South Africa

Ellies disappoints investors – but it has a plan

Ellies released its financial results for the year ended 30 April 2022, which revealed a disappointing year for the company.

Revenue decreased 10.8% to R1.1 billion, EBITDA decreased 149% from a profit of R76 million to a loss of R37 million, and earnings per share decreased 182% to a loss of 5.96 cents.

The results were not well received by investors, and the Ellies share price plummeted from 25c per share on 21 July to 17c per share on 1 August.

In a letter to shareholders, Ellies CEO Shaun Prithivirajh blamed everything from Covid-19 and the riots in July 2021 to the economic downturn and micro-chip shortages for the poor results.

He also revealed an ambitious turnaround plan to return the company to profitability, focusing on three areas.

  1. Reset the cost base.
  2. Restructure the business for growth in new categories.
  3. Pursue acquisition opportunities.

“We believe that this comprehensive plan will allow us to access more working capital funding that will deliver the desired result,” Prithivirajh said.

He said the turnaround process is estimated to take 18 months and will decrease costs and grow revenue.

However, this is not the first time that the Ellies management team has launched a turnaround plan to bolster its finances.

In 2020, for example, Prithivirajh said they had cleaned up the business and were ready for future growth opportunities.

As part of the turnaround, Ellies focussed on alternative energy solutions and moving from DStv satellite dish installation to fibre-to-the-home (FTTH) as new revenue streams.

However, Ellies could not grow revenue as promised despite near-perfect conditions for alternative energy solutions with the worst load-shedding the country has ever seen.

Instead, Prithivirajh continued to blame the erosion of its satellite installations business which it promised to move away from in 2020.

A look at Ellies’ finances

Once a JSE darling, Ellies’ share price plummeted 98% from almost R10 per share to current levels of around 18c.

Many factors contributed to the declining share price, including:

  • A withdrawal of institutional investors.
  • Several years of losses.
  • South Africa’s ongoing challenges related to migrating to digital TV.
  • Instances of obsolescence of inventory and write-downs.
  • Losses linked to Ellies’ manufacturing segment.

The company also had rights issues in the 2015 and 2016 financial years. In July 2021, it had another rights issue with a BEE shareholding deal at 10c per share.

It has caused further dilution of shareholder value, with the number of outstanding shares rising from 620 million to 805 million.

On the positive side, the deal raised R185 million for the company, and the improved BEE level could boost revenue in the future.

Revenue and profit

Ellies’ turnaround plan has not been successful over the last few years.

The latest results revealed the lowest revenue since 2014, with a clear downward trend.

The 2021 earnings per share (EPS) of 7c gave hope of a successful turnaround, but it was, unfortunately, a repeat of 2018’s 7c EPS result.

In 2019, Ellies returned to a loss per share (LPS), and the latest results showed a recurring theme.

One of the problems is that Ellies fails to control costs. It has a reasonably high gross profit margin – usually above 25% – that was improving before the latest results.

However, its operating expenses remained stubbornly flat, only decreasing 4.3% in 2021, despite closing down its manufacturing segment.

Ellies has also outsourced its warehouse and logistics and reduced its workforce from 1001 employees in 2016 to 825 in 2020 and 496 in 2021.

In the latest reporting period, Ellies managed to cut its operating expenses by 10%, but costs remained at a similar proportion to revenue.

Ellies is losing the operating profit fight because it cannot adequately reduce its operating expenses.

What is telling is that Mustek, with similar operations to Ellies, generates a net profit with a gross margin of only 15%.

Weakening Balance Sheet

A big difference between Ellies’ 2018 and 2021 profits is that the company had a much weaker balance sheet in 2021.

The book-value-per-share halved from 52c to 26c between 2018 and 2021 and decreased even further to 17c in 2022.

The company’s property, plant, and equipment have shown a continued decline, and there has been an uptick in debt after 2018.

Most worryingly, the company’s inventory has been on a significant downtrend, reducing even faster than the company’s revenue.

It is understandable that Ellies does not want to repeat past mistakes and get stuck with obsolete inventory, but low stock levels can seriously hurt the company.

For example, many of Ellies’ alternative energy products were out of stock during the peak of load-shedding. It is a big missed opportunity to increase revenue and profit.

Even with Ellies’ ambitious turnaround plan and exploring new revenue streams, it has a mountain to climb to reach the highs of yesteryear.

The performance over the past five years showed that Ellies has challenges in executing a turnaround strategy and following a path to profitability.