Could Zeda hit unbundling heights despite early market snub?

The market has given car rental and leasing group Zeda, which owns the Avis and Budget brands, a hard ride since it was unbundled from industrial conglomerate Barloworld in mid-December.

After starting at R18, shares in Zeda stalled at a low of R12.54 a few days before Christmas, but found a little traction to rally to R14.20 earlier this month. On Friday the share closed at R13.80, giving Zeda a market value of just more than R2.6bn.

Market watchers have suggested some large asset managers that are shareholders in Barloworld might have dumped the unbundled shares as Zeda might be deemed too small for existing investment mandates. Recent Sens announcements have confirmed that major Barloworld shareholders Zahid Tractor & Heavy Machinery (ZTHM) and Silchester International remain anchor shareholders in Zeda.

Unbundling exercises are often initially treated dismissively by the market, with perceptions that the unbundled company is not regarded as core to the parent company’s growth ambitions or that the parent might be unwilling to fund further strategic growth endeavours. However, unbundling exercises can also allow management teams to explore growth opportunities that might have been checked by a conservative parent company. Management, especially if appropriately incentivised, can also thrive away from an overbearing corporate culture.

Bytes (unbundled from Altron), Astral and Spar (both Tiger Brands) as well as MiX Telematics (Control Instruments) have all blossomed into more substantial entities after their respective unbundlings.

Montauk Renewables is perhaps the most famous example of unbundling success. After a shaky listing on the JSE in 2014 (when the shares touched as low as 200c) its shares have surged as the market warmed to its green energy solutions. At the current price of R196, Montauk is worth more than double the market value of its former parent company, Hosken Consolidated Investments (HCI).

Long-term prospects

Officially, it was argued that the assets held by Zeda and Barloworld had divergent strategic focuses and required different capital requirements. Barloworld’s board maintained that “with competing management and funding demands of a geographically and technically diversified organisation, Zeda will benefit from a more focused and fully dedicated executive management that is directly accountable to a similarly focused and dedicated board of directors”.

The Barloworld and Zeda boards believed the long-term prospects of both companies would be enhanced by their being separately listed.

While the market has been cool on Zeda’s unbundling and listing, the company recently issued high-revving results for the year to end-September. Revenue was up 7% to R8.2bn, but operating profit kicked up 53% to R1.26bn. Headline earnings came in at 325c a share, which places Zeda on a modest earnings multiple of about four times.

The modest rating comes despite local holiday destinations, especially Cape Town, experiencing bumper tourist inflows after the Covid-induced lull. How strongly this tourism resurgence feeds into Zeda’s interim numbers to end-March could have a major bearing on the share price.

Zeda’s prelisting statement showed its car rental business had a reported revenue market share of 38.1% for the 12-month period September 2021 to August 2022. The smaller, but better-margined, full-maintenance leasing component of the leasing business held a reported market share of 21.9% over the same period.