Reunert | Cash is king in a crisis

Low GDFI spend in SA reduced the cable business's (electrical engineering - EE) operating profit by 27%. Given no current signs of a pickup in state/municipal spend, we cut our earnings forecasts by 10% to 16% over the next three years. However, the Group has approximately a quarter of its market cap in cash. We expect Reunert to cautiously start deploying capital through select ICT acquisitions (strategic fit at right price) and renewable energy development (improving regulatory environment). Reunert's core competencies are in SA and management believes SA is becoming more investable. Reunert has a history of conservative capital deployment with high hurdles for return on capital which has protected shareholder value throughout the challenging economy.

Reunert is positioned to build a scale business in renewable energy through Terra Firma (solar) and Blue Nova (storage). We estimate the Group could leverage the Quince book (c.R3bn) and balance sheet (c.R2bn) to build significant megawatt capacity with favourable legislation on the horizon. The Group will probably not commit further capital to the cable manufacturing operations. However, management note latent demand in aging infrastructure at Eskom and municipalities. Reunert's focus is shifting towards ICT, where an acquisition to increase annuity revenue and embed customer relationships through cross-selling is probable. Increasing the Group's ICT business should convert its revenues from low and volatile operating margins (EE: 6%) to higher margin annuity revenues (ICT: 23%). ICT's share of operating profit has increased to 55% in FY'19 from 39% in FY'14.

We maintain our MARKET PERFORM recommendation with a 12-month target price of R75ps,