[TOP STORY] Stocks that may benefit from Ramaphosa’s energy plan

SIMON BROWN: I’m chatting with Anthony Clark. You’ll find him on Twitter and Small Talk Daily. Of course the president on Monday evening gave lots of talk around power generation. Frankly, the story sounds great. The execution is what’s going to matter.

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Anthony, I appreciate your time today. There are a couple of stocks on the market [that would be affected by this move]. We were chatting before we hit ‘record’. ARB would be one of them, but Sabcap owns that. There’s Reunert. Even Renergen could benefit. But the one that I’ve been noticing is Ellies. The stock hasn’t moved, but certainly they’ve sort of pivoted into solar.

ANTHONY CLARK: Hi Simon. Yes, Ellies is a very interesting stock. For many, many years, the company rode high on the last wave of loadshedding. I think the market forgets going back between 2010 and 2013, where Eskom was actually paying companies to go out to your homes to install low-energy light bulbs, blankets on your geysers, etc. Ellies made a great deal of money on that initial initiative. When that ended in 2013, the share price basically fell off a cliff. I was looking at my notes before we came on air and the peak of Ellies was April, 2013, at R9.40. It got down to a low of about three or four cents. It’s now trading at 21 cents. So it’s a typical penny share.

I think the interesting thing with Ellies, as you correctly say, is it’s always repositioning itself to try and take advantage of a very difficult environment. They’ve gone through DStv, they went for corporate lighting. At one point they were making a lot of money from generators, and they’ve now flipped once again to do sort of what I would call home automation, home-streaming systems and of course, as you correctly mentioned, alternative energy and solar.

SIMON BROWN: It’s going to be a long road for them, although I see them when I go into some of the hardware stores – they’ve got space there. So they’ve got the space, and I imagine they’ve got some suppliers, but [it’s a] long road back into the minds of investors. As you say, a stock sitting at 20 cents once was the darling of the JSE.

ANTHONY CLARK: Yes. The concern I have with Ellies is as a penny share it’s going to be highly difficult for the institutional market to ever take the company seriously again with a market value right now, as I look, at R161 million. I was looking at their last interim results balance sheet, and they have absolutely no cash in their balance sheet. They have R119 million of debt and R187 million in inventory.

Now, if they had to suddenly raise money to try and expand into a new area of alternative energy, solar power or any of the new technologies – which we know consumers in this country will want, to negate Eskom’s problems – where are they going to find the money from to actually roll up this initiative? They can’t raise money via an equity placement because the share price has bombed out. Standard Bank has been propping them up for years. The current interest rate is Jibar plus 4.5%. Who is going to give them money to actually roll up this new initiative?

So my concern with Ellies is it has a wonderful little footprint, a name that everybody knows because we all have their remote blasters and extension leads, etc, but I cannot see the company in its current form having sufficient financial resources to actually move or migrate into a new area.

What it needs, excuse the pun, is a little light fairy to come in, give it some money, use the name, use its distribution network, use its installers to say ‘You know what, we’ve to install DStv. Let’s migrate. Perhaps we’ll install a solar panel for you.’ That’ll save time and money, which Ellies currently doesn’t have.

SIMON BROWN: Yes. I take your point on that. Reunert obviously has the cable division. I’ve chatted with them before. But then Sabcap (Sabvest Capital) with Chris Seabrooke, recently took out ARB, and ARB is an obvious winner here. Sabcap is a stock that I know that you are a fan of.

ANTHONY CLARK: Yes, I must say Christopher Seabrooke couldn’t have foreseen the president last night completely deregulating the independent power market. But the transaction that Sabcap did, buying up a company with the family who own ARB Holdings, and of course Masimong, the black empowerment company run by Mike Teke, now seems to be an extremely astute deal. From memory they have a look-through stake of just under 21%. When I spoke to Chris Seabrooke before he went to Mykonos, he said the company was performing quite well. And I think the news coming out overnight on the potential for cabling and connectivity going forward, as everyone rushes out to put in solar panels, inverters, etc, I think will really position ARB Holdings very, very well.

So I think, once again, for no fault of his own, Seabrooke has once again landed a very opportune little gem of a business [in ARB] that surely will tick into earnings over the next couple of years.

SIMON BROWN: Yes. He is a capital allocator of absolute note.

A quick last one is Renergen. I actually haven’t been down there, but I think you’ve been down since the January trip. Phase one is probably the big story, but there could be potential here. They’ve got all that gas. Every time they poke a hole in Virginia in the Free State, they just find more gas.

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ANTHONY CLARK: You are spot on. I was there literally three weeks ago with the CEO Stef (Stefano) Marani. The plant is basically going through its test operation. Two of the sites were actually operational and they intend to probably switch on the gas at the end of this month to start producing liquid natural gas and helium.

But phase two will be materially larger. Then they’ll be generating or producing 800 tonnes of gas a day and five tonnes of helium. Given that that site is on one of the largest known gas deposits in the world, it has potential to expand.

One would not be remiss in saying that there is potentially opportunity for Renergen – or should I say a third party – contracted to come in, build a gas plant on that site, tap the gas that’s in the shallow ground and start generating electricity to feed back into the grid.

I would imagine that, given the deregulation of the market yesterday, any financer worth his salt, be it be it locally or internationally, must be chomping at the bit, saying, ‘Here we are, there’s a great gas deposit in the Free State, we can connect to the grid and we can have peak power available at the turn of the button’. So I would imagine in due course Renergen will probably supply some very large quantities of gas to an independent power producer who may build an operation, one would imagine, very near its gas plant in Virginia in the Free State. It seems like a natural thing to do.

SIMON BROWN: You raised two points I hadn’t thought of there. A third party doing it, and of course they’d put it right next door, put it where the gas is. You don’t have to then pipe that gas hundreds of miles.

Anthony Clark, Small Talk Daily on the Twitters, I always appreciate the insights.

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