8 feb 06, the australian

The Australian
Edition 1 - All-round CountryWED 08 FEB 2006, Page 043
CRITERION


GWA International (GWT) $2.98
MANUFACTURING on these shores has become so unfashionable that soon the remaining operations will be heritage listed.
Yet the diversified listed players don't seem to be suffering in unison. GWA's results yesterday were ordinary, as expected, while Hills Industries is doing OK.
GUD's numbers last week were also quite good, as were garage door maker Alesco's. McPherson's (household goods) is yet to report but has sounded a profit warning.
In truth, ``manufacturing'' is a misnomer because most of these companies are in part importers and distributors, or assemble goods using imported componentry.
As a general rule, those most weighted to the slowing housing sector are faring the worst.
GWA chief Peter Crowley said yesterday he was happy with the performance of most divisions, but in an ``under the circumstances'' context.
Among its repertoire, GWA makes toilets, taps (the Caroma and Dorf brands), commercial furniture and Rover mowers.
Crowley believes the building fixtures and fittings side of the business (which includes the Gainsborough door business and Dux water heaters) did well to post only a 3.9 per cent earnings decline, given the NSW-led demand slump.
GWA's interim earnings fell 5 per cent on an EBIT basis and the company expected full-year earnings to be up to 10 per cent lower, albeit compared with a record 2004-05.
Unlike GUD, which makes Victa mowers, GWA seemed unable to benefit from wetter conditions conducive to sprouting lawns.
GWA has tried GUD's approach of offering an ``opening price point'' (el-cheapo) mower to tackle Chinese imports, but its Rover arm reflected the initial costs of outsourcing the parts to Asian suppliers.
An investment feature of GWA is that it is sitting on cash and thus pays out nearly all of its earnings as dividends. Last year's full dividend was 22.5c. If we conservatively assume a 20c full payout this year, the stock is trading on a 6.6 per cent yield.
Crowley doesn't expect the housing market to improve for a while, so it's a case of relying on the old staples of cost cutting and reorganisation, otherwise known as shuffling the deckchairs.
We last had GWA as a BUY at $3.16 in October 2004. We now reckon there are not enough compelling reasons to buy the stock, except for a decent yield, so rate the stock a SELL.
A wild card is the company's stated aim of buying a ``large domestic business'' (but it has denied any interest in paint maker Wattyl).

Hills Industries (HIL) $4.75
HILLS, meanwhile, says its full-year results will be ``satisfactory'', which sounds like a line in Criterion's school report from a teacher generously trying to fudge the truth.
In the case of Hills, satisfactory means just that: acceptable. Certainly the company's first-half results -- a 16 per cent EBIT gain -- should keep management out of remedial class.
While best known for the Hills hoist, Hills is more exposed to the non-residential construction sector. The recent acquisition of Brisbane Sheet Metal steers Hills further away from the home and hardware category.
Also in Hills' favour is its growing earnings stream from electronic security and entertainment. Not surprisingly, Hills is eyeing acquisitions in this sector.
Security -- closed-circuit TVs, video intercoms and the like -- faces little Chinese competition (not yet anyway) and benefits from a higher $A. Given the general rise in community paranoia about the bad guys, security has to be seen as a growth sector. The same can be said for the entertainment side -- TV systems, satellite dishes and the like -- unless sing-alongs by the piano are unexpectedly resurrected to usurp plasma screens.
Another positive is that as a big user of steel, Hills last year had to accept hefty price rises from supplier Bluescope. Since then the cycle has turned, so the (steel-capped) shoe is on the other foot.
Criterion rated Hills a HOLD at $4.71 on August 10, a ``satisfactory'' performance for this columnist as the stock's barely moved since. We'll retain a HOLD.

Nylex (NLX) 13.5c
NYLEX has long been viewed as a turnaround prospect, but the plastics goods maker is fast running out of friends, except perhaps for major investor Kerry Stokes.
Criterion would have to agree that the only key factor in Nylex's favour is that the stock's cheap, but then again so are those clothes pegs which disintegrate after one outing.
Perhaps that's being a tad cruel. Nylex also has a revered suite of consumer brand names, including Esky, and a recovery strategy based on water conservation products.
Balanced against that, Nylex derives about 25 per cent of its earnings from the troubled automotive industry, providing fuel tanks, car trimmings and the like to local manufacturers.
Add to the equation import competition, a high dollar and the soaring prices of oil-related input costs and it's not a pretty picture.
To survive, Nylex plans to move to the importer-distributor model by which its products are made in the Asia-Pacific. This week saw the closure of its Melbourne industrial products facility, at a cost of 50 jobs.
The closure is sad but hardly surprising (it's being repeated across the country) and the $8 million cost (mainly redundancy payments) is included in a previous writedown.
Nylex reports its half-year numbers on February 27 but has already warned of a poor result.
Criterion suspects we won't see an operational recovery at Nylex within a typical investor's time frame (which is about 10 minutes).
The much spouted water strategy is -- in Citigroup's words -- wearing thin. But the stock holds appeal given the potential for a shake-out of the consumer goods/homewares sector.
Thanks to the $115 million sale of the AH Plant hire business, Nylex can't be accused of being overgeared.
Nylex has an acquisition kitty of $60 million for two specific, yet undisclosed, targets but could well be in the sights of someone else.
On Citigroup estimates, Nylex will post a full-year result of around $10 million, rising to $16.8 million by 2006-07. These figures are adjusted for the AH Plant divestment.
Just for fun we'll bet on an industry shake-out and rate Nylex a SPECULATIVE BUY. But don't hang around for a dividend.
[email protected]
The Australian accepts no responsibility for stock recommendations. Readers should contact a licensed financial adviser. The author does not hold shares in the above companies.
Caption: GRAPH: UPHILL AND DOWN
Hills Industries close $4.75, up 5c Source Bloomberg
Illus: Table
Column: Marketplace
Section: FINANCE