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PDS ac­qui­si­tion coun­ters flat per­for­mance by se­cu­rity divi­sion

Finweek English Edition - - Companies & Markets - MARC HASEN­FUSS march@fin­week.co.za

LAST YEAR Fin­week feared elec­tronic se­cu­rity spe­cial­ists Amal­ga­mated Elec­tron­ics Cor­po­ra­tion (Amecor) had blown off what lit­tle mar­ket sen­ti­ment re­mained for the busi­ness by for­go­ing div­i­dends in a bid to di­ver­sify into power gen­er­at­ing. The deal in ques­tion was Amecor’s R15,7m ac­qui­si­tion of 50,1% of the PDS group, an in­de­pen­dent power gen­er­a­tion com­pany. With R12,5m of the buy­ing price set­tled in cash, Amecor also skipped its div­i­dend for the year to endMarch 2008.

At that point we noted Amecor share­hold­ers were prob­a­bly jus­ti­fied in an­tic­i­pat­ing an 8c/share pay­out – based on direc­tors’ com­ments that div­i­dends would be cov­ered three times by earn­ings. But our big­gest con­cern was that while the PDS ac­qui­si­tion al­most tripled turnover, it also re­duced trad­ing mar­gins from more than 50% to less than 30%.

In hind­sight, Amecor share­hold­ers will prob­a­bly ap­pre­ci­ate the div­i­dend sac­ri­fice in 2008 as PDS has come to the res­cue in fi­nan­cial 2009. Amecor’s just re­leased year to end-March 2009 re­sults show turnover more than tripled to R140m. Trad­ing mar­gins did drop to 28% – but that still saw a more than dou­bling of op­er­at­ing prof­its to R40m.

It would seem that most of Amecor’s growth dur­ing the pe­riod un­der re­view was gen­er­ated by PDS. In fact, a divi­sional break­down shows the core se­cu­rity ser­vices divi­sion played a ma­jor part in pulling down

trad­ing mar­gins, with prof­its com­ing in 12% lower at R8,6m de­spite a 40% hike in turnover to R42m. Net­work and an­nu­ity in­come pro­vided some com­pen­sa­tion, in­creas­ing to R7m from around R6m last year. But PDS was the star per­former, turn­ing R80m in sales to R5,9m in prof­its – a size­able jump from last year’s R3,3m prof­its. There’s no doubt the show­ing by PDS prompted Amecor direc­tors to re­sume div­i­dend pay­ments. But with group pre-tax prof­its com­ing in at R24m the pro­posed 8c/share pay­out (amount­ing to R6,2m) is cov­ered a rather con­ser­va­tive four times by earn­ings.

Per­haps the shift to a more con­ser­va­tive div­i­dend cover of four times ac­knowl­edges that – de­spite the growth in prof­its – Amecor’s net cash flow for the pe­riod was just more than R7m and that the bal­ance sheet re­flects R10m in in­ter­est-bear­ing bor­row­ings. Since the release of its year-end re­sults, Amecor has scram­bled quickly up to 120c/share (see graph), which puts it on a mod­est earn­ings mul­ti­ple of around four times and a rather at­trac­tive yield of 6,5%.

Clearly, the mar­ket re­mains cau­tious…

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