TRADE of the MONTH
Follow the money when deciding between value-laden and profitable industrial counters Transpaco and Howden
Though operating in different sectors of the economy, there are a number of similarities between packaging company Transpaco and industrial services group Howden Africa.
Both are more profitable than their peers in tough economic segments. Both are highly cash generative with strong balance sheets to boot. The respective management teams are conservative, but seemingly willing to look selectively at acquisition opportunities.
In short these are specialised businesses that are managing to maintain thick(ish) operating margins in lean trading times by enforcing a lean and mean operating culture.
There is, however, one major departure point … and one that is critical in assessing the short to medium-term outlook for both companies.
Transpaco is paying a fairly generous dividend while still maintaining a well fortified balance sheet, while Howden has not paid a dividend since mid-2013 despite having a balance sheet that is reinforced by a net cash balance of R764m.
Transpaco has shrugged off moribund economic conditions to post a 38% gain in bottom line in the year to end June — a performance that leaves its more illustrious (and larger) counterparts such as Nampak and Astrapak in the shade. Essentially, Transpaco has stuck to its viable niches in plastics as well as board and paper packaging in SA — no wild efforts to diversify operations and no growth-at-all-costs forays into African markets.
What really stood out in Transpaco’s results was that thicker margin of 9.2% (previously 8.1%) — which was established despite higher labour, energy and raw materials costs.
Transpaco CEO Phil Abelheim also seems to have the knack of eking out great returns from operating assets discarded by Nampak and Astrapak. With this in mind, investors should not ignore Transpaco’s comments that Transpaco would pursue “appropriate acquisitions”.
Transpaco’s core plastics division, now bolstered by former Astrapak operation East Rand Plastics, managed to hike top line 37% to R1.23bn with operating profit racing up 76% to R100m.
Transpaco’s headline earnings of 330c/share were underpinned by strong cash flows from operations at R139m. Net cash flow came in around R52m — or 157c/share, underpinning the full-year dividend distribution of 150c/share — 40% more than the previous year.
The dividend was covered a generous 2,2 times by headline earnings. Transpaco has now increased dividends by a compound annual growth rate of almost 16% over the past five years — making for a compelling story for value inclined yield seeking investors.
Howden stands in stark contrast.
The company — which built a reputation for consistent dividend flows — has now skipped paying a dividend for six consecutive reporting periods. Distributions were initially out on hold for a new empowerment transaction. But that has not come to pass, and cash starved shareholders are understandably starting to spout conspiracy theories.
At last count, Howden’s cash pile had reached R764m. This equates roughly to R11.50/share, which is close to 40% of the company’s share price.
It’s not uncommon for companies — especially those plying their trades in the industrial segment — to shore up balance sheets with cash. But in the case of Howden, the cash buffer seems excessive — even if the company is contemplating bolt-on acquisitions or share buy-backs (neither of which have been signalled by the company of late).
The telling statistic is that since the last dividend payment (covering the six months to end June 2013), Howden has accumulated earnings of R12.50/share.
It is baffling that Howden directors — or, more accurately, parent company Colfax (a US-based industrial conglomerate) — have not seen fit to declare even the most nominal payout.
Of course, the fact that Howden is communicating coyly around its dividend strategy might be interpreted by some quarters that directors may well surprise shareholders with a bumper special dividend.
For IM there remains too much uncertainty around the resumption of dividends in any form to rush into Howden at this delicate juncture. IM would prefer to be short Howden — even though we acknowledge the company holds a robust service offering and is well managed.
Transpaco, on the other hand, offers a dependable business model coupled to an owner/manager that grasps the importance of cash returns to shareholders. IM would be happy to be long here.
It’s not uncommon for companies — especially those plying their trades in the industrial segment — to shore up balance sheets with cash. But in the case of Howden, the cash buffer seems excessive