• Execution of a clearly defined strategy has seen AfroCentric Investment Corporation (ACT) deliver a robust performance in the last ten years: Revenue and adjusted EBITDA have increased by a CAGR of 20% and 15%, respectively. This has translated into diluted HEPS and FCF CAGR of 3% and 5%, respectively. The share price and DPS have increased by a CAGR of 8% and 14%, respectively.
  • Acquisitive growth strategy has seen 26 acquisitions completed since 2008, exceeding R 2.5bn: ACT has a proven capability of deal making, with ROIC mostly ahead of WACC since 2011. We estimate that in the past ten years that ACT has generated an economic profit of R 400mn, having only incurred its most significant economic loss in FY 10A. ACT’s intentional diversification strategy into Pharmaceutical (FY 21A: 48% of revenue and 31% of adjusted EBITDA) has meant less dependence on the medical aid administration business. However, this has lowered ROIC and weighed down on the cash conversion cycle.
  • Sanlam’s shareholding improved ACT’s capital base and helped facilitate Pharma acquisitions: Sanlam acquired a 28.7% shareholding in ACT Healthcare Assets (AHA) on 15 December 2015 for R 753mn in cash. To date, there have been limited tangible benefits from the ACT/Sanlam partnership. However, in the MT we expect this relationship to strengthen, providing shareholders further upside optionality, not yet priced in our view.  
  • Balance sheet has been prudently managed: Since FY 10A, ACT has mainly held a net cash position, with net debt/EBITDA not having exceeded 0.6x during this period.
  • FY 21A results highlights: Robust double-digit growth in revenue and EBIT underpinned by the Pharmaceutical Cluster (Healthcare Retail) driving diluted normalised HEPS growth of 9% y/y to R 0.60/share & DPS of R 0.34 (flat y/y).
  • ACT has traded on undemanding multiples and continues to offer double-digit upside: ACT’s historical one year forward P/E and EBITDA has averaged 10.8x and 4.0x, respectively. This compares to a 10-year CAGR EBITDA of 15%. We attribute this potentially to the hold co structure, overhang from the Neil Harvey and Associates case; and share liquidity (57% of shares owned by non-public shareholders). In our valuation, we calculate a target price range of R 6.35-9.00/share and estimate a a one-year rolled dividend yield of 6.4%.  

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