re: News: DuluxGroup boosts H1 profit, foreca... I think it's...

re: News: DuluxGroup boosts H1 profit, foreca... I think it's expensive for all the reasons you've mentioned, but i have a slightly different perspective:

- It actually has really good cash generating ability. Operating cashflow was not so flash if you look at the half year results prima facie and in isolation. However, taking into account:
a) one off items taken to account in previous periods (but with cash effect in the current period)
b) balance sheet movements (ie: a reduction in net trade payables)
operating cashflow is actually greater than NPAT.

- FCF is by definition exclusive of dividends paid. It would be difficult to compare companies using FCF yield after dividends paid as dividend payout ratios can vary greatly. It operates in a relatively low capex environment and as such I think it's ability to generate FCF is one of its strengths.

- Debt/equity ratio. Granted DLX has a high debt, but it has been reducing it a quite a significant rate over the past few periods. Also by increasing EBITDA in this period, even though it hasn't really reduced debt (management claims this is due to seasonal factors) it has improved its ability to service the debt.


- A dividend yield of 4% (fully franked) is pretty good in my view. It is even better when you consider this is only about a 63% payout ratio. Once they get the debt under control there's a high likelihood in my opinion of increasing the payout ratio. I think a better valuation metric would be FCF/market cap or E/cap.

- I think the growth prospects are reasonable also, although possibly a slight understatement. There aren't many companies of this quality on the asx with such good earnings growth and in such a benign growth environment the market is willing to pay a premium for reliable earnings coupled with good growth.

- The one thing I do agree with is a p/e of more than 20 is a bit steep for me. I think if you're holding period is at least a few years it will matter little. DLX will probably continue to keep growing profits and that P/E will eventually come down. However, at the moment it doesn't offer me enough margin of safety. In this market it's priced ok, but a less optimistic market could see that multiple compress. I'm happy enough to hold my cash rather than accept what the market is currently offering.