Howard Smith lies low
Recommendation
Partly this is because Howard Smith's earnings – excluding star performer BBC Hardware - have been flat. While BBC has more than offset this, investors remain unimpressed.
The most disappointing divisions have been industrial products and construction supplies. The safety products distribution operation, on the other hand, received a boost in June, with the acquisition of Carter Holt Harvey hospitality products in New Zealand. The venture will be renamed Packaging House and will supply hygiene and container products and food wrap to hotels and other institutions.
The purchase takes effect on 1 August and from then Howard Smith will be able to count on annual revenues of $NZ50m from the operation. We think the acquisition is a good one, yielding stable returns because customers order frequently and earnings are not highly cyclical.
Costs lightened
Howard Smith's towage operation has been in the news, after protracted negotiations between Adsteam Marine and the Maritime Union of Australia. The company is set to benefit from the union's acquiescence to three-man crews. After the initial redundancy payouts are made, this could lighten the towage division's cost base substantially.
There are other windfalls round the corner, too. In early June the British Government decided to change its shipping taxes. This will result in an abnormal profit of around $34m in Howards Smith's international towage operations. It seems that the Blair Government wants to arrest the decline of the English shipping fleet by taxing tonnage hauled rather than income from operations – in other words by giving companies like Howard Smith a tax break.
But the real success story is BBC Hardware. It's still powering ahead, with retail sales now accounting for more than half of the hardware division's sales.
A total of 19 new Hardwarehouse stores were expected either to be up and running or nearing completion by the end of June - fine, as long as we don't see a continued downturn in business activity thanks to the GST.
The industrial products division is less inspiring. The company's engineering division, Goninan, was sold last year and similarly drastic action may be required if adequate levels of profitability cannot be achieved. Overall, though, Howard Smith looks strong, underpinned as it is by the immense value of the BBC brand name. With the company's share price languishing near three year lows, even after a spike in late June and into July, the stock remains an ACCUMULATE.