Key message: Structural tailwinds bode well for medium to long-term growth in global armaments and renewable energy.
- We had a pre-close update with Reunert management. With respect to the guidance they provided at the FY24 results, 1H FY25 will be a tough period with little seen in the way of GDFI uplift in the local market and the order book (defence and HV cable) biased to 2H FY25. 1H FY25 is likely to be flat on the pcp, but growth is expected for the full FY25.
- Electrical Engineering: Transmission line tenders have been issued with 4 companies qualifying to supply OHC (transmission cables). Orders are expected in by the end of FY25 with Eskom running a transparent process and expected to appoint EPC contractors this year. OHC is high volume business that Reunert can perform at only extra variable cost in the existing factories – while it may be low margin the volume makes up for that. The procurement process is expected to last for at least 10 years. The circuit breaker business is running well with strong export demand into the US (low risk of tariff, without AGOA a 2.7% duty will apply). Reunert product has been approved for the residential market and sales are expected to grow. In the Rest of Africa the outlook is neutral, with Zambia seeing demand from copper mining companies but Zesco weak with the drought reducing hydro power and forcing expensive power purchases.
- ICT: Nashia is performing better after port delays impacted 1H FY24. The rest of the divisions are experiencing stable conditions. The finance book has declined and with lower interest rates will deliver a reduced finance result.
- Applied Electronics: Main markets for the defence cluster are SE Asia with the Middle East starting to grow. Product is sold into Europe, and with the growing instability globally more opportunities are seen in the region. The model will be similar to SE Asia – help customers set up manufacturing lines but retain the IP and key parts supply. In this way Reunert is not spending capital on factories but gaining annuity type income at low capital cost. There is significant growth potential globally as the countries look to become more self-sufficient in armaments and defence. The renewable energy market is seen to have steady growth in C&I solar installations, with the bulk of the battery stock now traded out.
- Reunert has two main structural drivers – global re-armament and the solar rollout in South Africa. The balance sheet remains conservative, with BOO orders able to funded by borrowing against the Quince book.