GUD Profit Crimped Again

By Glenn Dyer | More Articles by Glenn Dyer

GUD Holdings is at least consistent, although investors yesterday didn’t think so in the way they sold off the shares after the company reported a 10 per cent drop in its first half EBIT to $29.2 million.

Investors were no doubt reacting to forecasts of no improvement in earnings in the second half which is predicted to produce figures close to the first half result. If that happens it would be 8 to 10 per cent under the $31 million EBIT in the six months to June 30 2006.

And, not even news of a three million share buyback (five per cent of issued capital) over the next year, could change market sentiment yesterday.

The company has reported earnings slides over the past three reporting periods: not huge falls, but enough to be consistent!

The shares were knocked down by more than 50c at one stage, to under $8: a long way from the 52 week high of $9.13 set a fortnight ago amid some hysteria about the prospects for the company to be on a private equity buyers list. They closed 45c down at $8.

The fall in interim earnings, from 2005’s $32.4 million followed a 10 per cent rise in group sales for the half to $265.77 million.

Net after tax profit fell a hefty 26 per cent to $14.9 million from $20.2 million reflecting the 10 per cent drop in trading EBIT and the $3.5 million pre-tax charge (announced at the AGM in October) associated with restructuring the New Zealand automotive filter business.

The steady interim dividend will absorb almost $16 million so the company will have to dip into reserves to pay it. That’s a sign of just how much the board wants to keep shareholders happy. Happiness does come at a price and there are sure to be some broking re-ratings after this result.

Driving the profit loss was the poor performance of the Victa mowers business while the Sunbeam household product group and the Water Products group did better. Water Products increased EBIT 50 per cent to $10.7 million due to benefits of its bolt-on acquisition strategy, new products and organic growth in the expanding water products market.

Automotive Products and Security Products also did relatively well.

But after a solid first quarter for the 2007 financial year Victa seems to have fallen in a hole as the drought worsened, rainfall stopped, home gardeners gave up because of water restrictions and the whole climate change debate changed sentiment.

GUD said that:” Demand for Victa’s products in the grass growing months of October through December was weak due to the impact of drought conditions across Australia”.

As well the Oates Clean business underperformed expectations due to delays in contribution from the Bissell product range and competitive conditions in cleaning products markets.

And there were costs of $2.0 million associated with the valuation of forward foreign exchange contracts. These were taken in the Consumer Products division (Sunbeam and Victa).

The company said however that at the trading level GUD was a net beneficiary of the stronger Australian dollar due to the lower cost of imported product. Benefits are reflected in improved gross profit and helped to offset pressures from higher commodity prices and the competitive trading environment domestically.

“Gross profit margin dipped to 36.7% from 38.2% on sales that increased 10% to $265.5 million”. Managing Director, Ian Campbell said.

“The 10% lower EBIT performance is driven by the unsatisfactory trading in Victa and Oates and the mark-to-market valuation of our forward foreign exchange contracts.

“I am confident that our positive momentum within the Water Products business and Sunbeam will continue to underpin solid financial returns in future periods.

“Trading EBIT in the second half is expected to be around the first half result of $29.2 million. The hedging costs of $2.0 million incurred in the first half are not expected to recur in the second half.

“Continued growth is expected within Water Products due to the expanding market, new products, contribution from recent acquisitions and business integration.

“Within Consumer Products, Victa is unlikely to rebound in the short term, but sustained strong performance is expected from Sunbeam, driven by electric blankets and new products.

“The on-market buy-back demonstrates the Company’s continued commitment to active capital management, and represents an effective mechanism for us to return capital to our shareholders,” Mr Campbell said.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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