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A Broker's PreView - The Good Oil on Hellaby

Overview: Hellaby Holdings describe their strategy as “Buy, Build, Harvest.” The company successfully harvested their Packaging division in May, selling the company for approximately $30 million. Hellaby’s portfolio now consists of 15 companies in 4 divisions. These divisions are Automotive, Equipment, Footwear, and their Oil & Gas Services division.

Pros: The Oil & Gas Services division consists of Contract Resources, which Hellaby purchased in 2013. The company should avoid the worst of the recent plunge in crude oil prices as much of the work revolves around servicing pipelines, refineries and the associated infrastructure. Contract Resources has grown steadily since Hellaby purchased 85 percent of the company, and now contributes 38 percent of Hellaby’s earnings.

The other major earnings driver of the company is their Automotive division. Hellaby have acquired 9 companies that operate wholesale distribution of automotive parts across NZ and into Australia. They have achieved reasonable earnings growth, and also contribute 38 percent of group earnings.

Hellaby’s Equipment division has also seen earnings growth of late. The business unit focuses on heavy equipment and is a good complement to the Automotive division.

Cons: The odd one out in the portfolio is the Footwear division, whose brands of Number One Shoes and Hannahs are consistently contributing less and less to earnings. The footwear division does not quite fit in with the overall portfolio of assets, so could be given the boot if the price was right.

The Equipment and Automotive divisions have enjoyed exposure to NZ economic growth. It appears this growth has started to slow, with the particularly pertinent ANZ Truckometer warning of a dip in their July report. Official Cash Rate cuts are expected and should help to stimulate economic activity in the medium term. The drop in the NZD will also be increasing the costs of Hellaby’s imports.  

Price performance: The share price has been stagnant for the past 3 years at approximately $3, over which time the NZX50 index has appreciated almost 50 percent.

Investment outlook:  The Company has a historical gross dividend yield of 8.80 percent, and trades on reasonably cheap multiples. Earnings accretive acquisitions could come, as could the sale of the Footwear division, either of which could boost the share price.

*A Broker's View is written by Grant Davies, Investment Advisor at Hamilton Hindin Greene Limited. This article represents general information provided by Hamilton Hindin Greene, who may hold an interest in the security. It does not constitute investment advice. Disclosure documents are available by request and free of charge through www.hhg.co.nz.

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