DENEB PULLS OFF THE BIG ONE

Deneb Investments, a small(ish) industrial cog in the Hosken Consolidated Investments empire, pulled off a big one in the year to end-March.

Sometimes, as one of my tennis partners reminds me, the small victories are really the big ones. Gain a few, and you can win the bigger battle.

Deneb Investments, a small(ish) industrial cog in the Hosken Consolidated Investments (HCI) empire, pulled off a big one in the year to end-March. At this point there might be more important (and much bigger) components inside debt-shackled HCI — like the cash-spinning bus business, the oil and gas exploration thrust, the Platinum Group Metals Ltd venture and the recovering gaming core.

Deneb is essentially the remnants of the old Seardel group that HCI rescued by underwriting a rights issue in 2013. I think HCI got more than it bargained for. But to its credit the group, and Stuart Queen, HCI’s appointed executive at Deneb, have stuck stoically to the task of securing sustained profitability.

The year-end results for Deneb need to be seen in context of the early lockdowns. In April and May last year, Deneb’s operations — which span textiles, automotive products, building wares, chemicals, office equipment and toys, among others — operated at 10% and 40% of capacity respectively.

In the first quarter of the financial year under review, Deneb notched up a pretax loss of R42m. But from the second quarter on, Deneb found remarkable traction, finishing the financial year with a total comprehensive profit of R128m, a R253m swing from a loss of R125m at the end of March 2020. Some sectors served by Deneb’s operations came out of the hard lockdown with plenty of pent-up demand.

But I suspect the cost-cutting efforts are what won the day, with margins looking more than just a little respectable. One could say Deneb was well prepared for the Covid crisis, given that its management team has, since 2013, mostly been in crisis mode in turning operations around and restructuring the group.

What is most impressive is that cash flows remained strong: R260m before working capital changes and R208m on a net basis.

This meant Deneb, which holds a valuable property portfolio, could slash interest-bearing debt by R201m. In fact, over two years, net interest-bearing debt has been cut by R474m, which explains the decision to pay a 7c a share dividend and make references to possible acquisitions. I’d imagine HCI shareholders will be hoping Deneb’s debt-culling successes can be replicated at HCI. Some shareholders might even be wondering if the unflappable Queen might not be a natural successor to long-serving HCI CEO Johnny Copelyn.

By the way, the net cash flow figure is equivalent to 48c a share and offers some reassurance when considering the deep discount on the share price of 160c and “hard” NAV of about 345c a share. Could there be a better time for HCI to take out the remaining minority shareholders in Deneb? I suspect not.

Source: Financial Mail – MArc Hasenfuss