GUD Holdings Limited (ASX: GUD) shares were down more than 10% this morning following the release of the company’s interim results to 31st December 2018.

GUD is comprised of multiple different businesses including Ryco, Cooper, Wesfil and Davey. Together, these businesses provide automotive accessories, lighting and electrical accessories, oil and fuel filters, pumps, water pressure systems and more. GUD primarily distributes through leading retailers in Australia and New Zealand, but they are also developing export markets in Europe, the Middle East, Asia and North America.

GUD Holdings Interim December 2018 Result

The main focal point from the GUD interim report was the 13% increase in revenue to over $219.75 million. Not a bad start.

However, after this positive announcement, GUD admitted that net profit after tax only increased by 3% to $29.3 million. There’s more to that story though.

NPAT on continuing operations was up 14% from 2017 following a record result for the automotive side of the business. The reason profit was only up 3% seems to be that $2.5 million in profit in 2017 was profit from discontinued operations, skewing results.

As mentioned, much of that growth came through the automotive side of the business, with the water side of the business struggling and showing no increase in revenue.

Managing director Graeme Whickman reported, “The Water result showed some challenges, largely due to the drought.” He goes on to say that early signs from December and January are showing some improvement and, “positive momentum”.

The automotive side of the business showed growth of 18% and is now responsible for about 73% of total revenue. The interim report also includes results from six months of contribution from Disc Brakes Australia, a new acquisition.

Some negatives to come from the report were the huge 73% decrease in operating cash flow and debt levels sitting at $142 million. This is in part due to that acquisition of Disc Brakes Australia Pty Ltd, which was acquired in July 2018. Although debt has decreased from $194 million, that was largely only due to the proceeds of sale from Oates.

Following the increase in revenue and a slight increase in profit, basic earnings per share increased over the period by 13% to 33.9 cents.

GUD Holdings Dividend

The interim dividend was announced as 25 cents per share, fully franked. This represents an increase of 4% from 2017 and gives a payout ratio of 74%.

GUD Holdings Outlook

The positives from the interim report were not enough to satisfy investors. GUD is still expecting positive growth to continue in the automotive segment and are hopeful that the early signs of improvement in the water segment will continue, but debt remains high and cash flow is low.

Mr Whickman commented on the automotive business saying, “we are expecting similar ongoing performance, with further organic growth across the businesses and a full twelve months’ contribution from Disc Brakes Australia.”

My Take

All things considered, the interim report does show some positive signs of growth with revenue continuing to increase, especially in the automotive side of the business. However, there is concern about the slow-down in the water side of the business and the decrease in operating cash flow, and only time will tell if this can be turned around.

The big driver of growth could prove to be the exporting side of the business, where GUD says they have a “growing presence”. For now, though, GUD does not make my list of shares to buy. I recently wrote about another ASX company that may be worthy of a spot before GUD.

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Disclaimer: Any information contained in this article is limited to general financial/investment advice only. The information has not taken into account your specific needs, goals or objectives, so please consider consulting a licenced and trusted adviser before acting on the information. Please read The Rask Group’s Financial Services Guide (FSG) for more information. This article is authorised by Owen Raszkiewicz of The Rask Group, which is a corporate authorised representative No. 1264179 of Strawman Pty Ltd (ACN: 610 908 211) (AFSL: 501 223).

Disclaimer: At the time of writing, Max does not own shares in GUD Holdings.