Sanlam bullish about Reunert’s mix for load-shedding success

Sanlam is bullish about Reunert’s investment case due to record sales of its renewable power products and SA’s energy crisis that has upped demand for its electronics products. 

Despite much volatility in financial markets since the Covid-19 pandemic, Sanlam says small- to mid-cap companies have done well in 2021 and 2022. 

Vanessa van Vuuren, portfolio manager for the SIM Small-Cap Fund at Sanlam Investments, says having small and mid-cap shares is a useful source of diversity within an equity investment portfolio.

While many companies have suffered during the last three years, certain companies have managed to buck the trend. 

One of these is Reunert, which has stood out in Van Vuuren’s portfolio.

The electronics company is one of a handful of companies that has done well due to load-shedding given its investments into renewable energy and supply contracts with the power sector. 

“Reunert is one of those fascinating business cases. It is just in the perfect sweet spot of contending with the current environment,” Van Vuuren told Business Day. 

The market has acknowledged as much, with the group’s share price rising more than 35% in the past 12 months. 

The other companies making up the top five stocks in the Sanlam fund are: Famous Brands, Omnia, Sun International and Reinet Investments.

Weapons side

Reunert, which is valued at about R11.3bn on the JSE, has operations that include the design and manufacturing of various electrical conductors, cables and accessories, as well as ICT-related services for businesses. It also has niche businesses that cover communications and radar systems.

“On the one side there is the weapons and the defence side in which you can already see a scenario where that order book and pipeline is full with heightened geopolitical tension around the world,” said Van Vuuren.

She noted that the electric cables business has had a difficult run.

“It was about that business recovering and getting a better order book. Now we are starting to see Eskom spend on transmission, so that is propping that business up.”

The fund manager considers the electronics and IT parts of Reunert to be in a “reasonable” state.

“And then they have this new renewable side as well. If you look at the investment case for the renewable side where they are doing sort of turnkey solutions — again it is an area of significant insulation because that is a natural beneficiary of what is going on with Eskom.”

According to its recently released interim earnings report, the group’s applied electronics segment had a strong first half. Revenue was up 49% to R1.6bn and operating profit almost trebled to R163m, driven by strong exports and the demand for its renewable energy products.

Upside potential

Van Vuuren and her team started buying shares in the electronics group in 2022 when the stock was down, with the rationale that electricity supply uncertainty would drive up demand for power-related products and renewable energy. 

“We bought most of our investment sort of in the middle of last year. We were a little bit early and we have done well out of it and still see some more upside potential.”

The industrial group has 20 businesses in its three segments. It also provides solar energy and storage products via its Terra Firma Solutions, BlueNova, and Apollo Energies subsidiaries that have benefited from the government opening access to green energy as SA’s power crisis and problems at the state-owned power utility persist.

“Those are the types of opportunities we were looking for because we could see that as load-shedding increased, there is big opportunity and scope for their renewables investment through this new business that they have invested in. And you can just start to see all the cards falling in place,” she said. 

Reunert says the demand for renewable energy products and services accelerated in the six months to end-March “as sustained load-shedding continued to plague the country”.

To ensure that these businesses grow sustainably, investment has been made at both the battery business, Blue Nova Energy, and the solar business, Terra Firma Solutions. “This investment has been made in preparation for further increased demand and resulted in higher costs in the businesses,” said the group.

While such investment would normally result in earnings taking a hit because of the expenditure, revenue and operating profit increased in the period. The growth trend is expected to continue into the medium term, the company says. 

gavazam@businesslive.co.za