HOLD DuluxGroup

The Intelligent Investor. James Greenhalgh

DuluxGroup lives up to the decades-old slogan of its Berger paint brand: the company “keeps on keeping on”.

For the half-year results to March 31 this year, it produced sales growth of almost 5% in Australia, compared with market growth of only 0.5%. This division contributes half the group’s sales but more than two-thirds of profit. It’s a fantastic business with operating margins above 17% and a market share of around 46%.

The remainder of DuluxGroup’s businesses aren’t as strong but the best of them is Selleys Parchem, which manufactures the ubiquitous No More Gaps flexible filler as well as construction chemicals. Here earnings rose 11% on flatl t sales due to cost reductions.

In total, the company’s first-half sales rose 4%, while underlying net profit rose 9%.

DuluxGroup is not as cyclical as other building materials companies. Paint is a low-value, high-impact way to renovate a home. Nevertheless, we can imagine earnings falling 10%-20% in a “regular” recession or housing downturn, with the non-paint divisions most at risk.

The stock is priced on a forward price-earnings ratio of 20, which isn’t cheap. Yet this is a higher-quality business than it appears at first glance. Hold.