Taking Stock – TSL’s major strength is diversity

Barbican Asset Management

Background THE company was founded in 1957 as Tobacco Auction Floors and went on to list the same year.


I

t then diversified in late 1960s. It is the holding arm for a group of companies and its main operations are focused on auctioning of tobacco, retailing and distribution of agricultural inputs, storage and distribution and printing and packaging.


Subsidiaries include Bak Storage which specialises in storage of tobacco, distribution of agricultural products and also container handling and distribution.


Chemco Holdings imports, formulates and supplies crop chemicals.

Tobacco Auction Floors auctions tobacco while TS Timbers focuses on the retail of timber and other building materials. Hunyani Holdings are also another subsidiary that manufactures and distributes paper and softex paper.


Shareholding


The major shareholding of TSL is in the hands of institutions. This is smart testimony of the confidence institutions have in this group of companies.


Financial performance


During the half-year under review, turnover grew by 231% which was above inflation of 128%. Profit before tax went up by a staggering 862% to $6,4 billion while the after tax profit was 1 046% up.


It is interesting to note how turnover growth trails profit growth.


This could be a sign of cost effectiveness on the part of the group.

Earnings per share were up 1 292% to 1 270 cents. Return on assets and return on equity were up to 13,9% and 27,7% respectively.


There was also an improvement in the company’s ability to meet short-term obligations as indicated by an improvement in the current ratio. Interest cover remained at a comfortable seven times.


Strengths


Diversification is the major strength of the group as its operations range from product to service provision.


The fact that the companies that make up the group export significantly puts the whole group in a good position especially given that the local dollar is continuously depreciating.


Timber and building materials are likely to experience an increase in demand due to the ongoing land reform. Land reform will see the construction of schools, hospitals and homes hence the timber and building materials wing is likely to benefit from this.


Weaknesses


The import costs continue to rise due to the depreciating local dollar. The revenues realised from exports however would cover this.


Evaluation


TSL is currently trading at a historical PE of 7,9.


Basing on earnings growth, the counter is trading at a forward PE of 0,6x, which clearly indicates a counter that is yet to firm in terms of share price.

Given that price controls are gradually dying, the group is expected to report higher results for the second half of the year.


Conclusion


We view TSL as one of the undervalued stocks. A buy is recommended.

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