Company Overview: GUD Holdings Limited manufactures, imports, distributes and sale of automotive with operations in Australia, New Zealand, France and Spain. The Company's segments include Automotive and Davey. The Automotive segment provides automotive and heavy-duty filters for cars, trucks, fuel pumps, gaskets, gasket kits and associated products for the automotive after-market. The Davey segment includes pumps and pressure systems for household and farm water, water transfer pumps, swimming pool products, spa bath controllers, and pumps and water purification equipment.


GUD Details

1HFY19 Bottom Line Growth Underpinned by Automotive Business Segment: G.U.D. Holdings Limited (ASX: GUD) happens to be an ASX listed company which is engaged in the automobiles and components industry. As on July 11, 2019, the market capitalization of G.U.D. Holdings Limited stood at A$921.08 million. The company had earlier released its results for the half-year ended December 2018 (or 1H FY 2019) in which its underlying NPAT on continuing operations stood at $29.6 million, reflecting a rise of 14% as compared to 1H FY 2018 and there was a record result for Automotive businesses which got marginally offset by the decline in Davey business. The company’s revenue from the continuing operations witnessed a rise of 13% and stood at $220 million and the Automotive businesses witnessed both - organic and acquired growth. The company’s EBIT from continuing operations amounted to $43.5 million, which reflects a rise of 9% from last year and this included $0.4 million of significant items, principally related to the manufacturing restructuring costs within Davey business. Coming to the net debt position, the company’s reported net debt amounted to $142 million as compared to $194 million at December 2017 end. The reduction was witnessed mainly because of the receipt of proceeds from the sale of Oates, partially offset by the acquisition of Disc Brakes Australia Pty Ltd.

From the analysis standpoint, the stock seems pretty much attractive as its operating income witnessed a CAGR growth of 26.43% in the time frame from FY 2014- FY 2018 which could be considered at decent levels. Also, the company’s total operating expenses have witnessed a fall from $561.6 million in FY 2014 to $319.8 million in FY 2018. The company has also made an announcement about an interim dividend amounting to 25 cents per share (fully franked) which reflects a rise of 4% on the last year’s level. This reflects the payout ratio of ~74% on the basic earnings per share from the continuing operations. At CMP of $10.590, the stock of the company is trading at P/E multiple 13.51x of FY20E EPS. Fundamentally, the stock looks in a decent position with a net margin of 13.3% and ROE of 11.0% in 1HFY19.  Keeping the view of growth potential in the long run at the back of decent financials, paying regular dividend to its shareholders, and ongoing organic and inorganic growth in the business, we have valued the stock using two relative valuation methods, P/E and EV/EBITDA multiple and 1-year forward P/E market multiples to FY20E consensus EPS of $0.78 and arrived at a target price in the ambit of $11.66 to $12.48 (lower double-digit upside (%)). 


Key Metrics (Source: Thomson Reuters, Company Reports)

Top 10 Shareholders: The following table provides a broader overview of the top 10 shareholders in G.U.D. Holdings Limited:


Top 10 Shareholders (Source: Thomson Reuters)

Decent Standing from Margins’ Position: G.U.D. Holdings Limited is having a decent position with respect to its key margins which further strengthens the confidence in the company’s business activities. Its net margin in 1H FY 2019 stood at 13.3%, which is higher than the industry median of 10.3%, reflecting that GUD is having better capability to convert its top line into the bottom line. Also, in 1H FY 2019, the company’s gross and EBITDA margin stood at 48.7% and 20.8%, respectively, which can be considered at respectable levels.


Key Metrics (Source: Thomson Reuters)

The company is having sound liquidity levels which is evident from its 1H FY 2019 current ratio of 2.99x that is higher than the industry median of 1.39x, implying that the company would be able to meet its short-term obligations. Also, it looks like that the company could make deployments towards its strategic business activities which could act as the long-term growth catalysts. Coming to the leverage ratios, the company’s Debt/Equity ratio stood at 0.59x in 1H FY 2019, which implies a fall of 40.6% on the YoY basis and, thus, it can be said that the company has been deleveraging its balance sheet which could further strengthen its balance sheet position. The percentage of long-term debt to total capital of GUD stood at 36.9% in 1H FY 2019.

Investment Towards Mid-Term Growth Initiatives: The key personnel of G.U.D. Holdings Limited stated that the Automotive has been showing organic growth in 1H FY 2019 and added that newly acquired Disc Brakes Australia business had performed ahead of the initial expectations. In 1H FY 2019, the company continued to deploy towards mid-term growth initiatives across GUD Group. The following picture provides a brief overview of the results of half-year to December 2018:

 
1HFY19 Segments Summary (Source: Company Reports)

The company had made deployments towards people in order to support the program introductions across Automotive and Davey businesses. There are expectations that the deployments would be helping in delivering the improved results for 2H and into the next year.

Strong Sales Growth in Automotive Businesses: G.U.D. Holdings Limited’s Automotive businesses have witnessed a sales growth of 18%, that consisted of organic growth as well as growth from the acquired businesses. The Automotive businesses witnessed an EBIT growth of 10% in 1H FY 2019 over the prior year. The EBIT/sales ratio witnessed a slight reduction to 26% which reflects the early contribution from the acquired businesses as well as mix changes within the BWI business.


Automotive (Source: Company Reports)

BWI increased the internal resources in order to support the new product development and there are expectations of an increase in BWI product tooling investments over the next 18 months to help the mid-term growth. The company would continue to pursue the Automotive acquisition opportunities with the disciplined approach, that fit within the investment criteria, as well as at the transaction prices, which would be adding shareholder value.

Understanding Performance of Davey Business in 1H FY 2019: The reported sales of Davey business amounted to $52 million in 1H FY 2019 which was in line with prior year even though there was an improvement in the market share. This was mainly because of the reduction in the demand throughout the market in key sell-in months of September to November, because of the drought conditions in much of eastern seaboard.


Davey (Source: Company Reports)

The key personnel has added that early signs in December and January reflect that some positive momentum is building and there are expectations that this should translate into the improved performance in 2H.

Higher Than Industry Median Dividend Yield Might Attract Attention: Over the last five years, the company has consistently distributed dividends with decent payout ratios in the range of 74% to 96%. The annual dividend yield of the company is about 4.5% on a five-year average basis (FY14-18). Currently, the annual dividend yield of GUD happens to be at 4.98%, which is higher than the industry median of 4.1% (Automobiles & Auto Parts). This implies that the company has been delivering better returns to its shareholders as compared to the broader industry. This might help in attracting the attention of dividend-seeking investors. 

GUD had also made an announcement about an interim dividend of 25 cents per share (fully franked). It equates the dividend payout ratio of 74% on the basic earnings per share from continuing operations, which can be considered at respectable levels.  Moreover, the Dividend Reinvestment Plan (DRP) remains suspended due to GUD’s ongoing strong financial position.

Dividend Per Share Trend (Source: Company Reports)

What to Expect from GUD Moving Forward: With respect to the Automotive businesses, there are expectations of the similar ongoing performance, with further organic growth throughout businesses as well as a full 12 months’ contribution from the Disc Brakes Australia. It was also mentioned that Davey is witnessing some early signs of the improved sales performance and continues the focus towards strengthening the platform for the mid-term growth in the innovative product segments. The existing key pillars behind the company’s profitable growth strategy happen to be in the sound position, and there are intentions to maintain the focus of the business to further grow as well as expand position in the Automotive segment.

The company also stated that the cash conversion is expected to witness improvement in H2 FY 2019 as the company capitalizes on the growth initiatives as well as witness the normalising of inventory and creditor levels. GUD added that the strong capacity is expected to support the mid-term acquisitions. In H2 FY19, there are expectations that the company might witness further improvement in financial performance. Additionally, the company happens to be well placed to deliver the continued robust returns for the shareholders.


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodologies:
Method 1: PE- Based Valuation

PE- Based Valuation (Source: Thomson Reuters), *NTM:  Next Twelve Months

Method 2: EV/EBITDA Multiple Approach

EV/EBITDA Multiple Approach (Source: Thomson Reuters), NTM:  Next Twelve Months
 

Historical P/E Band (Source: Company Reports)

Stock Recommendation: The stock of G.U.D. Holdings Limited had delivered the return of 2.31% in the span of the previous one month which can be considered at respectable levels. The company is having an annual dividend yield at decent levels which can help it in gaining the traction of market players. It was mentioned that the company is having the ability to grow via further bolt-on acquisitions. In the J.P. Morgan Emerging Companies Conference presentation, it was mentioned that the company’s aftermarket “addressable market” is expected to remain robust beyond 2030+ even at the high EV adoption rates.  Fundamentally, the stock looks in a decent position with a net margin of 13.3% and ROE of 11.0% in 1HFY19.  Keeping the view of growth potential in the long run at the back of decent financials, paying regular dividend to shareholders, and ongoing organic and inorganic in the Automotive businesses, we have valued the stock using two relative valuation method, P/E and EV/EBITDA multiple and 1-year forward P/E market multiples to FY20E consensus EPS of $0.78 and arrived target price in the ambit of $11.66 to $12.48 (lower double-digit upside (%)). Hence, we give a “Buy” recommendation on the stock at the current market price of $10.590 (down 0.563% on 11 July 2019).
 
 
GUD Daily Chart (Source: Thomson Reuters)

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