Sentula keeps the market in suspense

[miningmx.com] — IT SEEMS Sentula Mining, which has been suspended since mid-September this year, could soon be trading on the JSE again.

I suppose the company – suspended to allow an investigation into “possible irregular transactions’ – could not really have timed its voluntary suspension any better.

In essence, Sentula has been on the sidelines sorting out rather delicate matters of corporate governance while the JSE – and especially commodity stocks – have endured some of the ugliest trading conditions in recent memory.

Sentula was trading at 860c when its shares were suspended.

That price already represented a major tumble from an annual high of around 2365c roughly a year ago. Sentula was a real market darling until news of rather unsavoury activities spilled out (roughly R240m was “misappopriated’ at the open cast mining division).

In any event, media reports last week suggest Sentula is close to finalising the results of these investigations.

Suggestions were that Sentula could resume trading on the JSE this week – something that will entail clarifying the effects on year to end March 2007 and 2008 accounts. I’m not so sure Sentula will resume trading within days, but surely such a development will transpire in the next few weeks.

The point is that relatively soon Sentula will again be subject to the vagaries of market sentiment. And just like the frozen super-hero (was it Captain America?) who gets thawed out many decades later to find a much changed world, Sentula is going to find the JSE a very different place.

Thankfully, Sentula has just released its interim results to end September 2008, which gives punters something tangible to work with if the share is allowed to start trading on the JSE again.

Of course, the extent to which investors ignore or simply overlook fundamentals at Sentula could well depend on the market at the given time – noting that for the last six weeks investor sentiment has been anything but rational.

The first thing to consider is whether there are shareholders in Sentula that will simply sell out once trading resumes – perhaps in a bid to liquidate an “artificially supported’ position in order to take advantage of other market opportunities.

I would advise any ordinary folks still holding their Sentula positions to scan the latest interim results quite carefully before making any hasty decisions.

To me the most critical gauge is that Sentula’s broad(er) services offering is still achieving an acceptable trading margin of around 17%.

Admittedly the margin is well off last year’s 23% – but it does suggest Sentula has enough operational slack to cope profitably if clients are stretched in the months ahead.

Adjusted basic earnings came in at 74c/share, and the quality of these earnings looks good with net operational cash flows (after dividends, tax and working capital changes) coming in at R301m (equivalent to around 127c/share).

The interim performance has to be seen against the backdrop of an iffy performance from the group’s core open cast mining services division.

While turnover soared from R550m last year to R890m, margins were squeezed down from 27% to just 16% as “abnormal’ input cost increases and poorly priced contracts at the Scharrighuisen division took their toll. Ultimately an unsatisfactory R142m was left in profits in this key division.

But the longer term outlook for open cast mining services, according to Sentula directors, still looks good.

If there is a early stage turnaround at the Scharrighuisen division, open cast mining services could to double its contribution by end of the 2009 financial year.

Elsewhere at Sentula (drilling & blasting, exploration services, crane hire etc) things are not looking too bad – although there are the veiled warnings about the effect of the current market volatility on mining and exploration activity.

Whether an earlier profit forecast of 170c/share for the year to end March 2009 is at all realistic after recent dramatic developments in the global economy is not made clear in the interim commentary.

But I’m sure our astute readers have noted that more than a few junior mining operations are reining in their marginal activities.

So what could transpire in Sentula’s second half?

CEO Robin Berry reckons the company has largely dealt with the extraordinary challenges faced by the company recently. He believes the underlying mix and fundamentals of Sentula’s businesses presents solid prospects “despite the global resource markets volatility”.

Naturally Berry’s reassuring commentary will be measured against the decision by Sentula to forego the interim dividend in light of “prevailing market volatility and tight credit conditions. Actions speak louder than words.p>

Still, with interim earnings of 74c/share in the bag, one would have to say that at its suspended price of 860c/share, Sentula is – fundamentally speaking – hardly looking over-priced.

If we take a worst-case scenario and assume that just 35c/share is generated in earnings during the second half that would put Sentula on a forward earnings multiple of around 7.8 times.

So what’s in this for investors?

Well, with the market currently in the meanest of moods, it’s not impossible that Sentula – despite its solid fundamentals – gets an icy reception when it resumes trading on the JSE.

I think investors holding a longer term view may do well by digging carefully into Sentula if the share price is shaky.