Search for a remedy to clear gloom over Dawn

Investors sceptical as board cites strike, blackouts for poor form

NOT all of Dawn’s shareholders are persuaded the company’s dismal results are due entirely to external factors.

Some reckon management and the board have scored a few spectacular own goals and that unless the board is beefed up, this construction and building materials group will never recover its previous profit potential.

Dawn manufactures and distributes quality branded hardware, sanitary ware, plumbing, kitchen, engineering and civil products in South Africa and elsewhere in Africa.

The recent grim set of results released by Dawn contained a detailed list of external factors that held back performance in the nine months to end-March.

Two key factors were the National Union of Metalworkers of South Africa strike, which hit both the building and infrastructure divisions, and 37 power disruptions, which “punitively constrained manufacturing output”, said management.

Then there were the government’s delayed infrastructure activity and a slump in mining.

The 151% fall in headline earn- ings to a loss of 25.5c a share was also due costs related to the sale of a 51% stake in Grohe.

Not all shareholders are accepting what they describe as an “external locus of control” mindset, which sees the events affecting the company as being out of management and the board’s control.

Chris Logan of Opportune Investments, who manages shares on behalf of investors, says it is difficult to accept the board’s explanation for the poor performance. He says Invicta, which operates a similar business, has been able to turn out solid earnings performances in recent years. There is also the fact that the latest dismal re- sults look to be part of a longterm declining trend, which cannot be attributed to Numsa, Eskom or government infrastructure spend.

The group’s operating profit margin declined from 10.4% in 2008 to 2.4% in the 12 months to June 2014. A drop in asset turnover and an increase in pay per employee account for much of the deterioration over that period. The nine-month results to the end of May take the margin into negative territory.

Two recent issues appear set to nudge shareholders out of their seeming indifference to their investment’s declining value. At the end of last year, Dawn shocked shareholders with an announcement that it intended spending R664-million to buy back 78 million shares held by its black economic empowerment shareholder, Ukhamba Holdings, at R8.50 a share.

However, when the deal was announced, the Dawn share price was trading at R6.40. Chief operating officer Collin Bishop said that when the deal was agreed with Ukhamba, the share was trading higher. It had been trading as high as R11.80 in July last year, but the price took a knock when the company released a worse-than-expected 24% slump in headline earnings for the year to end-June.

In February, when another set of poor results hit the share price, the board told shareholders it had “decided to re-engage with Ukhamba” with a view to reducing the buy-back price being offered. Then, a month later, Dawn said it was scrapping the buy-back plan. Shareholders with 30% of the company had said they would not provide the support for the special resolution needed.

This ill-considered mess was made messier by the board’s plans to have a rights issue at about the same time as the buyback, which would have been pitched at a lower price than the buy-back.

More recently, a closer look at the details of the Grohe transaction reveal that a private company, Bishop Corporate Finance, run by Collin Bishop, picked up a fee of R10-million. The transaction document discloses that Bishop Corporate Finance will receive the sum in cash for corporate finance advisory work on the deal and that “a prescribed officer of Dawn is the sole director” of Bishop Corporate Finance.

Last September, shareholders voted overwhelmingly in support of the transaction, which is expected to have long-term benefits for the company.

However, now there are mutterings of conflicts of interest from frustrated shareholders and questions about why the chief operating officer of a company under evident strain is doing corporate finance deals and is not focused on operations.

There are questions about why the COO is doing corporate finance deals

See StockTalk for management’s response to request for comment on this conflict