ROBIN PEGLER INVESTMENT ANALYST TEL & FAX (011) 646 5396 PO BOX 84566 GREENSIDE 2034 E-MAIL: rpegler@eject.co.za 7 February 2008 PSV HOLDINGS LTD (JSE Code PSV) RESULTS FOR THE SIX MONTHS ENDED 31 AUGUST 2007 RECOMMENDATION: BUY FOR RECOVERY - Important contracts for PSV to supply its customers have been signed, and there seems to be considerable scope for new business. - A recently concluded BEE deal should increase business. It was largely responsible for Petrologic landing a three-year maintenance contract with a leading oil company. Service contracts yield a wide profit margin. - The copper belt in Zambia looks a particularly good area for growth. - The Engineering Linings acquisition should increase earnings materially. - The share price has suffered more than that of most AltX companies in the recent fall on the market. Management are not aware of any reason for this. It now looks considerably undervalued. Year end February 2007A 2008F 2009F HEPS 7,56 8,8 13,5 PE on current price 57c 7,5 8,5 4,2 PSV is not yet paying dividends. It seems unlikely that it will do so just yet, as it needs to retain earnings for expansion. PSV was listed on AltX in April 2006, following a reverse takeover of Elixir, which had become a cash shell. It was started in the 1980s, so it is a well-established business. Fully diluted share capital 221m shares. Market capitalisation: R126m. 1
BUSINESS PSV is a general industrial engineering company which focuses on the provision of flow control products, services and electromechanical solutions to the mining, petrochemical and water and waste management sectors in South Africa and further north on the continent. The industries supplied by PSV are: mining, petrochemical, power generation and water supply. SUBSIDIARIES PSV Services manufactures and refurbishes pumps, pump spares and valves to all industries in Africa. It can complete fluid handling contracts all over Africa. Its customers are large reputable international-based companies. PSV Zambia is based in the mining town of Kitwe. It supplies the same items as those provided by PSV Services to the mines on the copper belt. PSV s product offering has extended from providing pumps and valves to its customers, to positioning itself to implement larger projects that address customers requirements. It has also established an in-house capability for the manufacturing and refurbishment of pumps, a highly lucrative business with substantial profit margins. Turnaround times are now 3-4 weeks for complete pump refurbishments. Previously, pumps had to be sent to South Africa, which took 10-14 weeks, and this meant downtime for the mines. Notable among these is Mopani, where the contract has been extended to include the supply of spares, management of the pump workshop and control of the pump spares inventory. The work for Mopani is expected to amount to R50m over the next four years. In the future, similar contracts may be signed with other mines. Umzantsi is a supplier and stockholder of valves. It sells its products to the mining, power generation and water industries. Several large mining houses have recently awarded it contracts. A BEE alliance has been entered into with the Royal Bafokeng Nation to supply the mines and industry users in North West Province with pumps and valve products. Although small at present, it is expected to grow in the future. Group Line (acquired 1 September 2005) provides ceramics and glass-based lining products that change the flow characteristics of coal and similar materials. Its customers consist of Eskom and large industrial companies. Groupline is the only company which can undertake this. It has the technology to bond concrete to glass. 2
Group Line has contracts for the collieries supplying the old power stations that Eskom is bringing back into production. It has recently completed contracts for Grootvlei, Komati and Camden. Group Line is benefiting from expansion by Eskom and coal and iron mines. OmniRapid supplies mining and industrial consumables, such as piping, fittings, flanges and steel, to industrial and mining customers locally and in Africa further north. Petrologic (acquired 1 September 2005) focuses on the manufacturing, supply, installation and maintenance of fuel handling systems at service station forecourts and fuel depots. The bulk of its income comes from service contracts with large petrochemical companies. A recently concluded BEE deal has brought about a contract with a major oil company worth R80m over the next three years. RESULTS FOR THE SIX MONTHS ENDED 31 AUGUST 2007 (Excludes BEE cost in accordance with IFRS2, as this is non-recurring). R000 6 mos to 6 mos to y/e Aug 07 Aug 06 Feb 07 Continuing operations Revenue 119 904 76 628 151 024 =============================== Gross Profit 35 471 28 021 59 473 Operating expenses 19 555 12 348 36 997 ---- EBITDA 16 991 14 964 22 476 Depreciation 1 873 2 733 2 278 --- 15 118 12 231 20 198 Net interest paid 297 364 1 047 - Profit before tax 14 821 11 866 19 151 Tax 4 087 3 654 5 474 --- Profit after tax 10 734 8 212 13 677 Discontinued operations - 670 487 -- Attributable earnings 10 734 8 882 14 164 Adjustments for headline earnings -20 - -176 ----- Headline earnings 10 714 8 882 13 988 ----- 3
Weighted average no of shares 000 215 951 211 108 187 263 HEPS 4,96 4,21 7,47 EBITDA margin % 14,2 19,5 16,9 PSV grew revenue organically by 57% compared with a year earlier. 2007 HEPS before IFRS adjustments was 8,83c. SEGMENTAL ANALYSIS FOR H1 2008 Pumps, spares Engineering, linings Petrochemical Total & valves & industrial supplies Turnover R000 43 782 25 099 51 023 119 904 % of total 36,5 20,9 42,5 100,0 Profit before tax R000 12 245 3 653 2 732 18 630 % of total 65,7 19,6 14,7 100,0 Operating margin % 28,0 14,6 5,4 15,5 # Before deducting central costs Group margins were substantially lower than in F2007. This is because of the much greater contribution by the low-margin Petrologic, and a change in profit mix at Group Line from high margin glass lining to low margin ceramic lining contracts. CASH FLOW Net operating cash flow was a negative R11,7m. This was due to an increase in working capital. PSV took advantage of discounts offered by suppliers, so the figure is deceptive. Cash flow should improve in the future, once the organic growth process starts. Cash held was R12m compared with R3,5m bank overdrafts and R12,3m long-term borrowings, which was satisfactory. BEE In terms of a recently announced deal, the BEE company Vunani Capital has subscribed for 25m shares at 57c each at a cost of R14,25m. The price represents a 15% discount to the weighted average price of PSV for the 30 trading days to 27 February 2007. In addition, PSV s three executive directors have sold a total of 30m shares to Vunani at the same price out of their personal holdings. The Vunani directors will not have any operational role but are assisting in marketing. They have been largely responsible for Petrologic securing a contract worth R80m with a major oil company, referred to earlier. 4
PSV s clientele includes Eskom and other public sector groups, while many of its private sector customers will give preference to suppliers with BEE credentials. So far, it has been unable to secure contracts from some of the mines. Accordingly, a BEE deal has been a priority ever since listing. PSV also disposed of 5,263m shares to Mapi Investment Group, another BEE partner. The deal gives Vunani a 25,6% interest in PSV, and a total BEE interest of 27,3%, including Mapi. ENGINEERED LININGS Last October, PSV announced that it had acquired Engineered Linings (EL) for R40m. EL specialises in the installation of geo-synthetic liners for the purposes of containment, environment protection and corrosion protection. It was established in 1984 and has grown steadily ever since. Among other activities, EL installs linings for mines in various countries in Africa, and it has also worked further afield. Its activities are complementary to PSV s existing businesses, but there are many cross-selling opportunities. As regards payment for the acquisition, R20,2m in cash will be paid at the end of this financial year, on 28 February 2008. The other payments are: R5m cash after the end of F2008; R5m cash and 6m shares at 85c each after the end of F2009; 5,7m shares at 85c each after the end of H1 F2010. PROSPECTS PSV has an extensive customer base in the mining, water management and other fluid-related sectors. There is considerable growth potential for the supply and repair of pumps to de-water mines in Africa. The work to re-commission the Eskom power stations at Camden, Grootvlei and Komati has just been completed. Petrochemical projects include the supply of equipment to new service stations as well as larger projects in Southern Africa. These include the completion of fuel depots, bulk supply lines to harbours and all storage facilities, including the complete design and supply of fire and explosion suppression systems. The Mopani contract is of particular importance, as it is worth at least R50m per year over the next four years. It is essential to keep the pumps going and prevent the mine 5
from flooding, so PSV has stocked up on the necessary items. There will be a need for more pumps and valves for the contract, so PSV will increase its manufacturing capacity. Stock is turned around every 2-3 months on average. It is likely that the need to stock up for the Mopani contract was at least partly responsible for the negative cash flow. PSV can replicate the Mopani formula for other mines on the Copperbelt. As mentioned earlier, it already services pumps on the spot for some mines. Petrologic will continue to service and supply dispensers to Engen. As repairs are particularly profitable, with a margin of 20%, facilities are being expanded, though it will take 2-3 years to do this. So its margins, which are narrower than those for the group as a whole at present, should improve. There is now a new head office building, which also houses three subsidiaries, which will save costs. Previously, its various facilities had been too dispersed. MY EARNINGS FORECAST FOR 2008 I have assumed: PSV excluding EL: The work is growing steadily, with turnover 56,5% up in H1. I have assumed a 50% increase for the whole year. The EBITDA margin was 14,2% in H1. However, it is becoming less as lower margin activities increase in importance. I have assumed 13,4% for the whole year. EL (4 months): Turnover R35m. Operating margin a little wider at 11,2%. Group: Net interest charges R4,5m (R1m 2007) as PSV has had to take on more debt to increase its working capital. Depreciation and amortisation R2,5m. Tax 29%. Share capital 221m shares. 6
This would give us: Rm Turnover PSV excluding EL: 226,5 EL 35,0 Total 260,5 ==== Operating profit PSV excluding EL 30,4 EL 3,9 Total 34,3 Net interest charges 4,5 Depreciation and amortisation 2,5 - Profit before tax 27,3 Tax 7,9 Headline earnings 19,4 HEPS 8,8 MY EARNINGS FORECAST FOR 2009 I have assumed: PSV excluding EL Turnover 40% up to R317,1m Operating margin lower at 12,5% EL (whole year): Turnover R85m. Operating margin rising to 11,5%. Group: Net interest charges a little lower at R4m. Depreciation and amortisation R2,5m. Tax 29% 7
Share capital 221m shares. This would give us: Rm Turnover PSV excluding EL 317,1 EL 85,0 - Total 402,1 ==== Operating profit PSV excluding EL 39,6 EL 9,8 ----- Total 49,4 Net interest charges 4,0 Depreciation and amortisation 2,5 Profit before tax 42,9 Tax 12,4 ----- Headline earnings 30,5 - HEPS 13,5 ROBIN PEGLER There is no limitation on the distribution of this report, and you may use it as freely as you wish, provided only that you attribute its authorship to me. You may quote me by name, and I welcome questions about what I have written and about the company s prospects in general. I have taken every care in the writing of this report, but those who act upon it must do so entirely at their own risk and on their own responsibility. 8