Taking Stock – Barbican Asset Management
Introduction CLASSIFIED in our Barbican Equity Model as being in the printing and packaging sector, Hunyani Holdings Ltd is a public company listed on the loc
Its main business includes manufacturing of pulp and paper products, printing and packaging and the growing and processing of timber.
The group comprises three major subsidiaries each specialising in a separate but related area of business. These include Hunyani Paper and Packaging (Pvt) Ltd, Hunyani Forests Ltd and Hunyani Properties Ltd.
The packaging and paper entity is involved in the manufacture of corrugated containers, specialised packaging that include explosives cartons, horticultural and citrus packaging among other things.
The manufacture of Kraft papers for the corrugated container industry, envelope paper and book cover for the printing and stationery industry is done through its pulp and paper division. On the other hand, its flexible products division is involved in the manufacturing of plastic and paper bags, aquamol tobacco paper and foil laminating packaging for basic foodstuffs.
The last subdivision under the packaging and paper entity is Printopak which manufactures diaries, calendars, magazines, books and some other print products.
Hunyani Forests Ltd is a supplier of eucalyptus and pine timber for transmission poles, pit props and timber for pulping at the Pulp and Paper division. On the other hand Hunyani Properties leases immovable property to the other companies in the group and to outsiders.
Hunyani performed exceptionally well with a 331% surge in turnover to $16 billion compared to $3 billion for the six months to April 2002.Volumes grew by only 13% largely due to low yields in tobacco production following erratic rainfall and interruptions associated with the land reforms. However the group managed to grow its export volumes by 56%.
The exchange gains might have been responsible for the 653% increase in operating profit to $3,4 billion. Turnover growth trails EBIT growth. This is a sign of operational efficiency.
At the same time, attributable earnings swelled to $2,3 billion representing a 95% growth from $328 million. As a result EPS jumped by 608 percentage points to 742 cents from 104 cents the same time last year. Worth noting is the fact that the growth in operating profit and EPS of 653% and 609% respectively has exceeded year-on-year inflation over the same period and are already ahead of the full previous year.
The group increased its capital expenditure (capex) by around 930% to $777 million mainly through Pulp Mill upgrade project and replacement of other major machinery. This, coupled with large investments in inventory ahead of the much busier second half of the year, has resulted in negative cashflow.
This is a reflection of a company geared to increase its earnings in the future as soon as its capex projects begin to pay off.
The Hunyani stock has been doing fairly well of late. It has been performing in tandem with the industrial index for the greater part of the year. We therefore expect it to follow the industrial index and even outperform the latter as its export earnings potential is likely to make the share firmer.
The group has a reliable export base, which if exploited to the maximum can further increase its earnings through exchange gains. With its up-to-date equipment and machinery, the group has potential to increase its volumes beyond current levels.
Thus the group has a promising growth potential that can take it very far in the sector. The land reform has presented opportunities for the group, as demand for poles is likely to rise given the ongoing rural electrification programme.
The costs of equipment and other inputs have continued to increase and this has resulted in an increase in general operating expenses. Furthermore, Zesa power outages, shortages of forex and fuel shortages have also affected the group’s output.
The group traditionally enjoys a strong performance during the second half of the year and despite reduced yields in tobacco production we expect informal sector demand to sustain the group. With de-controls in place, the company is likely to achieve impressive results since it will now be able to competitively price its products.
At the same time major brands that had been removed from the market are now resurfacing thus the demand for packaging might improve.
The counter is trading at a historic P/E of 8.1x compared to the weighted P/E for the sector of around 10.35x. In this case, the counter is trading at a discount to its intrinsic value. Such a scenario cannot be sustained in a market with the slightest level of efficiency, hence we expect an upward adjustment in the share price.
Based on the above valuation, we consider the current price of around 6 500 cents an understatement of the intrinsic value of the share. Consequently we recommend a strong buy at the current price.