Shareholders of household fittings business GWA Group Ltd (ASX: GWA) are much happier today, given a sudden spike in its share price on Tuesday. However, some of the news surrounding GWA has been negative, even though general sentiment is higher. Here are some highlights from its most recent annual report:
- Trading earnings before interest and tax (EBIT) were up 8% on the prior period to $72.3 million.
- Net profit after tax was down 43% from FY13 largely due to one-off significant items.
- Net Debt was down 10% to $145 million, bringing its gearing ratio to only 26%.
- A final dividend of 5.5 cents per share was announced, down from 6 cents in FY13. This brings its total fully franked dividend per share to 5.5 cents for the year, a 54% decrease from last year.
What this means?
What may look bad from the surface may actually not be that damaging for GWA. If investors dig a bit deeper, it's evident that operating income has been relatively strong, primarily weighed down by one-off write-downs and restructuring charges.
Partially stronger operating performance levels can be primarily explained by a 7% increase in bathroom and kitchen sales from the previous year. However, solid growth in these areas was heavily weighed down by its Gainsborough Door and Access business, which saw its sales down by about 7%.
Given mixed results from GWA's various business functions, I wouldn't say these are the best of its results so far, but the upbeat outlook of the company is what I think caught the attention of investors.
Now what?
What limited GWA's ability to provide good results, was its underperforming Gliderol garage door business, which resulted in impairment charges of $17 million.
In addition to this, GWA is facing an evolving market, requiring management to quickly but effectively change its business structure. In its annual report, GWA inferred that relationships with buyers are becoming less predictable and unfavourable changes in its supply chain require a more flexible business that can improve efficiencies within its business functions.
Following these problems, GWA has conducted a strategic review, which has ultimately led to divestments of its lagging Dux Hot Water and Brivis Heating and Cooling businesses. After the review GWA has also directed more effort into its core businesses such as its Bathroom and Kitchen sector, where it sees more quality growth potential.
Given management's firm response to GWA's dynamic business environment, I think GWA is well set to provide growth in the future, as it offloads its weaker businesses and restructures its operations. Despite write-offs, it has been able to retain a very healthy balance sheet with a low level of debt, giving it the potential to expand through acquisitions in the future.
While it trades on a hefty price-to-earnings ratio of 19.9, I don't think there's much potential for aggressive future share price growth. However, I will certainly be watching out for further updates and looking to take advantage of a lower share price, if the time comes.
