- DLX
- MARKET CAP
$920m
DuluxGroup
A Premium Product
DLX; Buy up to $2.56
As noted elsewhere in his week’s report, Orica has successful completed the demerger of its paint business – with DuluxGroup trading as a stand alone ASX-listed company from the beginning of this week. Orica shareholders should now have received one DuluxGroup share for every Orica share held.
“DuluxGroup has successfully commenced trading on the ASX this week, debuting at a small premium to its nominal value assigned in the Orica demerger process.”
DuluxGroup is a manufacturer and marketer of premium branded products with leading positions in the coatings, home improvement and garden care markets in Australia and New Zealand.
Source: Company
Although DuluxGroup has a small start up operation in China, the business is essentially focussed on the domestic Australian and New Zealand markets. Its key competitive advantage is a number of very powerful consumer brands, supported by ongoing research and development and a strong focus on customer service.
Source: Company
While the DuluxGroup business has delivered consistent earnings growth in recent years, it operates in relatively mature markets. The DuluxGroup business is expected to be a strong generator of positive cash flow and a high dividend payer – with a proposed payout ratio of 70% – 90% of net earnings. This will be attractive to domestic investors seeking a high fully franked yield. The Board has stated that it will consider paying a dividend after year end based on post demerger profits – which will represent approximately two and a half months of earnings for the period ended 30 September 2010.
Source: Company
Source: Company
Source: Company
It is important to note that the EBIT figures exclude stand alone corporate costs – which are estimated to be in the order of $13m pa.
The growth trend has continued in 1HFY10, with 3.6% revenue growth to $486.2m and 6.2% EBIT growth to $64.9m. The outlook for 2HFY10 is for further recovery in the Australian markets (following a decline in 2009), continued volatility in New Zealand markets (although they appear to have bottomed) and ongoing development of the China business platform.
The DuluxGroup business has achieved excellent operational and financial performance in recent years and has essentially been self-funding. However, a dedicated, focussed board should generate opportunities for further improvement in its performance.
Similarly, the company should attract a premium market rating due to its leading market position and brands, potentially including the attention of major offshore competitors. The list of possible predators would be headed by Akzo Nobel – which is the largest coatings supplier in the world and manufactures and sells the Dulux brand in Europe, North America, Latin America and Asia.
On the negative side, DuluxGroup may incur higher borrowing costs than it would do within the pre-existing Orica structure – although it has in place a A$400m syndicated facility with a range of Australian and international banks, with a combination of 3 and 5 year maturities. The current net debt of the company is around A$245m.
It is possible that DuluxGroup may not be included in the S&P/ASX 100 Index (the cut off is a market capitalisation of around $1 billion), although it will definitely be included in the S&P/ASX 200 Index.
Discussion and Recommendation
DuluxGroup represents a well managed, market leading business that generates high free cashflow – with a high proportion of earnings to be returned to shareholders via dividend payments. This should enable it to attract a premium market rating despite operating in relatively mature markets – which could constrain its earnings growth trajectory.
In the near term there could be share price volatility as some Orica shareholders sell down their holdings (particularly offshore mining focussed investors) and domestic investors establish positions (particularly superfunds and retirees). Based on the recent earnings performance and peer comparisons, we believe the company’s share price has potential to appreciate towards the $3 level in the short – medium term.
Hence, Stock Resource recommends DuluxGroup as a Buy up to $2.56 for members with no current exposure.
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Disclaimer
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