Meikles – Time to consider a spin-off?

Meikles – Time to consider a spin-off?

By Ray Chipendo, JOHANNESBURG, July 24 (The Source) – If legendary and loathed US Activist investor “Carl Icahn” had one company to pounce upon on the ZSE, it would be Meikles Limited. His obvious first port of call would be: rally proxies to push for a spinoff of TM from the group.

We believe Meikles’ bundling of unrelated business units has not benefitted investors. There is an argument; by spinning off TM stores and perhaps Tanganda too, investors would unlock value.

Excluding debt and cash we estimate TM’s comparative value to be in the region of $48 million ($25 million for Meikles’ holding), yet Meikles group including (Tanganda, TM, Meikles Hotel, Meikles departmental stores and wholesale and mining) is worth $19 million on the stock market. We think Meikles’ massive debt of $94 million and other issues are clouding the real value that can be unlocked in units like Tanganda and TM. From our work, we understand that too much debt has the inherent ability to permanently destroy even the best of companies.        See our post on RioZim.

Growth Prospects

Retail and wholesalers
The M-store model is designed to sell clothing on a cash basis. Management believes it should target the less affluent market segments. We regard the strategy with indifference. Our view is that competition at that level for clothing is cutthroat and unconventional. Flea markets, vendors and existing stores in downtown target the same market segment.

When we first heard of Meikles’ Mega store concept, our concern was that fewer and fewer households are earning lump-sum salaries that enable them to buy groceries in bulk. Informal businesses mostly provide day to day provisions. But, emerging consumer habits particularly in high density areas where households team-up to buy groceries in bulk, enough to last months, are instructive. Apparently, Meikles is following these nascent trends. In addition, Mega stores will also cater for tuck-shops sprawling in high density suburbs. As indicated by management this strategy will begin to bear significant results in 2016.

The current number of TM supermarkets is fifty three, with eight trading under the Pick n Pay brand. The ability of retailers to import wholesale groceries from South Africa and sell them locally provides a back door discount to their cost structure. With the US dollar expected to continue strengthening against the Rand, we think the exchange rate divergence will allow TM and Pick n Pay to cut down domestic prices of groceries without suffering that much.

Revenues have been softening in the last two years. FY2015 show Tanganda experienced a negative EBITDA. Management has noted Tanganda has exhausted available land and now needs to purchase extra land to expand. We regard Tanganda as a quality operation with a captive domestic market but we would not expect significant growth.

Hospitality

We expect imposition of VAT of 15 percent on accommodation of foreign tourists to dent revenues. Particularly where Meikles acknowledges, foreign tourists account for 75 percent of hotel guests. We also expect weakening incomes to negatively affect domestic tourists spending and numbers. But despite these negative headwinds, we view calming international relations with Zimbabwe as a boon. Given the myriad of factors affecting revenue, a clear picture is not easy to construct. Our sense is that hospitality revenues for the current period will be flat at best.

Quality

For a value investor thinking Meikles is trading at a discount, it is impossible to look past the debt. We think Meikles’ debt position of $94 million is the largest risk for the business. Meikles cash and “liquid” assets of $54 million fall short of meeting total debt by $40 million.

In 2014, Meikles’ corporate office (non-operating) assets were $125 million (35 percent of group assets). The figure dramatically fell by 50 percent to $64 million in 2015. These non-operating assets do not have a yield and are diluting returns on capital. Juxtaposing Meikles group holding strategy with that of other holding companies such as TSL and Warren Buffet’s Berkshire Hathaway flags the oversized corporate office.

Valuation

At a market cap of $88 million, OK Zimbabwe a peer to TM, is trading at an enterprise value to EBIT (EV/EBIT) value of 5. TM generates an average profit margin of 2.7 percent, a little shy of OK’s three- year average of 3 percent. Ignoring cash and debt, while adopting OK’s valuation multiple of 5, we estimate the value of TM’s operational segment to be in the region of $48 million ($25million for Meikles). Contrast that with Meikles group’s market capitalisation of $19.8 million.

By spinning off TM supermarkets without cash and debt, Meikles could be more valuable than the group. We think by un-bundling Tanganda and TM, Meikles will see more value in units as stand-alone businesses.

Ray Chipendo is Head of Research at Emergent Research. He can be reached on: ray@emergent-research.com

The information used and statements of fact made have been obtained from sources considered reliable but we neither guarantee nor represent the completeness or accuracy thereof. Such information and the opinions expressed are subject to change without notice. A report, update, article or note is not intended as an offering, recommendation, or a solicitation of an offer to buy or sell the securities mentioned or discussed – Editor

  • Dopori

    Ray, I agree with you absolutely – time for the group to spin-off the operation in order to give us the long suffering shareholders some value and in fact John Moxon kind of agrees with this whole notion going by his various comments spanning many years now .. I have lost count. I hope Mr Moxon reads these comments. A few companies have done it much to the delight of shareholders and here I have Innscor and Masimba, for e.g. in mind. You have not touched on the Mentor Investment and the mining venture in your comment which I think I as a even as a small time investor feels so uncomfortable with for lack of information. I mean how can Mr Moxon with all his business and accounting knowledge invest in non quoted entities and in which the group has no board representation? How do you determine the performance and returns of such businesses and when to exit or for that matter, increase your shareholding? Before I sign off there are then of course the legacy and political issues with regards to the day light robbery of the group funds by the GoZ. To some extent I sympathise with Mr Moxon in this regard, but he needs to be resolute and stand his ground. Whether we like it or not, Meikles is part of the Zimbabwean business scene and history – after all, money knows no colour!