Howden holds out
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