Building fixtures and fitting company GWA Group Ltd (ASX: GWA) tumbled to a two-and-a-half-year low on a profit warning although investors can find some relief that the group has managed to rid itself of its loss-making garage door business and is promising more capital returns this year.
Shares in the group shed 2.1% to $2.30 in early trade after management said trading earnings before interest and tax (EBIT) will range between $67 million and $69 million for 2014-15 if restructuring and other one-off costs are excluded.
This compares with its February guidance of around $70 million and I see more downside risk to the share price as I think the potential upside does not justify the risks, at least not yet.
GWA is warning that it will have to take a $25 million impairment charge for 2014-15 that is related to the sale of its Gliderol garage door business to Reliance Doors for $7 million and a further one-off charge of $7 million to $9 million from its restructure.
The news is likely to prompt analysts to downgrade their earnings estimates for the group and I suspect this will put GWA on a 2015-16 price-earnings (P/E) multiple of around 14x.
That's actually not expensive and some might even say it's cheap compared to its historical P/E. Supporters will also point to its strong balance sheet which holds over $60 million in cash and the group's improved outlook with the group divesting underperforming businesses to focus on areas that it is a leader in – namely bathroom and kitchen fittings.
What's more, management's promise of returning more cash to shareholders in the current financial year by way of a special dividend or capital return could tempt bargain hunters to jump in now.
GWA gave back $88.3 million to shareholders in April after selling two other underperforming businesses.
But I think the stock needs to fall by around another 15-20% before it will appeal to me because I am nervous about buying the stock on a 14x P/E at this part of the renovation cycle.
I think rents are going to fall in over the next 12 to 24 months due to a glut in apartments and that will impact on new building projects and landlords' willingness to spend on renovation.
It may be hard to think about buying stocks now as the market is under pressure from a potential Greek default, but this period is really a good time to be looking for well-priced stocks to add to your longer-term portfolio.
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