What sets Italtile apart is its
business model. Its retail chains –
CTM, Italtile Retail and TopT – pitch
offerings that appeal across the
income and fashion spectrum.
When things get tough, consumers
are able to trade down within the
group’s offerings – often in the
same stores because of the range
of choice but also across the group’s
stores. This ensures Italtile does not
lose customers to competitors.
The group also acquired strategic
stakes in two of the industry’s major
suppliers: a 20% stake in Ceramic
Industries and 46% of Eezitile.
Other than ensuring reliability of
supply, this also gives the group an
edge over its small, independent
competitors that rely on imports
and are thus highly exposed to
rand volatility. The arrangement
also means Italtile has reasonable
control over pricing.
Largely due to this smartly crafted
approach, Italtile boasts highly
desirable defensive qualities that
we think are critical in the current
environment. Another positive
factor is that about 80% of its
business comes from the residential
upgrades and renovations market.
This market is more resilient and
holds more promise than new
builds.
Further supporting its investment
case are high cash-generation
abilities, zero debt and astute
management, topped by a dividendpaying history.
AMALGAMATED
ELECTRONIC CORPORATION
The disposal of the alternative
energy division has set a positive
tone for continuing results. It has
freed up working capital without
sacrificing profitability, which will
increase group free cash flow,
thus driving up its valuation. We
believe the market should, over
time, reprice the counter to a higher
multiple to reflect its elevated
margins. Also the company has
a relatively lower valuation than
its peers.
The share price has been volatile
in the past year and lost a bit
of ground after it released
a poor trading statement,
mainly due to losses from
discontinued operations.
Now Amecor focuses on its
networks and transmission
technology business which has two
segments, FSK and Sabre Radio
Networks. FSK supplies a wide
variety of radio frequency and
GSM-based technology, providing
secured wireless communication
between monitored sites &
responding control centres. Sabre
provides a platform for radio and
GSM-based networks for securityrelated transmissions, which use it
on a subscription basis.
Company resources are freed
for further expansion of its more
profitable security business as the
group focuses on growing its African
footprint. The disposed division had
all the marks of a dying business:
low and declining margins, stiff
competition from imports, high
working capital requirements and
transactional-type revenue.
In contrast, the Sabre division has
a growing annuity income stream
derived from African expansion
augmented by superior margins.
We also like its business model
where the cost of adding new
subscribers is low, so margin
growth is assured with the growing
subscriber base. The FSK division,
albeit susceptible to rand volatility
and competitor activity, leverages
Sabre’s offering by creating crossselling opportunities.
Management says it has taken
steps to address the significant cost
increases encountered in FY15,
including head office costs of R2.5
million, with the benefit expected
in FY16. In addition, it will be
reporting off a low base at the end
of FY16 and there is potential for
positive surprises.
However, its small balance sheet
is a concern because African
expansion can be unpredictable and
miscalculations costly, as has been
experienced by some heavyweight
South African companies. In
addition, the internet has devalued
the importance of its GSM and
radio infrastructure which makes it
easier for competitors to encroach
this somewhat niche territory.
And the need to stay ahead of the
technology curve can be costly. ■
Figure 5
ISSUE 6 – SEPTEMBER 2015
9