Australia | Jul 31 2015
-Sunbeam on more sustainable footing
-Cash conversion still weak
-Automotive expansion a positive
By Eva Brocklehurst
GUD Holdings ((GUD)), a diverse supplier of consumer and industrial products, appears to have turned a corner. Brokers were relieved by the FY15 results, which signal the company has completed most of its restructuring.
There is still a busy period ahead, integrating the Brown & Watson (BWI) acquisition, ramping up its Dexion manufacturing plant in Malaysia and releasing capital to pay down debt.
Macquarie assumes further benefits will come from cost reductions but suspects they could be eroded by pressure on the underlying business. Cash conversion was weaker for the second year in a row, and remains below historical levels, but there has been increased investment to drive sales growth.
The broker was surprised by the increase in receivables in the second half, given there was always a first half skew. Macquarie attributes this to late sales in the first half with some clients taking on longer trading terms.
Margins were stronger in the second half and Sunbeam (consumer appliances) and Oates (household products) performed better than Macquarie expected. Dexion (storage solutions) was softer than expected but still delivered strong second half sales growth despite the transition of manufacturing to Malaysia.
This division is expected to deliver an earnings uplift over the next three years from profit improvement programs. Macquarie observes, maintaining all assumptions, Dexion needs to deliver 8.0% revenue growth to avoid an impairment charge.
Dexion was the bright spot, in Goldman Sachs' view, as revenue was up 12% in the second half on the back of new contracts. Sunbeam gained traction from cost cutting and new products and the broker expects this will continue to drive growth in FY16. This was a substantial part of the turnaround agenda – cost savings at Sunbeam and Dexion – and Goldman Sachs observes both are now on healthier, more sustainable margins.
Re-locating manufacturing for Dexion has enabled pursuit of new markets in Asia and the broker contends that once the start-up issues are worked through, the company is well placed to win new projects despite competitive trading conditions. Goldman Sachs retains a Neutral rating and $10.20 target.
JP Morgan is not so convinced about Dexion. The broker is looking for product innovation to continue driving growth and remains concerned about cash conversion. The company has been intent on cost cutting to improve earnings but now hopes to deliver new products through FY16 and FY17 to invigorate sales. In this sense the broker queries the restructuring costs which are still outstripping earnings generated by the business and worries about sustainability.
BWI (automotive products) appears a good fit, accretive in both earnings and business quality. Macquarie notes this takes the pressure off the overall contribution to earnings and growth from cost savings initiatives. The automotive business, overall, is the company's star performer and this recent expansion is considered a positive development.
A combination of the company's existing business in this field, plus the BWI acquisition, will mean the automotive after-market is more than 60% of earnings in FY16. The stock is inexpensive, UBS maintains. Its defensive aspects, a strong yield and the continued turnaround makes the stock attractive in an equity market where earnings certainty has weakened. A lack of top line growth outside of the automotive division is the broker's main concern.
Citi is encouraged enough by the results to upgrade the rating to Buy from Neutral. There was no quantitative guidance for FY16 but the broker highlights the commentary regarding a further substantial uplift in financial performance, expected to be driven by ongoing sales and the BWI acquisition.
Citi expects BWI will dilute automotive divisional margins but expand group margins to 12.8%, given its size. Sustainable, organic top line growth emanating from demand is still needed for the stock to genuinely re-rate while cost reductions remain paramount. Nevertheless, the majority of the restructuring is complete and Citi believes the benefit should be apparent in FY16.
The reaction in the share price suggests to Credit Suisse the market is increasingly confident in management's ability to turn the company around. Sunbeam is now back in a strong position, having delivered top line growth for the first time in around five years amid signs market share losses may have subsided.
The broker envisages the stock attracting further interest, given the price/earnings ratio of 14.4x in FY16 is undemanding. Cash flow is the only disappointment for Credit Suisse but commentary is comforting in that it suggests a strong forward order book across Dexion and Sunbeam.
FNArena's database has three Buy ratings and two Hold. Consensus target is $9.94, which suggests 5.0% upside to the last share price and compares with $8.80 ahead of the results. The dividend yield on FY16 and FY17 estimates is 5.06% and 6.0% respectively.
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