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IT’S funny. So many of the small cap companies that came to the JSE in the 2006 to 2008 listings boom with great flourishes and fanfare now appear to be flat on their backs or limping along.
On the other hand, some of the low(er) key listings – companies that attracted little hype – appear to be chugging along very comfortably.
History will show that listing booms on the JSE tend to produce quantity but not always quality. But there will always be a handful of exceptional companies that do wend their way onto the JSE in the heady rush of a listings boom.
I have been keeping a beady eye on a few of the more robust contenders (Afrimat [JSE:AFT], Universal Industries Corporation [JSE:UNI], Buildworks Group [JSE:BWK], MiX Telematics [JSE:MIX], Wescoal Holdings [JSE:WSL] etc), but had unfortunately not taken – until Thursday – as much as a sideways glance at ARB Holdings [JSE:ARH], a specialist electrical wholesaler.
ARB was up 9% to 262c on Thursday (a distinctly dull day on the market) after releasing results for the year to end-June.
At face value, one might not describe the results as stunning.
Turnover (R1bn) and pre-tax profits (R115m) both crept down, leaving diluted earnings 5% off last year at 29 cents per share.
But it’s a great comeback from the interim period, when earnings were down by more than 20%.
Even more encouraging was that ARB managed to fatten up its gross profit margin during the second half of the year – pushing the full-year margin to 18.4% (last year 17.5%). It’s not easy out there (especially when bedding down a new acquisition), and management can take a bow for a sterling effort in bumping up margins.
Most reassuring – especially as I like to keep close tabs on cash flows – is that ARB’s cash conversion rate is excellent. The R115m shown at pre-tax profit level is more than reflected in the cash flows from operating activities of R116m.
Fantastic for shareholders
But what really got the market going on ARB was probably the change in the company’s dividend policy. At a time when I reckon there are more small caps contemplating rescue rights issues than there are small caps paying dividends, it really is astounding to see a company with the confidence to markedly ratchet up its payout policy.
Of course, one might argue that erring on the side of caution (with talk of double-dip recessions, World Cup hangovers, etc) around a dividend policy might be more prudent.
But taking into cognisance strong cash generation and a sturdy (ungeared) balance sheet, the ARB board seems justified in revising the annual dividend policy from a maximum payout of one-third of after tax profits to 40% of after-tax profits.
That’s fantastic for ARB shareholders. They will collect a dividend of 11.5c/share for the year to end-June and – wait for it – also receive a capital reduction distribution of 13.5c/share. Yes, that’s a payout of 25c/share.
Punters who bought ARB near the end of 2009 will be yielding a most attractive 13%. The Johnnies-come-lately who filled their boots on Thursday still lock in a more than respectable yield of 9.5%.
Setting a 40% notch for the annual dividend policy makes the company a decent yield prospect, especially if the top line grows in the new financial year.
And while one can’t reasonably expect ARB to regularly resort to generous capital reduction payouts, there is a comforting cash pile of over R260m - which equates to around 110c/share.
Naturally a good chunk of cash could also be mobilised for acquisitions, which do seem a distinct possibility in the current climate. In that regard, I wonder if ARB would be so bold as to look at South Ocean Holdings [JSE:SOH] (market capitalisation: R280m)?
- Fin24.com
