How­den holds out

Financial Mail - - MONEY & INVESTING - @mar­chasen­fuss

On the sur­face, it would ap­pear How­den Africa is pre­par­ing for a huge ac­qui­si­tion or the eco­nomic apoc­a­lypse. The com­pany, which pro­vides spe­cialised air and gas man­age­ment ser­vices and has Eskom as a ma­jor cus­tomer, fin­ished the six months to end-june with R1.125bn cash on hand. The cash pile is worth about R17/share — rep­re­sent­ing an in­or­di­nately large chunk of in­trin­sic net as­set value. This once again raises the ques­tion of why the heck the com­pany hasn’t paid a div­i­dend since 2013.

But nei­ther an eco­nomic apoc­a­lypse nor a ma­jor ac­qui­si­tion ap­pear to be on the hori­zon for How­den. The com­pany posted a more than de­cent 185c/share in in­terim earn­ings, backed by net cash gen­er­ated from oper­at­ing ac­tiv­i­ties of R185m (285c/share) and an­other re­as­sur­ing per­for­mance from its core fans and heat ex­chang­ers di­vi­sion. That di­vi­sion had a 20% in­crease in or­ders re­ceived in the first half of 2017 to R713m (com­pared with R592m in the cor­re­spond­ing pe­riod in 2016). How­den CEO Wil­liam Thom­son said this in­crease re­lated to min­ing and min­er­als projects that were awarded in the in­terim pe­riod.

For the record, the fans and heat ex­chang­ers di­vi­sion man­aged a 12% in­crease in rev­enue to R660m, buoyed by the ex­e­cu­tion of rest-of-africa min­ing projects awarded in the pre­vi­ous fi­nan­cial year. So if things are chug­ging along nicely, why the con­tin­ued ret­i­cence on the div­i­dend? This was one of the first is­sues raised at the re­cent in­vestor pre­sen­ta­tion, when a share­holder wanted to un­der­stand the com­pany’s plans for the cash — “as­sum­ing R1bn is suf­fi­cient for any sin­gle ac­qui­si­tion”. Thom­son in­di­cated that while R1bn would sup­port a sin­gle ac­qui­si­tion, the firm is not lim­it­ing it­self to one.

A fol­low-up in­quiry asked whether there are plans for the re­sump­tion of a nor­mal div­i­dend on cash in ex­cess of the ex­ist­ing cash pile of more than R1bn. Thom­son noted that “at this stage the com­pany main­tains its pol­icy on divi- dends and there are no plans for the re­sump­tion of nor­mal div­i­dends”.

At this point it seems How­den is likely to make an ac­qui­si­tion be­fore it re­con­sid­ers div­i­dends — though I sus­pect more than a few share­hold­ers would not be averse to pro­pos­als to buy back shares.

In­ter­est­ingly, How­den looks de­ter­mined to ex­pand ex­port sales into the rest of Africa and di­ver­sify away from the tra­di­tional power mar­ket (read: Eskom), and seek out op­por­tu­ni­ties to grow its after-mar­ket “both or­gan­i­cally and through ac­qui­si­tion”.

Cu­ri­ously, though, Thom­son reck­ons that if How­den mo­bilises cash for ac­qui­si­tions it will be in SA. So that would prob­a­bly mean a lo­cally domi­ciled busi­ness with ex­ten­sive in­ter­ests in Africa.

Not likely to rush into any­thing

As things stand How­den could af­ford — and I use these ex­am­ples for il­lus­tra­tive pur­poses around scale only — to pitch a fairly at­trac­tive of­fer for Bell Equip­ment or dan­gle an of­fer for ELB Group and still have enough cash left for a size­able special div­i­dend or to fund a much­mooted em­pow­er­ment deal.

Gut feel is that it prob­a­bly won’t rush into any po­ten­tial deals, as there still ap­pears to be some growth trac­tion de­spite the sub­dued trad­ing en­vi­ron­ment.

Over­all, How­den ex­pects some pos­i­tive move­ment in the rest-of-africa min­ing in­dus­try, and it seems rea­son­able to ex­pect the core fans and heat ex­chang­ers di­vi­sion to keep churn­ing out good cash flows by fo­cus­ing on spares and ser­vice to key in­dus­tries.

The smaller en­vi­ron­men­tal con­trol di­vi­sion won’t shoot out the lights, but How­den noted that “pos­i­tive signs from the sec­ond half of the year” in­di­cate more ac­tiv­ity in this mar­ket.

If you can live with­out the dis­tri­bu­tions for the fore­see­able fu­ture, How­den is an in­cred­i­bly well-man­aged com­pany with a solid suite of ser­vices. Thus, to my mind, it re­mains a share for stuff­ing away in a bot­tom drawer.

Nei­ther an eco­nomic apoc­a­lypse nor a ma­jor ac­qui­si­tion ap­pear to be on the hori­zon for How­den

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