GUD is a giant leap closer to being a pure ‘industrial play’

Given that it’s finally freed it up to focus more on core earnings from its automotive division, GUD Holdings’s (ASX: GUD) long awaited decision to end its chequered exposure to small consumer appliances found instant favour with the market.

Following the decision to sell its 51% share in Sunbeam and its 49% share in Jarden Consumer Solutions (Asia) Limited to its joint venture partner the US-based Sunbeam Products Inc – which trades as Jarden Consumer Solutions – for $35 million, GUD’s share price has broken out of the long-standing down trend, jumping 20% from a low of $6.33 mid-February to $7.93.

The Sunbeam sell-down provides some welcome relief since GUD’s 90% drop in half year profit to $1.7 million – following $18.5 million in impairments related mainly to its loss-making Dexion storage and shelving business – was followed by downgrades to full-year earnings guidance by as much as 8.8% before one-off cost to between $82 and $88 million.

However, to put the impact of Dexion in context, it’s worth noting that GUD’s underlying net profit for the six months ended December 31 did rise 11% to $19.6 million with underlying earnings before interest and tax (EBIT) up 33% to $37.2 million, with GUD raising prices across the group by up to 5% in the first half to recover currency-related cost increases.

Having been a bad fit for GUD’s product offering from day one, the Sunbeam business generated an earnings loss with currency movements forcing up product costs, and intense competition making it difficult to raise prices.

GUD plans to use the proceeds from the Sunbeam sale to reduce debt and refocus on what it does best within the automotive space, which now includes its recent $200 million acquisition of Brown & Watson International (BWI).

As a leading supplier of lighting, electrical, battery power and maintenance products, primarily (85%) to the automotive aftermarket under the NARVA and Projecta brands, BWI has been combined with GUD’s existing automotive brands including Ryco, Wesfil and Goss.

While it often speculated that GUD should focus exclusively on its automotive business by divesting what are sometimes referred to as its ‘rats and mice’ divisions, including Davey – which supplies water products such as pool pumps, chlorinators, heaters and filters; and Lock Focus and Oates – the cleaning products and chemicals business – it’s worth noting that these divisions did report profit growth on last year.

With Sunbeam off its balance sheet, GUD expects to deliver improved performance in the second half across all businesses.

The stock has strong long term cash flow relative to reported profit, decreasing net-debt to equity (65.55%), and earnings per share (EPS) which has been very poor over the last five years is forecast to grow from $0.55 in 2016 to $0.68 in 2018.

While the stock is trading on a 16.39% premium to its intrinsic value (IV), IV is forecast to grow by close to a corresponding amount over the next 12 months.

But based on a 16% discount to its 12 month high of $9.77 in mid-August 2015, the stock does appear to be attractively priced, especially considering the massive drogue on earnings – a la Sunbeam – that’s just been lifted.

In the wake of the Sunbeam sell-down, GUD has been freed up to execute some impressive profit improvements that won’t be dragged by this non-performing asset.

GUD managing director Jonathan Ling has also hinted that further pruning of the company’s broad portfolio could include putting Dexion up for sale.

What’s equally encouraging is the BWI acquisition, which has over 65% EBIT exposure to its core automotive aftermarket industry.

Assuming there are pending upgrades to GUD, the current share price could look like an attractive entry point 12 months from now.