Paint business DuluxGroup Limited (ASX: DLX) has been a strong performer over the past five years, riding a housing and DIY boom to deliver growth of 125% before dividends to shareholders. However, after today's results, investors will be left wondering if there's any value in the company at today's prices.
I think not – but first, the results:
- Revenue grew 1.7% to $851.1 million
- Underlying profit grew 3.7% to $63.7 million
- Mid-single digit growth in Paints Australia, Garage Doors, and Cabinet & Architectural Hardware offset by lower Parchem revenue and the Mitre 10 exit from Paints New Zealand
- Higher inventory and tax costs resulted in lower cash flows, but inventory effects are expected to 'wash through' by end of year
- Short term market correction in retail/renovation paint segment (75% of market) due to sales discounting and stock clearance by some retailers*
- Strong growth in new home market (20% of market) which grew at ~8%
- Commercial market (5% of market) grew at ~5%
- $36.6 million cash and $421 million in debt (average cost of debt of 4.9%)
*excluding the impact of this, Dulux believes overall market size continued to grow
So What?
Dulux shares were down 2.7% at the time of writing, reflecting the average-ness of the results. Dulux is not an exciting business as it operates in a mature market, and any growth is incremental – and they're small increments, at that. Nevertheless, the results were positive with an acceptable performance in most categories including the biggest segment, Paints and Coatings ANZ.
Management is well aligned, with high levels of stock ownership, and has a long-term view as witnessed by the manufacturing plant upgrade announced to the market last year, which won't be complete until 2019.
Competition in the domestic market is also fairly strong with well established brands like Wattyl and Taubmans also attracting a fair share of customer interest. On the plus side, most market demand comes from renovations and repainting, which helps insulate the business from a housing downturn.
Now What?
With Dulux trading on a Price to Earnings (P/E) ratio of around 20, the company looks fully priced given its steady growth outlook. Investors will want to watch that product diversification, particularly the garage doors business, actually bears fruit over the long term. Thanks to management's long-term approach, Dulux could go on to be a market beater for the patient. However, I'm not a buyer at today's prices.
