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Group CEO Alan Dickson says the company’s strong cash flow enables the payment of good dividends.
SIMON BROWN: I'm chatting with Alan Dickson, Group CEO of Reunert. Six months' results ending March. Revenue up 7%, Heps up 8%, dividend up 8%. Alan, probably the only sort of bleak spot in the set of results was logistic challenges, mostly port. That hurt revenue from the Nashua brand. You simply couldn't get the stock that you needed. Has that resolved itself?
ALAN DICKSON: It has largely resolved itself. Now that we've moved into the second half of the year, Simon, the stock levels are more or less back to where they should be, and we're expecting a normal second six months for Nashua and have the normal amount of sales that we would typically expect from them.
But in that first six months, unlike most of our other businesses where we were able to make some remedial actions, the shipments that Nashua takes on board are largely consolidated and quite large each time they come in. Hence when there was a disruption it was almost like a binary event that we just couldn't get right. So it was a fairly significant impact on them and we weren't able to resolve that – unlike the rest of the business.
SIMON BROWN: The rest of the business is doing well. Let's touch on renewables. You mentioned some saturation in the battery-storage market, particularly in the consumer and smaller corporate [area]. But otherwise it's a space that's doing very well and you are seeing good demand coming through.
ALAN DICKSON: Yes, Simon. Our primary target market is the commercial and industrial market. That's the market that we define nominally as one megawatt up to about 30 or 40 megawatts, and that's where we are primarily exposed and where we primarily focus – and have done for the last five or six years. In that market there hasn't been any of that saturation that we saw down at the bottom end in the residential and small commercial [area], which really was driven by a lack of load shedding, which is good for the country but not so good for that particular business area.
But that CNI space is very much call it a large company space now. Those companies are far more concerned about what Eskom's tariffs are going to be three years from now. What does the municipal infrastructure that I'm sitting on look like, and how likely is that to fall over?
We're increasingly seeing failures on the municipal grid, irrespective of the generation. So we are strategically seeing a trend whereby the CNI and business community are making a decision to have an alternative grid power to some extent, and therefore we are seeing lots of activity there. We have a large pipeline. Our build rates have increased very nicely in that space, and I think this is a medium to long-term trend whereby we are going to replace current grid capacity by alternate sources of renewable energy.
SIMON BROWN: I take the point. I mean, 60-odd days of no load shedding – and don't get me wrong, we absolutely all love that. But the bigger picture is that load shedding perhaps was a bit of the trigger a couple of years ago, but this is just more about sort of the good business decision being renewable, green, reliable, and truthfully cheaper than what we get from Eskom. That is that driver you talk about, which is a medium to long-term driver.
ALAN DICKSON: Absolutely, Simon. And then if you add onto that many of the South African space or SA Inc have export customers. Increasingly we are seeing green requirements or less carbon-intensive requirements and it helps; many of our partners are having to have some form of green energy, whether it be wheeled or generated for themselves – in which they can ensure that they remove themselves from the risk that South African Eskom power is going to present when some of these tariffs start to come in, in the not too distant future.
SIMON BROWN: Yes, of course the good old ESG [Environmental, Social and Governance].
Defence is another strong sector there – increased demand. I'm imagining in many of the cases, as you get that increased demand you increase capacity in your facilities, and that should over time ultimately help margins.
ALAN DICKSON: It definitely will. The largest demand we have at the moment is in our Fuse business. We did deploy capital last year – which was completed about five or six months ago – to increase their capacity quite significantly, and that's already starting to play through. But, other than them, we have quite a bit of capacity still left in those factories, so we're still able to pick up much more volume than we have at the moment without having to deploy hundreds of millions of capex in order to get there.
And obviously, exactly what you say, as those volumes go through those factories, recoveries increase, we get much better throughput coming out of those, and hence margins do increase. We saw the first of that already this year in which our defence margins have already started to improve very nicely on the increased volumes that we have.
SIMON BROWN: And that sector also has a strong order book into the future.
ALAN DICKSON: It does. We have nearly R3 billion – R2.7 billion worth of order books, of which 80% is export. So very little reliance on the South African customer base, and that's great.
And secondly, in that 80% it's actually very diverse geography. So we have many geographies that we're selling into, which is also very positive. But that R2.7 billion at the moment, where we stand right now, is more or less a year's worth of coverage. So we are fully covered for the rest of this financial year and a big chunk of the next financial year already. And we are certainly seeing no decrease in the demand. In fact, with the geopolitical uncertainty we see out there, we anticipate that this is a medium- to longer-term trajectory that we are going to see ourselves on in this defence business.
SIMON BROWN: How much of the group? Obviously there's stuff you're importing, The Nashua brand is one of them and other bits, but how much of your revenue is export? You mentioned in the defence here of course there's the circuit breakers. A lot of that goes into the US.
ALAN DICKSON: Yes. Our export is primarily driven around that defence business that you speak about and our electrical engineering segment – both cables and circuit breakers. Last year we exported a little over R4 billion [worth], so around 35% of our revenue. And in this first half we did R2.2 billion, so it was up 16% on last year. We are well positioned. We've already spoken about the defence order book.
The environment in Zambia is positive. The Americans – our export order book of circuit breakers into America and Europe specifically is much improved over where it was about a year ago. So we have quite a good line of sight of our exports, and we expect this to continue. It's a particular strategic drive that we've got. We've got five large geographic presences around the world and we are continuing to invest into those so that we've got better boots on the ground and better capability to ensure that we can continue to grow the export drive because, despite a hope of improved conditions in South Africa, we do expect that the macros are going to remain under some pressure for some years yet.
SIMON BROWN: I take your point on that last question. A strong cash flow – and this in spite of increased working capital requirements. You are generating good cash at a group level.
ALAN DICKSON: Yes, we are. It's always been, I would argue, a core competency of Reunert. It's a very strong part of our investment case and we've continued that. So yes, we have put a little bit more into working capital just as a part of the Transnet [situation], to support ourselves through that. And we also had quite large sales in the second quarter which haven't fully been collected. So we've got a little bit in trade debtors as well.
But overall [we are] generating very strong cash flow and that, together with the balance sheet that we have, enables us to fully support all of our strategic initiatives and our opex requirements, as well as paying good dividends.
SIMON BROWN: We'll leave it there. Alan Dickson, Group CEO at Reunert, I appreciate the time.
