Howden is a global supplier of fans, rotary heat exchangers, compressors and gas cleaning equipment to customers around the world. Howden Africa (JSE: HWN) operates from its head office in Booysens, Johannesburg while its Donkin Fans operation is based in Port Elizabeth. Like many of its small-cap heavy-engineering peers, Howden has traded through a rough patch of late. Shareholders have had to endure a steady decline in share price since the mid-2008 high of around 1300c per share.
For all the latest recommendations, start your MoneyWeek Online 3 week risk-free trial now.
Perhaps the market’s judged the company a bit harshly. The group’s latest results (for the full-year to December 2008), confirm solid prospects at the company. Tough times or not, Howden reported a 23.8% improvement in revenue to R849.8m for the year. The R95.8m operating profit was also marginally better, while headline earnings per share dropped from 95.42c to 93.22c. Howden remains confident in its future earnings prospects, declaring a final dividend of 15c per share. That’s why Rand Merchant Bank, RMB Asset Management and Fraters Asset Managers remain large stakeholders in the company.
First prize over the next decade is for Howden to generate healthy revenue from Eskom’s various new-build projects. And management is already confident of solid improvement in the 2009 financial year after successes in this regard. The group says various Eskom projects, combined with a large environmental control system order for ArcelorMittal, contributed to its “record year-end order book at a time when much uncertainty prevails in industry nationwide”. At 1 January 2009, the group order book stood at more than R1bn, with R450m booked for delivery in 2009! There’s more good news for shareholders – Howden’s business is based on “flexible supply chains and relatively low levels of fixed cost” – giving the company an edge in navigating a continued business slowdown.
At its current 650c per share, Howden is on a price-to-earnings yield of less than 7 times. And although the 3.85% dividend yield isn’t overly impressive, Howden has paid frequent special distributions to its shareholders, 241c per share in June 2006 and 100c per share last year. With a net cash position of R17.6m at the beginning of this year, we believe Howden will enter the business cycle turnaround with all guns blazing. We think it’s a buy at 650c per share.
Recommendation: BUY at 650c Market capitalisation R427.239m
