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

Where are we in the cycle?

The yield curve has almost flattened and even both immediately before and just after Fed Reserve jacked up the interest rates by 25 basis points, the US 10-year treasury yield remained much lower than psychological level of 3 percent instead of moving up. The 10-yr yield is now around 2.78 percent --- defying the Fed’s effort of getting it to move up. I think this is an ill omen to the US stock market in that:

1.  When the interest rates keep moving up, as long as the rates are still “tolerable” by the market players, it means the US economy is doing well and investors have confidence that the stock market should be doing well going forward. The declining 10-yr yield is suggesting otherwise now.

2. Fed Reserve jacks up interest rates primarily to tame inflation and secondarily to cool down the market. But now the US market has been so cold that it becomes a mockery for Fed to do just the opposite. Trump was somehow right to try to get Jerome Powell not to hike the interest rates in that sense but the latter knew he could not heed his President’s advice for fear of Mr Market’s negative sentiment as all would think that the u-turn means recession is fast approaching.

3. When the yield curves flatten, it foretells with certain respectable probability that the recession will come sometime later. Historically, the flattened yield curve will lead the recession by 15 months on average.

4. The 10-year treasury yield is another leading indicator for the stock market. If it has lost its upward momentum and retreated, it has signalled in all probability a slowing economy.

Reasons for the current situation

It is actually not difficult to find the causes of this phenomenon: Trump initiated a trade war with China. Mr Market knows that the US has a slight advantage in the trade war, but the outcome of the trade war will be a lose-lose proposition for both countries. The reason why the China market has dropped much more than the US market during the initial phase of the trade war was because of the US tax cuts. But the tax cuts enjoyed by the US listed companies was a one-off event and Mr Market knows too well that this catalyst will evaporate in 2019 and he is now exerting this hard-truth on the US market. Trump’s sledgehammer tactics have come home to roost.  

China, with its market already hovering around its trough, should rebound faster than the US. My crystal ball has been telling me to have patience to wait for its signal.

What is the stage of the current market?

The US market has enjoyed 10 years of growth and with contraction in profit margin, trade tariffs, rising wages, higher interest rates, higher uncertainties caused by Trump’s mercurial behaviour, the good times should be behind us. It is difficult to see the light at the end of 2019 tunnel.

For contrarians, it should present a golden opportunity going forward.

Superphang
https://superphang.blogspot.sg

No light at the end of the trade war tunnel?

Which of the following choices is the best when you do business with your trading partner?

(1) I win big you win small.

(2) We win equally.

(3) I win you lose.

(4) I lose small you lose big.

(5) We lose equally.

The answer really depends on your attitude.

I would like to interpret the positions of the US and China in their current trade tensions as follows:

(1) is the current position China has been in with the US as her trading partner. But the US is not happy and Trump, the US President, thinks that China is in (3). Trump is now trying to upend the status quo and put the US in (2) by imposing tariff on Chinese imports worth US$200 billion. China has no choice but to retaliate so as to reach (4) ultimately if the US proceeds with raising the tariff. The trade tensions have impacted on the world economy and we are all in (5).

Am I correct in the interpretation? It is not really important to me.

I must be able to guess correctly the timing of the trough for my perfect entry point. My sizable war chest is on standby to seize the opportunity when it presents itself.  

Superphang

https://superphang.blogspot.sg

Handsome Profit from AEM

Read my earlier post on AEM dated 1 Aug 2018:
https://superphang.blogspot.com/2018/08/aem-reported-very-solid-1h2018results.html

Divested all my positions today, 16 Aug 18, in AEM and made a handsome return.  

My thought:
1.  Any one of the many current world-wide threats may escalate into a black swan event.
2.  Reliability of TA in a gloomy market will be reduced greatly.
3.  It needs a breather after surging so much.
4.  I anticipated insiders to be more aggressive in buying the shares these past few days but it was not to be.

I will go in and grab AEM again if another golden opportunity presents itself.

Superphang

https://superphang.blogspot.sg

Crisis in Singapore property market is brewing

The cruel facts about Singapore property market

In the first half of 2018, there were 35 collective sales with amount exceeding $10 billion, while for the whole of 2017, there were 27 deals totaling $8.13 billion. From 2000 to 2017, about 80 percent of new homes came from plots sold through the Government’s land sales. But for 2018 and 2019, about 75 percent of new homes are expected to be built on lands that were acquired by developers through en bloc sales.

The new additional units are about 36,030 and those unsold inventory is about 23,500. The current unsold inventory and new supply totalling more than 59,500 units are sufficient to meet demand for about six to seven years but the new units will take only about 4 years to build.

In addition, prices of private property have risen 9.1 percent in the last four quarters. Before that, prices had declined for 15 straight quarters, falling 11.6 percent by the middle of 2017.

The latest cooling measures introduced by the government on 5 July 2018 was described by some analysts as draconian and high-handed. But to me, it came a bit late as this time, not only some uninitiated buyers during this U-turn of private property index (PPI) were trapped, but most of the en bloc sales developers were also made to bear the brunt. The problem is that it may not have dawned on them yet that they have been trapped.

My Prediction

There is still a real demand for retail residential property for the next half a year. However, the problem is that prices of resale property market have remained stagnate even when the PPI has gone up by 9.1 percent since mid-2017. This has been artificially caused by irrational prices of new launches. Sellers have to be realistic in their offer price as the window to sell is about half a year before the situation becomes worse.

I estimate that 75% of developers of en bloc sales done within 2017 and 2018 will scramble to sell their mostly yet-to-be-launched units within 4 to 5 years from now so as to run faster than their competitors. I can foresee that developers will give more and more discount as time goes by before their developments obtain the temporary occupation permits. Coupled with the impending stock market crisis and interest rates hike, the PPI should plunge by about 30% by 2Q2022.

If you have patience to wait till four years later in 2022, you should be able to buy your private condominium unit at a price 40 percent lower than that of today if you work hard enough to look for it. I believe by which time the government will have removed all ABSD and SSD.

HDB prices will not drop that much because of government's very effective control mechanism. When the crisis is within our government's control, they should be able to slow down the speed of the drop, precisely like what they achieved from mid-2013 to mid-2017. But if the decline is due to an international crisis caused by the US or the China market crash or some downturn equivalent to the scale of the previous 1997 Thailand's meltdown, our government cannot do much.

I was able to buy my investment property at the trough in 2004 and sold it at the peak around end of 2012. I am confident that I can repeat the feat to buy a bigger unit at the next trough in 2022.

Superphang
https://superphang.blogspot.sg

AEM Plunge Was Overdone

AEM reported very solid 1H2018 results in the evening of 30 July 2018 but the share price kept plunging for two consecutive days.  

I made big money in 2017 on this stock and I had no positions in it. I think the precipitous plunge was overdone due to:

1. The forward p/e is now about 5.4x

2. Too fierce the decline when its Q2 performance actually improved.

3. Volatility as mentioned by the CEO does not mean the share price has to come down. It may mean it can go up too.

4. The insiders will likely go in and buy the stock very soon again. Once people see this, some confidence will return.

5. The reasonable price level should have been 98 cents.

6. The big volume achieved in these two consecutive days can mean all weak hands have been flushed out.



When others are fearful, you must be greedy especially when the reasons for the extreme pessimism are unfounded.

I went in to get my first tranche at 75 cents. If it dares to drop further, I will buy more.

Superphang

https://superphang.blogspot.sg

Trading in a Trade War

Shanghai Composite Index has been in a bear market since 13 April as it has priced in the full-scale impact of the US-China trade war. The weakening of RMB against USD since mid-April has resulted in the continued decline. Within a short span of three months, the RMB has weakened more than 6% against USD.  

Shanghai Composite Index in a Bear Market since 13 April 2018

Weakening of RMB against USD since mid-April 2018

On the other hand, the US market has been consolidating well in a bull market, with S&P 500 VIX at a very safe level of around 13.

However, I think Federal Reserve should be more concerned about the rapid rise in US CPI than the US-China trade tensions as it is easier for President Trump to tame the trade war than to tame the CPI.

As it is, US CPI rose 0.1% in June 2018, and in the 12 months through June, the CPI increased 2.9%, the biggest gain since February 2012. The underlying trend continued to point to a steady build-up of inflation pressures that could compel the Federal Reserve on a path of rapid interest rate increases. Furthermore, the retaliation from China to increase tariffs against the US goods can only add fuel to the fire.

Given that Trump will not want the US stock market to be in a bear market, before the US stock market plunges to a level that he cannot really contain, it is prudent that we can assume the US market’s near-term correction, if ever there is one, will be the most 10% and that is the point for our entry, not retreat.

Superphang
https://superphang.blogspot.com/