Investor fury at Howden stash
Group’s ’unacceptable’ withholding of profit distribution linked to BEE ambition
HOWDEN, the industrial airconditioning specialist that infuriated shareholders by halting dividends, may be gearing up for a possible delisting from the JSE, alongside a large BEE deal.
This week, Howden held its AGM, where it came face-to-face with a group of frustrated shareholders who see little justification for a total clampdown on dividends when the group has a cash pile of at least R650-million.
At the AGM, Howden said it had decided that “it is in the best medium- to long-term interests of the company and stakeholders” that dividends be “discontinued for the foreseeable future”. It cited the problems in the mining and power generation market, as well as the need to “maintain an appropriate capital structure”.
Investors were not pleased, and Howden’s share price tumbled 14.2% on the day to a new 52-week low.
Although orders and sales have eased off since the December year-end — when management described them as stronger than a year earlier — there seems little operational reason for the much more conservative dividend policy that was adopted in 2013.
Abax Investments is one of the irritated investors. Abax’s Anthony Sedgwick said that when the 2014 results were released in April, there was no mention of any deterioration in trading conditions, which was only raised in recent discussions with shareholders.
However, Howden’s finance director, Kevin Johnson, told Business Times that the company had told shareholders that “order and sales intake have been lower and management is implementing actions to mitigate this”.
But even if sales had been lower, Sedgwick said, Howden had enough cash resources to make some payment to shareholders.
“At December year-end they had R650-million cash on the balance sheet, and that was after a tough year when the Numsa [National Union of Metalworkers of South Africa] strike hit business. Subsequent cash flow and some gearing could lift this to R1-billion,” he said.
He said that, given this level of potential cash resources, “clearly there is something substantial on the cards”.
Until recently, Howden had been a firm favourite with investors, largely thanks to high barriers to entry, which ensured that it produced reliable earnings and dividends.
Even after slumping to a recent low of R33 per share, this is still up almost threefold on its 2010 level — despite the unexciting out- look for mining and Eskom over the period.
Some investors are now incensed.
Anthony Clark, an analyst at Vunani Securities, in a note on Howden describing it as “the unacceptable face of capitalism”, said the company’s management was hellbent on hoard- ing cash and destroying shareholder value.
The company said it was looking for “strategic flexibility” and talked about the possibility of doing “a BEE transformation arrangement or similar transaction, share buybacks, acquisitions, and/or other such investments and changes”.
Clark said: “Management contend that they need to conserve cash for a BEE deal and other initiatives — both of which gestated in their board packs for longer than an elephant’s pregnancy.”
Given its refusal to pay dividends, share buybacks would make sense only if the board were considering taking out all of the minority shareholders. Such a move might be a precursor to a BEE transaction, which is seen as essential given that Eskom accounted for 60% of Howden’s business in 2014 and 70% in 2013.
The controversial issue of payments to US-based parent company Colfax was also raised at the AGM. Management fee payments have only been incurred since 2012 when the previous controlling shareholders, with a 54.5% stake, sold out to Colfax. In 2013, Howden paid R32.3-million to Colfax, mainly for management services. This dropped to R25.2-million in financial 2014.
The board says the charges are made on an arm’s-length basis and will never exceed 10% of the company’s market cap in any one year. This self-imposed limit would allow payments of around R220-million.
This week, the share price slumped to R33, giving the company a market cap of just R2.1-billion.