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Pay now and pray later?

Jun 03 2010 00:00 Marc Hasenfuss
ANYONE SCANNING the latest financial statements from Buildworks and Austro – two out-of-favour newcomers to the JSE – might be slightly baffled by their respective strategies. The companies, which both branched from a building supplies base into the power sector, endured tough trading periods over the six months to end-February this year. Buildworks produced a steady R41m at bottom line, while Austro saw its bottom line halve to R12,3m.

Both companies worked hard at maintaining robust balance sheets and generating encouraging cash flow. But Buildworks ended the interim period in a net cash position of R240m, while Austro – despite much improved cash flow of R64m – was still lumbered with an overdraft of around R68m.

Now here’s the interesting bit: Flush Buildworks opted not to pay an interim dividend, while Austro decided to pay an interim distribution of 2c/share (equivalent to roughly R8m). Austro seemed awfully determined to cross shareholders’ palms with silver, the payout being covered only 1,45 times by earnings of 2,9c/share. Ironically, the payout is just about equal to the sum Austro forked out in finance charges over the interim period.

In these fickle economic times, conservative investors would argue it’s far more prudent for Austro to retain cash (especially while an overdraft still looms large), perhaps revisiting a distribution only at year end. But let’s try and see it from Austro’s side. Its directors argue a strong balance sheet justifies the resumption of an interim dividend.

Indeed, gearing was ratcheted down to 15% and, perhaps more importantly, inventories were reduced by more than R100m to R258m. But Austro’s prospects, at best, look modest and directors appear hopeful rather than convinced of an improved second half showing.

On the other hand, Buildworks isn’t getting shareholders’ hopes up for a dividend any time soon, noting: “The dividend policy will be reviewed periodically, taking into account prevailing circumstances and future cash requirements.”

With directors stressing that currently all earnings generated by the company will be utilised to fund future growth, it seems unlikely – but not impossible – a full year dividend will be considered. Says Buildworks CEO Raoul Gamsu: “You can never have too much cash as a small cap company. We’re fixated with cash at this point.” Gamsu is generally upbeat about second half trading for Buildworks, with a forward order book of R1,1bn, which represents roughly a year’s work.

But the determination of the company – which now earns most of its keep from its power distribution company, Conco – to retain a substantial cash cushion is understandable after a number of small cap companies in the broader infrastructure sector have seen sudden swings in their fortunes. For example, cladding specialist Mazor swung from a very profitable first half trading to suddenly struggling to break even during second half trading in the year to end-February this year.

But it’s not just tricky market conditions that demand some form of cash buffer but also the fact tough trading stretches often mean struggling rivals land up on the block. Companies with ample cash can mull distressed company situations where a small cash layout could net a controlling stake in a promising contender that can be tweaked for a turnaround.

Six months can be a long time in the life of a small cap and it’s going to be most interesting to re-evaluate the respective positions of Austro and Buildworks when their results for the full year to end-August are published. For now, there may be some significance in the fact Buildworks trades at a sizeable premium to its tangible net asset value of 30c/share and Austro at a deep discount to its tangible NAV of 73c/share.

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