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

Decent Performance in FY19: G.U.D. Holdings Limited (ASX: GUD) is a small-cap company with the market capitalisation of ~A$802.85 Mn as of 15 August 2019. Recently, the company released its results for FY19 wherein it posted revenues amounting to $434 million which reflects an increase of 9% on a YoY basis while its underlying EBIT encountered an increase of 6% on a pcp basis and stood at $88.9 million. Amidst challenging environment, the company witnessed solid growth in the automotive business segment and recorded sales growth of 12% in FY19. Whereas, the water business segment witnessed modest revenue and EBIT growth in the down market. The company’s cash conversion has witnessed an improvement in line with the first half projections and FY19 target, and it was added that the working capital would be providing continued support for the growth in the sales.

Based on the decent performance in FY19, the Board of Directors declared a fully franked final dividend of 31.0 cents, which implies an increase of 11% on a YoY basis. This summarized a total dividend payment of 56 cents per share (fully-franked) for full-year, which represents the payout ratio of 80% on the underlying basic earnings per share from continuing operations and an increase in the full year dividends of 8%. The final dividend will be payable on 30 August 2019 with an ex-dividend date of 15 August 2019 and record date of 16 August 2019. The company’s net debt witnessed a rise to $132.7 million from $92.4 million after the acquisition of Disc Brakes Australia, an earn-out payment for the IM Group in respect of its FY18 performance, a further investment towards Liftango, and an increase in net working capital in 1H of the year.

It was added that in 2018-19, the company’s performance was decent while there were some challenging business conditions. The company’s balance sheet happens to be strong with a gearing ratio of around 32%, robust interest cover and available banking lines well in excess of $80 million, which could help the future bolt-on acquisitions. Considering the above parameters,we have valued the stock using the relative valuation method, PE multiple, and 10-year average P/E market multiples of 14.8x to FY20E consensus EPS of $0.678 and have arrived at a target price upside in the ambit of $9.53 to $10.03 (lower double-digit growth (in percentage term)). At CMP of $8.58, the stock of the company is trading at P/E multiple 11.63x of FY21E EPS.


Key Metrics (Source: Thomson Reuters, Company Reports)

Top 10 Shareholders: The following table provides an idea of the top 10 shareholders in G.U.D. Holdings Limited:
 
Top 10 Shareholders (Source: Thomson Reuters)

Decent Position of Key Margins: The company has a decent position in its key margins, which strengthen the confidence in the company’s core business activities. The company’s net margin stood at 13.7% in FY 2019, reflecting an improvement of 1% and, thus, it can be said that its capability to convert its top-line into bottom-line has been improved. The company’s gross margin stood at 48.8% in FY 2019, which is higher than the industry median of 33.6%.  EBITDA margin stood at 21.3% in FY19, which is higher than the industry median of 18.0%.


Key Ratios (Source: Thomson Reuters)

The company is having a current ratio of 2.91x, which is higher than the industry median of 1.39x and, therefore, it can be said that the company would be able to meet its short-term obligations. 

Underlying EBIT of Automotive Products Rose 5%: The Automotive business of the company reported sales growth of 12%, which involved organic growth of 1% and the balance coming from acquired businesses consisting additional five months’ contribution from AA Gaskets and 12-month contribution from Disc Brakes Australia. The company further added that the Disc Brakes Australia wrapped up the year well ahead of the expectations and there was double-digit growth with respect to domestic and export sales.


Automotive HoH Operating Performance (Source: Company Reports)

It was also added that Wesfil’s revenue and EBIT contribution grew, which was supported by the filtration and product range expansion in the hard parts and accessories dedicated to their independent reseller customer base.

Underlying EBIT of Davey Business Rose 3%: The company’s Davey business has reported 3% rise in the full-year sales, and the figure stood at $104.0 million and there was sales growth in all the regions. It was driven by several factors such as successful launch of Nipper salt water chlorinator range in Europe, received a positive response from all key geographic regions, and new product innovation, etc. It was also stated that Davey is continuing to focus on its business fundamentals, which includes operational effectiveness, design for manufacture and supply chain efficiency, product innovation, refreshing existing products, and the commercialisation of the Modular Water Treatment technology.


Davey Business (Source: Company Reports)

Overview of Cash Generation and Capital Management: The company’s cash flow from operating activities amounted to $44.5 million, which reflects a fall from $59.4 million in the prior year. Additionally, it was stated that the net working capital, as at June 30, 2019, witnessed a rise by $30.4 million over the prior year levels of which $7.9 million was related to net working capital acquired through the acquisition of Disc Brakes Australia. It was added that the businesses addressed numerous themes with regards to managing net working capital in 2018-19.


EBITDA to Cash Flow Conversion (Source: Company Reports)

The company witnessed a balanced approach to capital allocation, and it was stated that the net working capital would be providing continued support for the Automotive sales and new product roll outs. Also, the robust balance sheet helps the company in capital management or preserving the capital in order to take advantage of the value-accretive opportunities if and when they arise. The company is possessing robust balance sheet metrics, and its net debt/Underlying EBITDA (continuing operations) happens to be around 2 times, and its Underlying EBITDA interest cover stood at approximately 13 times.

Increased Dividends Implies Decent Financial Standing: The company declared a total dividend for 2018-19 which amounted to 56 cents per share that consists of an interim dividend amounting to 25 cents per share and a final dividend of 31 cents per share. Additionally, it was added that both the dividends were fully franked. Also, the total dividend of the company equates to the payout of 80% on the underlying basic earnings per share from continuing operations and a rise in the full year dividends of ~8%. An improvement in the total dividend might attract the attention of the dividend-seeking investors. Additionally, the declaration of the dividends and witnessing decent growth levels reflects that the company is possessing respectable financial standing, which could help it in achieving long-term growth moving forward. Additionally, it was added that the company’s payout ratio happens to be in-line with the previous years. Looking at historical dividend performance, we presume that the company will maintain its dividend payout ratio above 75% on underlying basic earnings per share from continuing operations in future while this might be subject to the Company’s financial performance.


EPS & Dividend – cents (Source: Company Reports)

What To Expect From GUD Moving Forward: It was stated that the company happens to be well-positioned for medium to long term horizon. Additionally, the automotive division maintains robust brands, products and customer service in support of large and proliferated Car parc which GUD believes is strongly defensible. It was stated that Davey has a clear strategic vision and is focused towards the execution of its strategic plan with urgency. The company further stated that, in 2019-20, there are expectations of further revenue and EBIT growth with regards to automotive and water businesses, even though the economic sentiment and the recent demand suggests that the growth would be modest.
Additionally, the company stated that they would not be reducing the innovation, new product development or renewal, or acquisition activity. However, the company is expanding its efforts in order to address the operating efficiency utilising the growing scale and commonality.


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodologies:
Method 1: PE- Based Valuation

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

Method 2: EV/EBITDA Multiple Approach

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

Note: All forecasted figures and peers have been taken from Thomson Reuters, *NTM-Next Twelve Months

10-Year P/E Band (Source: Company Reports, Thomson Reuters)

Stock Recommendation: The stock of GUD has delivered the return of -11.56% in the span of the previous one month, while in the time frame of the past three months, its return stood at -18.34%. As per ASX, the company’s stock is trading closer to its 52-week lower levels of $8.510, proffering a decent opportunity for accumulation. The company reported a higher than the industry dividend yield (Trailing 12 months) of 6.05% as compared to the industry median of 3.5% showing that the company is generating more income for its shareholders. This might attract the attention of the dividend-seeking investors. From the analysis standpoint, the company seems to be quite good as it has witnessed a CAGR growth of 10.3% in its top-line between FY17- FY19, which reflects that it is possessing decent revenue-generation capabilities. During the same period, Net Profit from continuing operations encountered a CAGR growth of 14.2%. Based on the decent financials, return ratios, and paying dividend consistently to its shareholders, we have valued the stock using two relative valuation methods, PE and EV/EBITDA multiple, and 10-year average P/E market multiples of 14.8x to FY20E consensus EPS of $0.678 and have arrived at a target price upside in the ambit of $9.53 to $10.03 (lower double-digit growth (in percentage term)). Hence, we give a “Buy” recommendation on the stock at the current market price of A$8.580 per share (down 7.343% due to the ex-dividend date on 15 August 2019).


GUD Daily Technical Chart (Source: Thomson Reuters)

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