PDS acquisition counters flat performance by security division
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…