PICK of the MONTH
reference to the “Class of 87” might well be lost on
younger readers. More wizened market watchers might recall that there was a listings boom on the JSE the late 1980s that brought a pack of largely unruly and undisciplined companies to the bourse. But of that wayward bunch there were a handful that endured by posting consistent profit growth and paying regular dividends over the decades.
These would include Spur Corp, Bowler Metcalf, Mediclinic International and Combined Motor Holdings.
The common thread is corporate consistency — a relenting focus on enhancing cash-generative attributes of the core business and reinforcing brand or service strengths. What is conspicuously absent from the business models is wild and woolly diversification efforts or expensive acquisition sprees.
One other graduate from this school of hard knocks is low-key consumer electronics distributor Nu-World Holdings. It has been around for more than 70 years and has never been too flush, but its consistent longer-term profit generation is enviable in a consumer environment that, at times, has been frustratingly fickle. The company distributes Ideal, Sunbeam, Goldair, Telefunken, JVC, Nutec and Palsonic products.
It is worth recording the earnings and dividends posted over the past five years. In financial 2012 (end August) Nu-World showed earnings of 179c/share and paid a dividend of 56c/share. In 2013 it was 223c/share (re-stated) and
A50c/share, in 2014 351c/share and 110c/share and in 2015 428c/share and 163c/share.
There was a setback in Australia for Nu-World in the year to end August 2016, when a client of its subsidiary Yale Prima went into liquidation, prompting a sizeable bad debt write off. Nevertheless, Nu-World still posted earnings of 488c/share and declared a dividend of 180c/share.
Aside from the steady increase in bottom line, what is noticeable is the lowering of the dividend cover from as high as 3.8 times in 2013 to around 2.7 times in the latest financial year.
Is the more liberal cover justified? Indeed, it is. There are no colossal capital demands and trading prospects are fair, but, more importantly, cash flows from operations of R98m equates to around 480c/share, underlining the quality of Nu-World’s earnings.
On a historical earnings multiple Nu-World is trading on a modest six times with an attractive dividend yield of 6%. If it’s safe to presume a worst-case scenario of Nu-World increasing earnings 5% in the financial year ahead, the share is dangling enticingly on a forward earnings multiple of under five with a potential forward yield of 6.5%.
For the value investors, net asset value is reflected as R43/share — but
calculates “hard” NAV (less intangibles) at around R42/share. A consumer-driven business trading at a meaningful discount to NAV is fairly rare — retail and wholesaling businesses, especially those with established brands and consistent profitability, traditionally command large market premiums. This probably explains why opportunistic investor Wild Rose Capital, which is associated with industrial services business ENX Group, has built an influential stake in Nu-World.
Trading has obviously not been easy in the main markets in SA. But there is a reassuring simplicity to Nu-World’s response to a tighter consumer climate: “we continue to try to offer our customer base the best quality products at affordable prices”.
Most encouragingly, the company managed an operating margin of 12,6% — an effort helped by consolidating warehouses, putting a lid on administration expenses and selling noncore assets.
Exports into Africa have also ticked up noticeably, and there is likely to be a better performance from the Australian business. Nu-World directors note that in the past financial year sales growth was also spurred by climate change and the more extreme weather in both summer and winter ranges.
thinks Nu-World is worth accumulating at current levels with a longer-term view.
It probably won’t shoot the lights out on the interim results — or even at the year-end dividend payout. But what may create upward momentum in the shorter term would be further share-buying sprees by Wild Rose Capital.
We recommend watching Sens closely for shareholding notifications.
Exports into Africa have also ticked up noticeably, and there is likely to be a better performance from the Australian business