DULUXGROUP LTD (ASX: DLX)

At these uncertain times, I have been trying to find a defensive stock with consistent good growth and good dividend yield so that I can sleep peacefully even when the US-China trade war is prolonged and GDPs of all countries decline. I think I have found one such gem in DuluxGroup Limited (DLX) listed on Australia exchange.

Nature of DuluxGroup Business
DuluxGroup Limited is an Australia-based company. The Company is engaged in the manufacture, marketing, sale and distribution of premium branded paint, coatings, adhesives, garden care and other building products to the residential home improvement, commercial and infrastructure markets across Australia, New Zealand and Papua New Guinea, with niche positions in China and South East Asia. It operates through five segments, including Paints and Coatings Australia & New Zealand (ANZ), Consumer & Construction Products ANZ, Garage Doors & Openers, Cabinet & Architectural Hardware and Other businesses. These segments are engaged in the manufacture and supply of paints and other surface coatings, home improvement products, construction chemicals, decorative concrete solutions and related equipment, garage doors, as well as hardware and components.

The Differentiating Factors

Let’s go through the earnings announcement of 14 Nov 2018, some important financials of DuluxGroup, the rampant insider trading done recently and the confidence demonstrated by its management to understand why this is a gem.

Group Performance
DuluxGroup reported net profit after tax (NPAT) of $150.7m for the year ended 30 Sep 2018, an increase of 5.4% over 2017.
Sales revenue increased by 3.3% to $1.84 billion. Excluding the divested China coatings business, sales revenue grew 4.5%. This is a very consistent growth.
Earnings before interest, tax, depreciation and amortisation (EBITDA) increased by 5.0% to $257.7m.
Earnings before interest and tax (EBIT) increased by 4.2% to $223.2 million.  

Dividend

The final dividend of 14 cents per share, taking the full year dividend to 28 cents, which represents a 5.7% increase year on year, and a 72% pay-out ratio on NPAT. Simply solid.

Business Performance

“EBIT growth of 4.2% was driven by solid results across all of our Australian and New Zealand business segments, led by the continued strong performance from our Dulux ANZ business,” said Managing Director Patrick Houlihan.

The Dulux ANZ business, which contributes approximately 70% of Group business EBIT, increased sales revenue by 4.8% and EBIT by $7.8m or 4.7%, maintaining EBIT margin at 17.6%.

“We believe that the Dulux ANZ result was excellent. Given significant increases in raw material costs and the higher depreciation due to the new Merrifield factory, holding EBIT margin reflected pricing discipline and a strong focus on costs,” said Mr Houlihan.

DuluxGroup’s other ANZ segments – Selleys & Parchem ANZ, B&D Group and Lincoln Sentry – collectively grew EBIT by $3.1m or 4.7%.

EBIT in the “Other businesses” segment declined by $0.6m or 5.3%. Growth in Yates and PNG was more than offset by investment in DuluxGroup’s UK business and Indonesian joint venture. 

Strategic Focus
“Our strategy remains consistent, with a focus on three key areas. Firstly, to defend and extend our market-leading Dulux, Selleys and Parchem businesses in Australia, New Zealand and Papua New Guinea. We see a good runway of growth by continuing our long term track record of market share gains and granular product range extensions in resilient markets biased to maintenance of existing homes.

“Secondly, our other home improvement businesses – Yates, B&D Group and Lincoln Sentry --- are domestic market leaders with good growth potential. We continue to see further opportunities to improve revenue growth and EBIT margins.

“Finally, we continue to seek opportunities to transfer our specialty product portfolio and related capabilities offshore, in a risk-measured manner. Whilst our offshore businesses are still small, we have made good progress in this regard during the year in Asia and the UK. “

Rampant Insider Trading

AustralianSuper Pty Ltd increased the holding of the company quite recently on a few occasions:
From 5.4% to 6.46% on 19 Oct 2018.

From  6.46% to 7.54% on 2 Nov 2018.
from 7.54% to 8.60% on 3 Jan 2019.

Summary of Outlook for 2019

Lead indicators for DuluxGroup’s key markets in Australia and New Zealand remain generally positive. Our core market, which accounts for approximately two thirds of DuluxGroup revenue, is the maintenance and renovation of existing homes. This market has historically proven to be relatively resilient throughout housing and economic cycles and we expect it to continue providing profitable growth. Recent favourable comments on GDP from the Reserve Bank, continued low interest rates and low unemployment support this view.

The new housing market accounts for approximately 15% of DuluxGroup revenue. Although new construction approvals are expected to moderate in FY19, completions are expected to remain at FY18 levels given the pipeline of work. Non-residential commercial construction markets are expected to continue to grow, while relevant engineering construction and maintenance markets are expected to be flat overall. 

Subject to economic conditions, and excluding non-recurring items, 2019 net profit after tax is expected to be higher than the 2018 equivalent of $150.7 m.

Conclusion

I have started my accumulation on this gem for its consistent growth, its solid dividend yield, management’s confidence and the rampant insider trading. My target price for it is A$9.50.

Superphang
https://superphang.blogspot.sg