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FUNNY how things go. About three years ago, almost every punter with an access bond was chasing newly listed or soon-to-be-listed building supplies or construction stocks.
In that feeding frenzy very few punters - perhaps even serious-minded investors - were paying too much attention to Masonite Holdings, an almost obscure company specialising (among other things) in hardboard, wall panelling and ceiling panels.
With no exposure to those "sexy" segments like readymix cement, bricks, glass or aggregates, the conservatively-run Masonite was not a stock for the excitable masses. This, and the fact that Masonite shares - 78.6% held by Masonite Corporation - are more tightly held than the Bulls front five.
Although Masonite (it listed way back in the 1950s) has been around for yonks, the company enjoyed brief market infamy in the late 1990s when its US-based parent made an unsuccessful attempt to buy out minorities.
Perhaps one could describe Masonite as the ultimate sleeper stock - meaning only a few people in the market (and sadly I don't include myself here) were awake to its virtues. Old Mutual is the second biggest shareholder, and good for them for holding out in this fine old firm.
In any event, between 2006 and 2007 - when everybody was cavorting around the surfeit of newly-listed building supplies stocks - Masonite traded far more calmly between a low of 1 600c and a high of 2 600c on the JSE. I doubt its earnings multiple (forward and historic) came close to 10 times during that heady period.
By the start of 2008 Masonite - which paid a handsome dividend at the end of 2007 - finally caught some of the frothy sentiment and charged through 4 000c, before, like its newly listed compatriots, the share started the inevitable decline in mid-2008.
The difference, however, between Masonite and the array of building supplies companies that rushed the JSE in recent years is that Masonite has managed to climb back to its late 2007/early 2008 highs.
Bucking the brittle trend
Since the beginning of 2009 a share graph for Masonite will show a steady climb from about 2 400c to current levels of 4 000c. This stands in stark contrast to other, newer building supplies companies, which mostly would show graphs that trend down or (at best) flat.
Masonite's interim results to end-June explain clearly why the company's shares have been bucking the brittle trend in the JSE building supplies sector.
Starting at the top of the income statement one can see that Masonite's gross trading margin - a chunky 30% - has not been demolished, even though turnover grew significantly to R314m (previously R269m).
Management clearly runs a tight ship.
Next is Masonite's operating profit of R49m being reflected commensurately in the cash flow statement - which, incidentally, shows a rather rosy cash balance of R72m (equivalent to 1 000c/share).
That means Masonite generates top quality earnings, and that management has built an excellent client base.
Finally, Masonite - which, unlike some of the more aggressive newcomers to the JSE's building supplies sector, did not tackle any acquisitions during the boom period - has no gearing.
That tells me management has been around the block and seen a few building sector cycles.
The numbers say it all
In fact, Masonite's balance sheet is well reinforced with current assets of R250m covering current liabilities by two-and-a-half times. Net asset value stands at over 5 000c/share.
Despite the robust interim showing, Masonite's directors offered less than 100 words of commentary.
Why not; the numbers, after all, speak for themselves. And they articulate quite plainly that this is a company that can ride out prolonged tough trading conditions.
Masonite is not a freak in the building supplies sector - other than the fact that its corporate conservatism contrasted starkly with some of the wild and woolly endeavours undertaken by the majority of other building supplies companies.
Masonite management kept things simple: retain focus on core operations, don't let anyone (especially not your designated adviser) twist your arm about bulking up with acquisitions and think twice before gearing up your balance sheet to secure future growth.
The fact that Masonite could achieve such a stout interim showing makes me pessimistic about so many of the newer building supplies listings which are battling with crippling debt loads, operating on crushed margins and desperately trying to squeeze sufficient cash flow from new acquisitions when building activity has stalled.
Make no mistake, there are a few of the newer building supplies listings - Afrimat and Mazor spring to mind - which, like Masonite, have managed to hold a decent margin, generate cash and keep debt to manageable levels. These shares may be worth investigating in the months ahead.
In the meantime, investors who are not fussed about slowly accumulating parcels of shares can't go too far wrong with Masonite. With over 500c/share earned in the first half, one might be inclined to presume that Masonite could do at least 850c/share for the full year.
That puts the company on a forward earnings multiple of less than five times, with the strong possibility of resuming dividends (which, testifying to the company's conservative management, were skipped in 2008).
- Fin24.com
