Initiating coverage on DuluxGroup

About the author:

Alex Lu
Author name:
By Alex Lu
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Date posted:
08 March 2016, 1:26 PM
Sectors Covered:

Key points

  • DuluxGroup (DLX) possesses a high quality portfolio of brands with strong market positions.
  • DLX's business is strategically skewed towards the more stable and profitable maintenance and home improvement sector rather than the more cyclical new housing market.
  • We forecast 7.2% FY16F EBIT growth to A$206.3m.

A quality business with strong brands

In our view, DLX's main competitive advantage is its portfolio of brands. Its main brands, including Dulux, Selleys, Yates, Cabot's and B&D Garage Doors & Openers, are some of the most recognised and trusted in the housing industry and also hold market leading positions in their respective categories. With additional investment we think there is potential for further share gains in largely low-growth, consolidated markets. 

The strength of DLX's business is also highlighted by its strong financial returns (ROFE 27.1%, ROE 38.8%) and FCF generation.

Focus on maintenance and home improvement the right strategy

DLX's business is strategically skewed towards the more profitable and stable maintenance and home improvement sector (65% of revenue) rather than the more cyclical new housing market (15% of revenue). Underlying volumes in the maintenance and home improvement market have historically tracked at around 1-1.5% pa (ie. at half the rate of GDP growth) and don't tend to have large peaks or troughs. 

In contrast, the new housing market is more cyclical, price competitive and lower margin. Despite risks of a slowdown in the new housing market over the next few years, it's our view that it's unlikely to have a major impact on earnings growth.

We forecast 7.2% EBIT growth in FY16

We forecast 7.2% EBIT growth to A$206.3m in FY16 driven by 5.1% revenue growth. We expect the maintenance and home improvement market to continue its steady growth with recent favourable building conditions to provide a small boost. For FY17, we forecast 6.3% EBIT growth to A$219.3m. We expect the balance sheet to remain strong, despite A$130m in capex on the new paint factory between FY16-18F, with gearing (ND/EBITDA) comfortable at around 1.5x and EBIT interest cover >9x. We forecast FY16F DPS of 23.5cps, representing a 70% payout ratio.

Initiating coverage

While we are attracted to DLX's strong brands, relatively defensive and stable earnings stream, solid balance sheet and strong free cash flow generation, we feel this is reflected in the current share price. Despite our neutral stance in the short term, we remain positive on DLX in the long term and would look to reconsider our view on share price weakness.

We initiate coverage on DuluxGroup (DLX) with a Hold rating.

More information

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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