Ben Temkin
18 July 2008
opinion
Johannesburg — WHEN I was writing about Argent yesterday, its shares were trading around R13.
The closing price was R12,50 and market sentiment, measured by its technical indicators, suggest possible further weakness.
I wonder if some of the sentiment has something to do with a feeling that it is trying to do too much.
I have lost the source but, somewhere in the data spewed out by the software I use, there was a mention that Argent is planning a separate listing of its cement and quarrying businesses.
As a strategy to focus management more closely on core operations, this seems sensible. If it is intended to implement now, however, the timing would be abysmal.
I don't really believe this unbundling idea is much more than a possible plan.
But there is some conviction in the feeling Argent is buying too many new businesses too quickly.
Again this is probably more illusion than reality. especially as Argent is in a buyers' market .
It costs money to buy businesses, however, and it's possible that at least a few of the recent sellers of Argent shares have been concerned about its level of debt and its cash flow -- especially as interest rates are already painful and are likely to hurt even more over the next year or two at least.
At the financial year ended March , although Argent's interest-bearing debt rose during the year to R297,91m from R200,3m, its debt:equity of 27% was almost unchanged over the year. I can't, therefore, accept that the company will suffer harshly from its debt-servicing costs.
In any case, the directors are stingy on dividends, preferring to reinvest most of the company's earnings into both organic and acquisitioned growth.
In the financial year 2008, 16% of earnings was paid out as dividends. The company's historic dividend yield is 2,64%.
I have a feeling the low dividend yield has indeed made Argent less attractive to many investors who espy some excellent companies with historic dividend yields now at 5% better.
My database shows me that the JSE general industrial index has an historic dividend yield of 3,29% while the price:earnings ratio of the sector is 9,36.
Argent, therefore, is lagging the heavyweights in its sector on cash payouts. However, it has to be under-rated on its low price:earnings ratio.
The return on assets managed model confirms the share is being underrated by the market -- even accepting its earnings growth in the financial year 2009 could well slow.
The company's operating margin this year was 18,6%, much higher than last year's 17,3%. Its asset turn -- the ratio of turnover to assets -- was, however, down to 0,92 compared with 1,06 .
I reckon in the financial year 2009, Argent could, conservatively, improve headline earnings by 15%, a forward guesstimate of 235c for headline earnings per share.
At a share price of R12,50, this is a forward earnings yield of 18,8%, a forward price:earnings ratio of 5,3 and a projected dividend yield of 3%. These are appetising ratings.
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