GWA Cleans Its Slate Ready For FY16

This story features GWA GROUP LIMITED. For more info SHARE ANALYSIS: GWA

-More comfortable outlook
-Restructuring, FX risks remain
-Need to revamp Gainsborough
 

By Eva Brocklehurst

GWA Group ((GWA)) has moved further along the road to becoming a pure investment in the domestic renovation market, confining its business to specialist building supplies for kitchens, bathrooms and door fittings. The company has now shifted most of its manufacturing offshore.

The company has finalised the sale of its Gliderol garage door business for $7m, the last remaining divestment in its plan to simplify its offering. The business has underperformed over the past 18 months and brokers welcome the sale. A non-cash impairment charge of $25m is booked for Gliderol and pre-tax one-off restructuring costs of $7-9m will be taken to re-set the cost base. Deutsche Bank expects this announcement will clear the decks for FY16 and, while not expecting a final dividend in FY15, expects dividends will be reinstated from FY16. GWA has tightened trading earnings guidance for FY15 to $67-69m, compared with prior guidance of “around $70m”.

UBS welcomes the sale and believes the recent sell-off in the stock was overdone. FY16 is now in focus and the slate looks cleaner. The broker upgrades to Buy from Neutral, given the sell off in the stock. UBS is now more comfortable with the earnings profile into FY16 but acknowledges there are still risks in terms of restructuring, FX headwinds and underperformance in the Gainsborough business.

Citi concurs, suspecting investors are likely to be fatigued by the restructuring charges. The broker estimates GWA has announced “one-off” restructuring charges in eight of the past 10 years, totalling $90m. In Citi’s opinion, limited success in its “adjacent business” diversification strategy may hinder further diversification by the incoming senior management – with a new CFO recently installed and a new CEO from June 2016.

Of paramount importance is the need to regain market share for Gainsborough, Citi maintains, which was lost because of supply-chain issues in China. The company also needs to respond swiftly to the change in mix towards apartments from detached housing and improve its supply chain now it is almost a pure importer. Hedging strategies may also need to be checked, given increased exposure to Australian dollar volatility.

Detached housing completions, where GWA benefits the most, are likely to rise over 2015, Macquarie observes. Also the company recently sold its Wetherill Park facility for $33m. In terms of returning excess funds to shareholders, the broker notes the total in the first capital return was equal to the net sale proceeds from Dux and Brivis. Ahead of a potential second return, the broker estimates the balance sheet is in a solid position.

Goldman Sachs estimates bathrooms & kitchens will now generate 91% of group earnings. There are opportunities to regain market share of major customers but the broker remains concerned about the margins, given the top three customers are likely to reach nearly 50% of the company’s sales in FY16. Goldman incorporates the updated guidance, sale of Gliderol and restructuring costs into forecasts. The broker’s price target is reduced 4.0% to $2.33 as market movements offset the minor earnings upgrades.

If gearing were to return to long-term averages, this implies around $50m available for distribution to shareholders, or around 18c per share, in Goldman’s calculations. The company has minimal franking credits following the special paid in May 2015. Therefore, the broker believe funds may be returned through an on-market share buy-back or capital return as well as via normal dividends. Goldman Sachs, not included in the FNArena database calculations, retains a Neutral rating.

The database has one Buy rating (UBS), four Hold and one Sell (Credit Suisse, yet to update on the divestment). The consensus target is $2.51, suggesting 8.4% upside to the last share price. The dividend yield implied in FY16 forecasts is 5.9%.
 

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