Ellies Holdings share analysis

24 Jan 2012. Ellies Holdings is a manufacturer & distributor of electronic products related to television reception, including satellite & terrestrial aerial range. I am a bit concerned about the negative cashflow over the last 6 months, but from a value perspective Ellies looks good if they can sustain the last18 months' performance.

What are Ellies' products & services?

Telecoms power	Towers in rural areas typically run on gennies 24/7. Megatron combines renewable energy technologies with batteries & gens, making them more economical.
Gensets up to 3MVAs	Electric generators using diesel or petrol, built for mines. Put together by Megatron, but all engines & alternators are sourced from European suppliers. Sole distributors for Genpower diesel generators in Southern Africa.
Megatron Federal	Megatron Federal manufactures transformer substations, medium voltage withdrawable switchgear & diesel generator sets. They import medium voltage fixed pattern switchgear, power transformers, overhead line hardware & low voltage components. Services offered are engineering & design solutions, as well as installation & commissioning & finally maintenance of low, medium & high voltage electrical systems. They have supplied equipment to projects in Ghana, the DRC, Zambia, Dubai, Burkina Faso & Tanzania. Key customers are City Power, City of Tshwane, Anglo Platinum & Ethekweni Municipality. "The surge in the copper price & other recourses has seen activity in African mines dramatically increase, creating demand for upgraded electrical infrastructures...The new transformer factory is gaining traction with supplies to Mozambique being executed & renewable energy solutions have been added to the product offering. These renewable energy solutions have created a unique offering to the telecommunications industry amongst others, where power in rural areas is limited."
Ellies Renewable Energy sector products	Ellies Shower Heads, flow regulators, instant-off flow controllers & toilet-flush saver. Solar hot water systems & geyser blankets. Partnerships in both LED lighting & Compact Fluorescent Lamp lighting; as well as offering ecobeams & solar panelled light kits.
Satellite-based broadband	Ellies owns 45% of SkyeVine (the other 55% of Skyevine belongs to Q-Kon), which provides internet satellite connectivity in sub-Saharan Africa, it began operations with the launching of Intelsat's New Dawn Satellite. SkyeVine's internet services reach where terrestrial broadband providers cannot, & provide redundancies to customers that are unable to maintain constant broadband levels.

Interim results to 31 October 2011

The 6 months to 31 October 2011 saw owners earnings of R43m, compared to owners earnings of R51m in FY2011. What is a concern is is the negative cashflow, largely as a result of increasing working capital - hopefully this is therefore temporary. Wayne Sampson explained it as follows: "in part of the working capital there was another R7.5m in properties, there was R15m in machinery and operating activity. So, there was a lot of input into getting it driven in the right direction and on top of that with Ellies as a bit of a timing issue as well we’ve gone into the renewable and energy saving products, being light bulbs, CFL and LEDs. That stock came in end of October, we were selling it beginning of November, so a bit of a timing issue on that." Here's a link to his explanation on JSE Direct.

Megatron grew PBIT by 361%, Ellies' consumer goods segment saw its PBIT decline by 5% (the prior period included the impact of the Soccer World Cup).

The group's capital demands, additional investments in plant & equipment, & the construction of new production facilities on existing land & buildings has been financed through additional gearing.

Directors

BEE

Created In-toto Solutions, 51% owned by Ellies Holdings & 49% owned by Intoto Technology Investments. In-toto Solutions focuses on both government & large corporate projects.

Phil Fisher methods

Market potential	The order book for Megatron is "looking very healthy for the next 6 months, if not longer" As South Africa & Africa grows wealthier, there is a large potential market for television reception products like antennas, decoders, satellite dishes & industrial audio. Over the next couple of years we'll see a growth spurt, due to the implementation of Digital Terrestrial Television in Southern Africa (SADC announced in November 2010 that DVB-T2 would be the preferred standard for the region). On 14 January 2011 SA announced that DVB-T2 will be the national digital terrestrial broadcasting standard. The public launch of DTT has been postponed in SA to the 3rd quarter of 2012. "Once the standards are finalised, hopefully by March 2012, we will be able to look at issuing the tender for the manufacturing & distribution of the set-top boxes". Analog switch off was originally planned for December 2013, although Minister Pule has said this will also be affected. Ellies has partnered with Altech UEC to distribute the set-top boxes manufactured by Altech UEC. South Africa's energy requirements are growting, whilst the cost of fossil fuels rises - there is a potential massive market in renewable energy solutions. As energy requirements grow power generation, transmission and power distribution markets should too. There is the potential to take these products to the rest of Africa. "When we bought Megatron 70% was local, 30% export. It’s now round about 80% export, 20% local. That’s the whole refocusing of the business".
Plans to grow business	The group's initiatives in energy conservation, making use of renewable energy products, are achieving traction. Ellies' energy efficient lighting products are proving to be an important component of these initiatives & are successfully penetratng the consumer market. Ellies has a close relationship with Eskom, in an effort to assist in the reduction of energy consumption in the domestic home. Management is planning aggressive expansion into export markets (into Africa?). "Ellies expects that implementation of the Digital Terrestrial Television (DTT) migration rollout through Southern Africa is imminent. Ellies, together with the group's strong strategic partners and alliances, will be positioned to participate in and benefit from the DTT roll out". In FY2011, Ellies reported that they "continue with the development of products, with new moulds being designed & made, and products submitted to the regulatory body, NCRS, for approvals"; and that they "continue to endeavour to fill the gaps in the market with innovations to make the consumers life easier".
How effective are the R&D efforts relative to company size?
Does the company have an above-average sales organisation?
Does the company have a worthwhile profit margin?
What is the company doing to maintain or improve profit margins?	In FY2011 Ellies reported productivity improvements in their engineering department "as new tools & greater automation was introduced"
Does the company have outstanding labour & personnel relations?
Does the company have outstanding executive relations?	Executive directors: ER Salkow (Chairman), MF Levitt (Chief Financial Officer), RH Berkman, RE Otto Lead independent non-executive director: OD Fortuin Independent non-executive directors: MR Goodford, MS Mazwi (resigned 11 November 2011) Non-executive director: AC Brooking
Does the company have outstanding executive relations?
Does the company have depth to its management?
How good are the company's cost analysis & accounting controls?
Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?	Degree of skill in handling real estate matters? Rate at which it borrows, given its debt? Patents?
Does the company have a short-range or long-range outlook in regard to profits?
In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing shareholders' benefit from this anticipated growth?
Does the management talk freely to investors about its affairs when things are going well but 'clam up' when troubles & disappointments occur?	Wayne Samson (CEO) was interviewed by Moneyweb on 24 Jan 2012, the biggest issue being the negative cashflow - the timing issue with Ellies seems to be the major factor, renewable energy savings products (light bulbs, the CFO & Leeds) coming in at the end of October but only being sold in November. I would have liked to see him specify the Rand amount of renewable energy savings products which came in in October & hasn't been sold yet, and whether that has been cleared out now.
Does the company have a management of unquestionable integrity?	I don't know much about it but apparently there was a " 'multi building purchase' deal announced a year after the fact (they bought a bunch of buildings around the country from directors)"

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	Wholesale consumer goods - Ellies & Elsat brands	Infrastructural electronics - Megatron
Operating profit	61%	39%

11 Nov 2011	Mr MS Mazwi resigned from the board, but no reason was given.
Apr 2011	Oliver Fortuin is appointed Lead Independent Director. Oliver has more than 20 years' experience in the technology industry, 15 of these with IBM. He is currently serving as a Senior Executive for IBM Sub-Saharan Africa.