of value assement from international perspective overall does indicate the company is massively undervalued.
The numbers above is based on a discounted cash flow model used by Simply Wallstreet with parameters used provided on the site. Below is a comparison of PE ratios versus international Aerospace & Defence Industry average and ZA market average. International companies clearly trading at much higher PE ratios – see last section in this regard. Note however the bar graph on the right which relates to Alaris earnings in comprison to local and international peers!
I founded Poynting in 2001, listed it (JSE:POY) in 2008 and remained as CEO until 2014. The listed JSE:POY initially consisted of Defence and Commercial business segments. In 2015 I bought the loss making commercial businesses as well as the Poynting brand from the listed entity and resigned from all board and management positions. The defence division stayed listed and rebranded as Alaris (JSE:ALH). I remain the second largest shareholder of ALH and although no longer involved directly understand the business extremely well. Although I am clearly biased, and frustrated with the unresponsive shareprice, I am also in the unique position of having followed Alaris performance extremely closely. This focus combined with my historic association puts me in a uniquely position to understand Alaris financials, but more importantly their business model, management and strategy.
Alaris recently released interim first half results for 2020 FY for Alaris Holdings. The profit figures below excludes the Corporate and Consolidation segment for all years to ensure valid comparison. It also excludes the Comparts and Aucom profits/losses for the earlier periods where these were still part of overall profit mix.
The 2020 interim 6 month numbers have been doubled to obtain default annual numbers. Second half numbers with few exceptions are traditionally better so this estimate is conservative.
Alaris have had a 28% compound growth in revenue from 2013 to 2018 and 31% growth in PAT for the same period. Certainly remarkable given that the growth is quite consistent and never faltered on year on year basis.
Issued shares were also reduced over this period because Alaris actually repurchased about 50 million shares (again using internally generated cash) reducing 165 million shares to current 120 million shares in issue.The EPS growth from 2017 to 2020 is 38% compounded annually and hence higher than PAT growth over the same period.
Given exceptional long term profit growth are their problems with the balance sheet?
Once again simply none. Alaris had a cash pile end Dec 2019 of R82 million – of which more than 50% in hard currency. Given the rand depreciation against $ and Euro of around 25% this cash pile likely grew to R100 million over the last 3 months excluding actual cash movements over this time. ALH shares hence incorporates around 90c per share in hard cash!
Alaris has virtually zero long term liabilities or other debt excluding trade creditors.
ALH has excellent liquidity with its current ratio higher than 3:1 and quick ratio just below 3:1.
So no warning signs or risks in the balance sheet.
What about the risks to its business, sustainability of income and regional factors?
Alaris sells mainly to international customers with a truly global footprint. Sales to Americas, Europe, Middle East and Africa and South Africa all are significant as seen by looking at their 2020 interim presentation. Note that the majority of the 11% SA sales are sold to local multinationals and hence destined for international markets. I estimate that more than 98% of Alaris products over this period were ultimately destined for global markets.
How sustainable are their sales/business model?
Alaris customers are typically global multi-billion dollar military system integrators. These customers are very discerning in terms of suppliers and Alaris/Poynting took almost 10 years to penetrate this market and gain international recognition. The antennas are typically a small portion of a sophisticated system but once the system has been qualified and calibrated such integrators are unlikely to change suppliers since both cost and risk of doing so is large.
As Alaris antennas are “designed into” many of these complex systems they also see increased “repeat” sales of existing products which has a massive impact on their PAT since first sales consume huge development overhead whereas this component falls away or reduces considerably during repeat sales.
Alaris Gross Margins are around 70% and profit before tax (PBT) is 22% of turnover. Certainly unheard of profitability in this industry. This bolsters sustainability dramatically since Alaris will breakeven even if turnover reduces by 30%. The high gross margins similarly means Alaris profitability is buffered against forex (ZAR strengthening agains international currencies?!) and other unforseen variations in cost or price.
How sustainable is their growth?
Quite simply they can grow 10x and will still be addressing a very small portion of the international EW military market. Current turnover of R260 million translates to $15 million.
“The estimated growth of the global electronic warfare market shows an increase of USD 23.13 billion in 2016, to USD 30.32 billion by 2022. Other sources indicate that in 2017 the electronic warfare market is in excess of USD 13 billion, and is set to reach USD 17.5 billion by 2027”
Alaris supplies the antenna component of this market and are also gradually expanding vertically by adding electronics, switching and filtering necessary for system integrators. The antenna component of EW systems used to be about 5% of an EW system value. Dramatic falls in computational end electronics costs increased the antenna component to levels around 10% to 15% of the value in typical systems. This indicates a market of around $3 billion which is about 200 times larger than Alaris current turnover. Plenty of room to grow I would think.
What’s right about Alaris?
Alaris is “rock solid” as a business. They inarguably have no real threat of collapse or sustainability as outlined by the facts earlier. Micro cap companies, on the other hand, are automatically perceived as more risky than the “blue chip” large companies. Purely looking at Alaris as business and not just as a share listed on the JSE Alaris is 10x more solid than many “blue chips”. Consider examples such as Sasol, Steinhoff, EOH, Aspen, many resources companies and many other ertswhile “blue chips” who lost 50% to 90% value over the past 12 months. These companies can be grouped into the following categories (in order of importance): a) High level of debt to equity (Sasol, Steinhoff, Aspen) b) Exposure to volatile international markets (Sasol, Naspers) c) Very exposed to a region/business area (EOH, Aspen) d) Exposure to “crazy tech” market (Naspers). Alaris doesn’t have any of these attributes. It’s main asset is IP – can write essays about this, but believe me it is more than “bright people”. You can start an Alaris competitor somewhere on earth with 100 antenna engineers who are “brighter” than the 10 to 20 at Alaris and its subsidiaries. They have no chance agains Alaris because 20 years know-how, client relations cannot be gained overnight. Reputation, relationships and “captured customers” takes time. Building trust and confidence with very selective customers in the military market even longer.
Alaris has an exceptional and experienced management team headed by Juergen Dresel whom I really know well. I met Juergen in 1994 and was his M.Sc mentor. Juergen was founding shareholder and instrumental in building Poynting antennas, listing it and acting as MD of the Defence Division (which became Alaris) until I resigned as CEO in 2014 and he became group CEO. He is exceptionally experienced as engineer and business manager, absolutely driven, focussed and very knowledgeable and capable in his field. Naturally I know many key employees still working at Alaris in production, sales, R&D, logistics and finance – these are really dedicated, experienced and often multi-talented and gifted people. The small but highly specialised international companies, Cojot in Finland and mWave in the USA have unique products and IP and access to different parts of the international defence and specialised antenna market. Each are run by a lean team of smart and competent people.
Alaris 8 years record of profit and turnover growth of around 20% to 30% compounded annually surely must reflect a company under exceptional management utilising world class IP and with sales and marketing which ensured a world wide customer base. Not sure many SA companies have ever achieved this.
So what’s wrong?!
Let me list the reasons as I perceive them:
Poynting (POY) as a share brand was considered quite exciting until 2016 mainly due to the prospects associated with the commercial antenna business and this “story” inspired confidence and investment in the company. Actual profits were made in the defence business but in SA context the defence industry has disappointed investors. When Andre Fourie bought the commercial business and brand in 2016 the listed company name was changed to Alaris (ALH). This rebranding was effectively communicated to the Alaris customer base. I believe the share brand was not a adequately communicated to the SA small investors. The confidence, excitement and belief in the Poynting share brand hence mostly did not transfer to Alaris. I have found many people who never realised that the original “Poynting” still exist under the name “Alaris”. They often just noticed Poynting is no longer listed and was not aware that the most exciting part ito performance, Alaris, remained listed.
ALH is a micro-cap company with market capitalisation of R214 million. Business journalists and institutional investors are not interest in companies with such low market capitalisation. Retail investors often rely on business publications for analysis.
This means Alaris shareprice is driven mainly by private investors for who small investments makes sense ito their portfolio size. These guys seldom have skills, willingness or interest to “analyse” investments and rely on friends and media for investment decisions. I am sure this exciting story is easier to sell than the Poynting one given the solid history, track record and profitability, but it needs to to be done and enjoy some board priority.
Charts of share price looks extremely negative, share liquidity is terrible and market sentiment is overall quite negative towards “micro caps”. Many small JSE listed companies such as Jasco, Ellies, Etion, AdaptIT and many others are trading at ridiculously low values for the same reason but most of these also have experienced significant profit, solvency and liquidity problems
Are there ways to fix this?
In my opinion the following could improve shareholder value:
A share buyback programme instead of dividend declaration. Alaris currently has a cash pile of around R100 million and applying around R20m in a share buyback will firstly be a “good investment” in that at current sharevalue one could increase EPS by around 20% using cash which is not really valued by investors. Having an active and relatively big buyer in the market will also significantly improve liquidity and shareprice itself.
Listing internationally: Given the values presented earlier it is clear that defence companies in the US and Europe are not at all undervalued and listing internationally in itself could realistically double share value.
Finding an international strategic buyer. Once again given the fundamental value of Alaris a strategic investor would likely be prepared to purchase Alaris at a PE in excess of 15 which implies massive premium to current company value.
Lastly I believe it is unwise of Alaris to make acquisitions without firstly comparing it to the obvious alternative which is buying Alaris. An international company bought at PE of 10 may be justified as “strategic” but that still implies it must do better than acquiring ALH over some period such as 3 to 5 years. Given that Alaris can be purchased currently at a price which provides immediate 20% earnings growing historically at 30% compounded an international “strategic purchase” providing only 10% will really have to add extraordinairy growth to equal an investment in Alaris.
My belief, in short, is until the ALH board management ensure a much higher ALH sharevalue doing acquisitions, dilutese shareholder value. Even acquisitions done in cash could be much better invested in Alaris shares and provide significantly higher shareholder value in terms of EPS and earnings growth. Once ALH shares trade at PE levels around 15 acquisitions makes a lot more sense.