GUD, one for the watch list
Ever since GUD Holdings (ASX: GUD) acquired Brown & Watson International (BWI) in early July 2015, we have had the business on a watch, wait and learn brief.
To us the acquisition of BWI saw a quality business being brought into the group. Quality because BWI is a leading supplier of lighting and electrical components to the automotive after-market sector. Further, it is unlikely to be impacted by the exodus of local car manufacturers over the coming years in what is a highly stable, growing and attractively structured industry.
While it’s still early days this view was confirmed to some degree in the half-year results. BWI’s leading Ryco and Wesfil brands sustained solid sales growth of 8 per cent and EBIT growth of 7 per cent on better than expected margins.
And whilst this is attractive growth other segments of the business were extremely mixed, recording anything from modest outcomes to extremely disappointing ones.
Oates, GUD’s cleaning products, segment grew 6 per cent. While this exceeded our flat expectation margins contracted modestly due to currency impacts, resulting in a marginal bottom line.
Davey, GUD’s water product segment was a shining light achieving 6.5 per cent growth, which was good in this mature division, coupled with margins expanding materially to 12 per cent.
That’s where the good news ends. Dexion, GUD’s storage and materials handling segment was very disappointing. The 1H16 demonstrated the high operating leverage and lumpiness of this division, with EBIT margins contracting to -3 per cent due to the Australian division rolling off a major project and not replacing this work. This drag on the group’s results wasn’t helped when management recognised a goodwill impairment of $15m and an inventory write-down of $4m. Dexion has been a problem for GUD ever since it was acquired for well in excess of $100m and although they hope to turn around its fortunes with seemingly very capable management now in place, we just can’t escape the feeling that he is rowing the wrong boat.
Finally we have Sunbeam, GUD’s small electronic appliance segment, which was a bigger disappointment than we expected. The question now is; can GUD sell its remaining share of Sunbeam to Jarden (its joint venture partner) and release some capital for deployment into other areas of the business that have attractive economics? It’s looking unlikely.
Despite the shares looking cheaper with the share price down more than 20 per cent since the results were released to the market, we think that management needs to gain order before GUD becomes investment grade for us at Montgomery.
On a positive note, Automotive is the jewel of the business and exceeding expectations, and it’s here that was see the greatest potential for a new GUD business to thrive and grow. For now GUB will remain on our watch, wait and learn brief.
Russell Muldoon is the Portfolio Manager of The Montgomery [Private] Fund. To invest with Montgomery domestically and globally, find out more.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
INVEST WITH MONTGOMERY
