Investors give Ellies a charge with rights buy

Ellies, one of the worst performing stocks on the JSE last year, may be poised to recover.

This is the view of analysts, who believe the electronics company can make its way back from a torrid time during which it struggled to manage its cash flow.

Ellies asked shareholders to put in an extra R115-million in a rights issue.

This week, Ellies shares shot up 19.8% after it revealed that its rights issue had been heavily oversubscribed - a sign that investors have confidence in the company's prospects.

Janine Weilbach, a research analyst at Thebe Stockbroking - which last year cautioned against the effect of the rights issue on existing shareholders - said: "There's a light at the end of the tunnel."

Weilbach said the company's consumer business, with its tangible assets, was expected to gain from a government tender for the manufacturing of set-top boxes for digital television.

Its infrastructure supplier business, Megatron, which Ellies acquired in 2008, was risky because of its large debtors book, while the order book was too large for its balance sheet.

But she was unable to give a recommendation because Ellies had not yet completed the split of its business between Ellies Electronics and Megatron.

Phibion Makuwerere, equities analyst at Intellidex, said: "We believe that if load-shedding persists, it will help its generators business. Management is also restructuring the business into two separate listed entities and this generally unlocks value for shareholders. Overall it is a speculative counter."

Makuwerere said securing a slice of the digital migration tender was not a done deal for Ellies as more than 100 companies were competing for it. But he added that if Ellies, which has been driven by "lumpy projects" in the past, won this tender, it would "go a long way to address its revenue base, which has been deteriorating since the end of some of its contracts with Eskom".

Ellies previously supplied energy-saving devices for Eskom's residential mass roll-out programme, which contributed 15% of the company's revenue.

Makuwerere added that the rights issue raised only a fraction of the company's working capital and debt requirements, and it may need to raise more.

Ellies CEO Wayne Samson argued this week that Megatron was still a good business. In a year, Megatron grew its order book from R800-million to R4.1-billion - proof of its potential.

"It is in a good sector. It's a matter of getting the right type of funding for the business," he said.

This is one of the main reasons Ellies Holdings is unbundling and listing its consumer business separately as Ellies Electronics, to allow the capital-intensive Megatron business to source funding separately.

Samson said that in the consumer business, the digital migration project, which is set to be launched this year, "would be quite meaningful".

He said Ellies spent R40-million two years ago to prepare for the project, but the launch was continually delayed by the government. The company has applied to sell the antennas that would be needed with the set-top boxes to convert the analogue TV signal to digital.

Samson said growth was expected in the company's commercial lighting business, especially for corporations. "We see it growing month on month. It is on a good trajectory."