Ellies-THE SOUTH AFRICAN INVESTOR

THE SOUTH AFRICAN INVESTOR

Ellies

MICA-26

Ellies (JSE: ELI) produces electric plugs, and Elsat satellite dishes among others.

The company had its highest market capitalisation of R2.9 billion in 2013.

Subsequent poor financial performance has seen this reduced to R62 million as at 19 December 2019.

Brief recent history

Ellies purchased 'Megatron federal',
which produced power generators and inverters,
In 2008 for R180 million.


After suffering losses from contracts in other African countries,
Megatron was put into business rescue and liquidated;

Such that Ellies consisted of only the consumer electronics business.

This article attempts to assess whether

  • the recent poorfinancial performance of the company has led to the market undervaluing the company.


We will examine the past performance of the 'Consumer electronics' business separately and e
stimate the cash flows that this business has previously generated,
(to get an idea of how much it can potentially generate) using two approaches:

  1. deducting an estimate of the cash flow effects of Megatron Federal from the 2009-2017 Statement of cash flows of the company and
  2. removing the effects of non-cash items on the operating profit performance of the Consumer electronics segment.

*Information used is obtained from the Ellies annual report and we will only go as far as it has been disclosed; we will not estimate an input used in our analysis.
 

Table: Ellies stock price (in ZAR cents) through the ages
image001

 

Source: Google



Operating earnings history

Operating profits have been poor from 2014 after Megatron Federal had contracts with Eskom and in Africpa expire and terminated respectively.

The 2009-2017 results include Megatron Federal which we will see in the next session was poor.


Table: Ellies operating profit history (2019-2009)

eli
 

Major happenings

Megatron was acquired in 2008 for R180 million to diversify company earnings.

Megatron's initial signs were encouraging, contracts were signed with Eskom and in Africa.


Contracts ot cancelled and Megatron Federal went into business rescue (it never came out).

 Ellies was left with a debt of R89 million.

Table: Megatron Federal Revenue and operating profit performance (2018-2009)
cgs
 

Consumer electronics segment performance

The consumer electronics segment is the remaining business of Ellies.

Revenue has stayed constant around R1.3 billion since 2013 while operating profits have fluctuated.

Table: Revenue and Operating profits of consumer electronics: 2019-2009
mgt
 

 

2019 operating profits are down after

  • Inventory write-downs of R82.7 million (2018: R46.5 million) and
  • Impairments of R24 million (2018: R7.1 million).

The loss in 2017 was after impairment charges of R27 million and falling revenues.

Recent company Cash flow.

Despite the accounting-operating losses of R42 million posted by the company in 2019 (2018: profit of R38 million),

The company made a cash profit of R32 million (2018: R30 million) as follows.
 

Table: extract of Ellies Cash flow statement

cash


 

Further cash flows analysis and estimation

The above cash profit got me excited to probe more on the cash gerating ability.

The following our results under two approaches.


Approach 1-using the company cash flow statement.

Estimate the operating cash flows the Consumer electronics business produced by adjusting the company’s cash flows for Megatron federal.

What we did:

We obtained the cash flow statements of the company from 2009-2019.
 

Our starting point was the cash generated from operations prior to working capital changes.

From the segment report of Megatron , we adjusted for non-cash items.

After which we added back the estimated cash losses and subtracted the profits of Megatron from from the company’s cash from operations (excluding working capital).

The below is the results.

Table: Ellies estimated operating cash flows excluding working capital, taxes and finance charges.
eli_1


Approach 2-using the Consumer electronics segment report

 

What we did:

We obtained the Consumer electronics segment operating profits from the Annual Financial statements.

  • Adjusted the results for non-cash accounting items as far as was disclosed.

The below is the results.
 

Table: Estimated operating cash flows excluding working capital, taxes and finance costs.
eli_2

Both approaches give similar results, except in 2017,2016 and 2015.

We will leave it here for you to make your mind about the company.

But from the above;

We have a company selling at R62 million having delivered recent annual cash profits of R32 million.

That is an annual return of approx. 50%.
The higher return should present little risk if confirmed to be true.

I personally think that the market is undervaluing the company.