Float flop opportunity?

Shares in Housewares were issued at $1 but when the stock listed on 25 May 1999, a bad day for the market overall it has to be said, it opened at $0.94, then dropped to a low of $0.87 before closing at $0.89. Is the company now worth considering?

A cheap issue

Housewares, a wholesale supplier to housewares retailers, has been around since the 1950s and enjoys reasonably strong margins of between 8% and 9%. Annual sales of $140m are divided between homewares (40%), appliances and nursery products (30%) and kitchenware (30%), an American venture through a Los Angeles-based business called Metro. Overall, sales growth has been a brisk 7% a year since the mid-1990s with the Australian business moving ahead slightly faster than its counterpart across the Pacific.

Even before its post-listing slump the issue looked cheap. The company expected earnings per share of $0.10 in 1999/2000, pricing it at a prospective PER of 10. It's conservatively managed with net debt-to-equity a very reasonable 29% at 31 December 1998. The business generates good cashflows to assist in managing the seasonal nature of the retail environment and intends to pay at least 70% of net profits after tax in dividends. At a prospective dividend yield of 8.2%, the attraction to yield conscious players is clear.

Reasons for the slump

Given these attributes you're probably wondering why the listing was a flop? We think there are a number of reasons. Firstly, Housewares was being offered to the market by Solomon Lew's Premier Investments, which had owned a majority stake since 1988. With Lew recently cashing in his Coles chips to move on to better things, some investors may have the perception that Housewares is a tired business and not worthy of a decent premium - if Solomon's not interested, why should I be?

Secondly, wholesaling isn't a particularly sexy business and with all the Internet-related floats around it didn't get much attention. Finally, the post-listing slump can partly be explained by the fact that Were's holding of almost 20% will eventually find its way onto the market and this is likely to keep the price depressed in the short-term.

All of these factors suggest that the company isn't going to shoot up in price overnight, but with the retail sector performing handsomely, the post-float share price offers good value when compared to other retail stocks. The yield conscious should ACCUMULATE and wait for sentiment to change.

Languishing on the vine

Cabonne isn't a wine maker just yet but it does manage four vineyards in the Orange district of central NSW. Unfortunately, its shares suffered a similar fate to those of Housewares, being issued at $1 but opening at $0.92 when the stock listed on 31 May 1999, subsequently dropping to a low of $0.82 before closing the day at $0.85.

We suspect that Cabonne, despite being in an attractive industry, failed to 'stag' because its revenue source is harder to understand - it earns management fees from the vine owners, paid from the sale of grapes to Southcorp. While management fees are set at a higher rate for the early years of a project the company intends to offset what will be declining fees by building its own winery from the float proceeds. This will be a 320 tonne facility for the 2000 vintage.

Grape production is increasing from 810 tonnes in the 1998 vintage to an expected 4,900 tonnes to cover the 2000 vintage but that's the easy part - establishing a brand in the marketplace that converts this production into sales may prove costly in the short to medium term.

These concerns are obviously factored into the share price and the stock is by no means over-valued at present. After all, it floated on a prospective FY00 PER of 9.5 and is now trading near its net tangible asset backing of $0.86. Looking past a forecast net profit for FY00 of $6.5m, the profit outlook is somewhat blurred but we think there's enough upside in the company for existing shareholders to HOLD and for subscribers comfortable with a higher level of risk to ACCUMULATE.