eBusiness Weekly
Silvester Mupanduki
Masimba Holding’s half-year revenue for the period ended June 31 went up by 52 percent to $9, billion supported by growing orders from both the private and public sectors.
The country has a big infrastructure gap and the Government is in the process of rebuilding.
Masimba is one of the top five companies that are currently contracted to work on some of these projects. Below are examples of a few big government projects that Masimba is reported to be involved in.
Construction of the busy Beitbridge – Chirundu Highway (971km project), the main trade route linking the southern ports of South Africa to Zimbabwe and other Southern African Development Community (SADC) states. So far over a third of the rehabilitated highway has been opened to public traffic.
Construction of 220 houses at a cost of US$300 million that is part of the Beitbridge modernisation project. Masimba is part of this project too.
Construction of the US$85 million Mbudzi traffic interchange at the intersection of Simon Mazorodze Road, Chitungwiza Road and High Glen Road. A world class traffic interchange that is expected to eliminate congestion around that area upon completion.
Majority of these projects spearheaded by the Government, are set to be completed by 2023. That means Masimba is likely to be one of the busiest companies in Zimbabwe for the next 12 to 18 months.
In my best case scenario, l forecast the Zimbabwean construction industry to expand at a compounded average growth rate (CAGR) of 6 percent between 2022 and 2027. However, it is very important to note that this industry is cyclical by nature, there is no guarantee that it will continue doing so well for the next 5 to 10 years and hence opportunistic.
Quality
A quick glance at Masimba Holdings financial results shows that this is one of the few companies that every opportunistic investors should buy and hold. The company’s stock is currently trading at $50 and has a Market Cap of $12 billion to go along a Net Asset Value of $15,8 billion. That gives us a P/NAV of 0,76. Benjamin Graham would recommend a price to book value of not more than 1,5 and if we are to use this Graham’s approach, Masimba looks very cheap.
The company reported a cash and cash equivalent position of $1,48 billion and a total debt value of $124 million (short term debt). Subtracting total debt from Cash, we will be left with a total net cash value of $1.36 billion. That’s $6 net cash per share sitting on the balance sheet.
Suppose you decide to pay for the entire business today, you will be buying it for $44 not $50 ($50 share price less $6 Net cash). The stock price has been going up and down in the last few months giving value investors a good opportunity to buy more shares at a huge discount. This company has Zero long term debt. Despite high capex demands, the business has so far managed to fund almost 80 percent of its financial position through equity. This is the type of strength that makes Masimba more attractive to long term value investors.
Great business generates positive free cash flows. Masimba has been one of these free cash flow generators over the last two years with a FCF/Debt of 5 percent and a FCF yield of 15 percent in 2021. Free cash flow yield indicates the level of cash flows this company is earning against its market value. This ratio is calculated by dividend free cash flows by its market capitalisation.
Valuation
Masimba has, over the past few years, grown to be one of the best construction companies in Zimbabwe and the order book is expanding every year. With the rate at which our construction and mining industry is growing, a few companies like Masimba in your small portfolio can make a career. FY2022 Operating margins are expected to stabilise at 20 percent from 18 percent in 2021. The company is now getting more than half of its revenue in USD terms and that will help control operating costs, which are on the uptrend due to inflationary pressures.
Construction is capital intensive, a growing order book demands more on Capex, and as a result I forecast reinvestment rate to average 10 percent to 12 percent in the next five years. I also expect the company to maintain a ROIC of around 50-55 percent during the same five-year term (2020:57 percent, 2021:51 percent) and the USD portion of revenue to keep growing.
My estimated intrinsic value is $131.34 versus a market price of $50. That gives investors a margin of safety of almost 163 percent and make this stock a potential three bagger.
Business Weekly has taken all reasonable steps to ensure that the information within this article is correct and no liability is accepted for any loss arising from reliance on it. All opinions and estimates expressed in this report are (unless otherwise indicated) entirely those of the writer. Readers of this article shall be solely responsible for making their own independent investigation of the business, financial condition and prospects of companies referred to in this report.
Sylvester Mupanduki/Phone: 0771 623 648/Twitter: @Real_UncleSly/Email: [email protected]
