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.
