G.U.D. HOLDINGS LIMITED

GUD Details

Decent FY19 Performance Amidst Certain Challenges: G.U.D. Holdings Limited (ASX: GUD) comprises a number of dynamic product companies based in Australia and New Zealand. As on December 05, 2019, the market capitalization of GUD stood at ~$938.11 million. Amidst certain business challenges, the company reported a decent set of numbers for the period ended June 30, 2019, wherein underlying NPAT from continuing operations increased by 10% to $60.9 million as compared to the prior year. The continuing operations of the company include Automotive, and Davey businesses. Revenue from continuing operations came in at $434 million, exhibiting a decent rise of 9% on Y-o-Y basis. It was mainly driven by Automotive and Davey businesses, which recorded limited organic growth and robust growth from the acquisition. The company’s key personnel have shown optimism as the businesses have won a range of customer awards, which demonstrates its strong customer focus, product excellence and service delivery excellence. It was further added that securing government innovation grant funding in the 2 automotive businesses and Davey’s product expansion “green shoots” can be said as favourable signs for the future.

The company’s business portfolio was focused on the automotive and water segments during FY19. On the backdrop of decent performance in FY19, the company has declared a total dividend for FY19 of 56 cents per share that consisted of interim dividend amounting to 25 cents per share and final dividend of 31 cps. Importantly, these dividends were fully franked. The full-year dividends of 56 cents, reflecting the payout ratio of 80% on underlying basic EPS from continuing operations. When compared with the total dividends amounting to 52 cents per share in the previous financial year, it reflects a rise of 8%. The company’s payout ratio has increased from 78.5% in FY17 to 80% in FY19 and, thus, it can be said that GUD has been focusing towards delivering a return to its shareholders. The company posted underlying earnings before interest and tax (or underlying EBIT) amounting to $88.9 million, reflecting a rise of 6% as a result of the organic growth of Davey as well as automotive businesses and acquisition of Disc Brakes Australia. Based on the decent financials in FY19 and long-term business prospects, we have valued the stock by using two relative valuation methods, i.e., P/E and EV/EBITDA multiples and 4-year average P/E market multiple of ~17.36x to FY20E consensus EPS of $0.678 and arrived at a target price of high single-digit to low double-digit (in % term). At CMP of $11.040, the stock of the company is trading at P/E multiple 16.28x of FY20E EPS.

Key Financial Metrics (Source: Company Reports, Thomson Reuters)

Decent Position of Key Margins: The company’s net margin stood at 13.7% in FY19, which reflects a rise from FY18 figure of 12.7% and, therefore, it can be said that GUD has improved its capability to convert its top-line into the bottom-line. GUD’s operating margin has improved from 10% in FY15 to 20.1% in FY19 and, thus, it can be said that the company is possessing respectable capabilities with respect to its operations. The company’s RoE stood at 21.9% in FY19, which implies an improvement from FY15 figure of 11.6% and, therefore, it looks like that GUD has been generating decent returns to its shareholders, which could help it in gaining traction among market participants. GUD’s current ratio stood at 2.91x in FY19, which is higher than the industry median of 1.43x and, therefore, it can be said that the company is well-positioned to meet its short-term obligations. Additionally, decent liquidity footing provides sufficient headroom for the company to make deployments towards strategic growth objectives.

Key Metrics (Source: Thomson Reuters)

Automotive Business Witnessed 12% in Sales Growth: The company’s automotive business posted growth in sales of 12% and the figure stood at $330 million, that consisted organic growth of 1% while balance came from acquired businesses involving additional 5 months’ contribution from AA Gaskets and full 12 months contribution from Disc Brakes Australia. Disc Brakes Australia, that was acquired on July 2, 2018, ended the year ahead of the expectations, and there was double-digit growth with respect to domestic and export sales.

Automotive H-o-H Operating Performance – Organic vs Acquisitions (Source: Company Reports)

Davey’s Underlying EBIT Rose 3%: The company’s Davey business posted a 3% rise in the full-year sales, and the figure stood at $104.0 million, and the growth in sales was witnessed across all the regions. The segment’s full-year underlying EBIT rose 3% to $9.4 million as compared to $9.2 million in the previous corresponding period, despite resources which are committed to innovation and product cycle plan efforts. The business also managed to launch new products, which include the Nipper salt water chlorinator.

Davey Business (Source: Company Reports)

Decent Dividend Policy: Over a period of 5 years covering FY15 to FY19, the company reported a dividend per share CAGR of 7.5%, with FY15 and FY19 dividend per share amounting to 42 cents per share and 56.0 cents per share, respectively. The annual dividend yield of the company is about 4.46% on a five-year average basis (FY15-19). In FY 15, the dividend payout ratio stood at 97.7% and finally, in FY19 the payout ratio was 80.0%. However, in FY16, FY17, and FY18, the payout ratios were 103.1%, 78.5%, and 75.5%, respectively. Amidst certain challenges, the company managed to declare full-year dividend amounting to 56 cents (fully-franked), reflecting a rise from 52 cents previously. This reflects a payout of 80% on underlying basic EPS from continuing operations as well as a rise in the full year dividends of 8% on YoY basis. The company’s gross dividend yield stood at 7.39% and, therefore, the stock can be considered for the investors seeking dividend income. The company’s dividends have been increasing since FY15 that reflects the company’s respectable financial standing, decent fundamentals and operational capabilities.

Dividend Per Share Trend (Source: Company Reports)

What to Expect from GUD Moving Forward: The company is well-positioned for medium to long term horizon. Its automotive division has been maintaining strong brands, products and customer service in support of large as well as proliferated Car parc that GUD believes is strongly defensible. The company reflected optimistic views with respect to recent multi-year preferred supplier agreements, and it would work to provide strong partnership outcomes. In 2019-20, the company is expecting further revenue and EBIT growth in both automotive and water businesses, although economic sentiment and recent demand suggests growth will be modest.

The company will continue its innovation, new product development and acquisition activity, as it remains committed towards ensuring that it has right mid-term foundations in place for the long-term growth and shareholder value. The company added that the automotive aftermarket sector happens to be structurally attractive and the company’s brands are well-placed when it comes to delivering sustained organic growth in the span of medium to long term.

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

Method 3: P/E Market-Multiple Approach

P/E Market-Multiple Approach (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation: The stock price of GUD witnessed a rise of 19.82% in the span of the previous three months, while the stock has increased by 7.77% in the past six months. The company stated that its balance sheet is robust, and a debt increase reflects in part a purchase of DBA at the beginning of the financial year 2019. It was further added that the balance sheet position supports further acquisitions with respect to the automotive aftermarket, where the company’s appetite is still strong.

FY19 was characterised as a year where a confluence of economic and industry challenges constrained the gains in larger automotive, which were seen in the past years. Though strong growth was witnessed, it should be recognised that this was led largely by acquired businesses with a modest contribution from the company’s continuing businesses. Based on the decent financials in FY19 and long-term business prospects, we have valued the stock by using two relative valuation methods, i.e., P/E and EV/EBITDA multiples and 4-year average P/E market multiple of ~17.36x to FY20E consensus EPS of $0.678 and arrived at a target price of high single-digit to low double-digit (in % term). Hence, we give a “Buy” recommendation on the stock at the current market price of A$11.040 per share (up 2.033% on 05 December 2019).

 

 

GUD Daily Technical Chart (Source: Thomson Reuters)