Strain is showing
At the end of June, the cash pile of industrial services business Howden Africa had breached the R1.3bn mark. That’s equivalent to more than R20 a share — startling for a company with a market cap of less than R2.5bn. The firm has mostly trundled along nicely since the most recent dividend was paid — in the second half of 2013 — which has frustrated shareholders accustomed to a generous payout policy.
The just-released interim results, however, show that Howden is feeling considerable strain in its main markets. The core division for fans and heat exchanges reported a 37% plunge in operating profits to R84m and the environmental control division slid R3.3m into the red. Overall revenue was down 23% and operating profit plunged 40%.
The large cash holding — which generated more than R40m in interest — provided a cushion, limiting the fall in bottom line to just 25%. Cash generated from operations declined to R151m from R236m in the corresponding period. Under the circumstances, I suspect the directors’ decision to not declare a dividend will be less vociferously interrogated by shareholders (myself included).
Still, Howden directors need to come up with more convincing arguments about how this growing cash pile will be deployed for long-term profitability and to extract value for shareholders. The new fabrication technology division shows some promise, but it still represents less than 5% of operating profits.
With activity stalled in its key markets of power generation, mining and general industry, Howden’s endeavours outside the borders of SA will be vital in the next few years. I suspect it will be prudent to temper short-term dividend expectations — unless former Group Five CEO Eric Vemer, who takes over as CEO in January, has other ideas.
Golden void
There seems to be a desperate attempt to create the impression that it is “business as usual” at food franchiser Gold Brands. Earlier this month its shares were suspended on the JSE because it failed to submit audited financial statements on time.
That’s not surprising, as the reviewed results to end-february delivered rather unsavoury numbers, notably a precarious balance sheet, in which current assets of R18.5m were overshadowed by current liabilities of R47m. The squeeze has already prompted the company to put its Black Steer brand up for sale, though the envisaged proceeds will not exactly beef up the emaciated balance sheet.
Despite these dangerously lean times, Gold Brands last week launched a new seafood brand, Northsea SA. The opening of the first franchise is planned for mid-month at the Angelo Mall in Nigel. Frankly, a store in Nigel is unlikely to generate the nourishment Gold Brands’ bottom line so desperately needs, and a rapid rollout of Northsea will be impossible to accommodate on the brittle balance sheet.
The only hope is for a strategic investor with deep pockets and an adventurous appetite to emerge miraculously.
Back down at Sandown
The ink had barely dried on my column last week when Sandown Capital’s directors convinced an uppity shareholder, which had called for a general meeting (and resolutions to change the board), to back down. Whatever transpired, it had a wonderful effect on Sandown’s shares, which promptly narrowed the discount gap on NAV.
Can we presume that a chunk of Sandown’s legacy portfolio, including listed counters such as Consolidated Infrastructure Group and Stenprop, will be sold off? More importantly, are there convincing private equity-type transactions in the offing?
As for Nkholi Consolidated Investments, what a slick piece of shareholder activism: no real hassle and not much cost. Credit should also go to Sandown for reacting pragmatically to a tilt at the corporate castle.
Howden directors need to come up with more convincing arguments about how the growing cash pile will be deployed to extract value for shareholders