Financial Mail - Investors Monthly - - Opening Bell - In­vestors Monthly’s Monthly In­vestors Monthly Marc Hasenfuss In­vestors

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

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