DuluxGroup

About the author:

Author name:

By Alex Lu

Job title:

Analyst

Date posted:

04 November 2016, 9:03 AM

Sectors Covered:

Industrials

Key points

• DuluxGroup (DLX) reports its FY16 result on Tuesday 8th of November.
• We expect DLX to deliver modest earnings growth driven by the core Paints & Coatings division in generally positive market conditions. However, the shutdown of Masters is likely to have a short-term impact on earnings.
• We forecast FY16 EBIT of A$200.6m, implying 4.3% growth on the previous corresponding period (pcp).

We expect 4.3% EBIT growth in FY16

Management have guided for FY16 earnings to be higher than in FY15, and we forecast FY16 EBIT of A$200.6m, implying 4.3% growth on the pcp. We expect FY16 underlying NPAT to rise 3.2% to A$128.8m. Similar to past results, we expect group earnings to be driven by the core Paints & Coatings ANZ division, with EBIT up 4.7% to A$153.8m on the back of generally favourable conditions in the renovations and repaint, new housing and commercial markets. 

With the exception of Consumer & Construction Products ANZ, we expect earnings in all other divisions to be higher than the pcp. We expect DLX to announce an FY16 dividend of 23.5cps, up 4.4% on last year.

Masters shutdown likely to have a short-term impact

Woolworths' decision to close Masters on or before 11 December has resulted in major price discounts storewide, in particular a number of competitive paint brands such as Wattyl, Valspar, Sherwin-Williams, Resene and Pascol. Upon visiting a Masters store over the weekend we found discounts of 40% on all paint brands. We believe the magnitude of the price discounts will only get larger as Masters approaches its shutdown date. The liquidation is definitely having an effect on the overall home improvement market with Wesfarmers' recent quarterly update noting an impact to Bunnings' sales in 1Q17 and 2Q17. 

While we believe the shutdown of Masters is a long-term positive for DLX as a number of the competitive paint brands seek to find other retail distribution channels, it is likely to be a drag on earnings in the short term.

Minor decreases to FY16 and FY17 earnings forecasts

We have made slight reductions to our earnings forecasts in FY16 and FY17 to reflect the short-term impact from the Masters liquidation sale. FY16F EBIT falls 1% to A$200.6m and FY17F EBIT dips 1% to A$213.2m. However, FY18F EBIT rises by 1% to A$221.6m as we believe the longer term impact will be positive.

Investment view

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 see the stock as fairly valued given its modest growth outlook. 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 maintain our Hold recommendation.

More information

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