Absa started the trend. But many of us thought that was an aberration driven by a needy parent. A logical conclusion,
considering the controller Barclays Plc had simultaneously announced the third biggest rights issue in UK history. But when two smaller industrial companies announce special dividends on successive days, you have to start wondering whether a new fashion has arrived. In both cases, the businesses were previously tight with their cash, paying many times covered dividends and eschewing debt. A feature of their being family controlled. But now the families have loosened the reins and professional managers are calling the plays, it’s all talk of “lazy balance sheets” and “cash generative operations”. I’ve been a fan of ARB Group for a while, “discovering” the stock in mid 2011 when the shares were easy to buy at 330c. Since then, founder Alan Burke has taken a back seat. His aggressive young CEO Byron Nichles has done lots that the investment community likes, and the share price has surged to a touch below 500c. The underlying profit growth has been stimulated by acquisitions. And, today, the declaration of a special dividend. What concerns me, and I raised it in the interview, is where will the money will come from to gear up for an infrastructure boom President Jacob Zuma keeps promising. Much like my concerns that Absa was shipping out capital at a time when rivals are finding plenty of new places to put it. Nichles offers an interesting response as you’ll see from the interview below.
ALEC HOGG: ARB Group is an electrical product distributor based in Durban. It managed to weather tough economic conditions in the year to June. Byron Nichles, who is the Chief Executive, is with us in the studio. Byron we last spoke, going on two years ago now, when your share price was R3.30, you needing to get more free-float in the market, you were hoping that you’d see the shares improving. Well, they certainly have. Today’s announcements – and we’ll get into those in a moment – has seen your price up to R4.90. A good return – have you reached your potential?
BYRON NICHLES: Well certainly, thank you Alec. We believe that the market has rewarded the performance of ARB over the last couple of years. In terms of the free-float specifically, while it has improved, we still think that there is scope to improve the free-float considerably. What you find though, with the results being what they are, there tends to be a couple more buyers than what there are sellers of our shares right now. So the free-float is certainly something that we are still looking to improve.
ALEC HOGG: But you certainly seem to be focussing on trying to get the share price going higher. You declared a special dividend today, it seems to be the fashion of the moment. We saw ABSA issuing a special dividend, there was another special dividend from Italtile yesterday, and yourselves paying a considerable part of your capital back. What’s the motivation in your case?
BYRON NICHLES: We’ve always had a very strong cash generative business and, over the years, through the strong cash generation, with no debt on the balance sheet, we have noticed the balance sheet perhaps being a little bit lazy and the capital structure being, perhaps, sub-optimal. When the board sat yesterday and engaged, we looked at the cash flow generation of the business, we looked at the cash requirements of the business going forward as well as our own acquisition aspirations and, all of that taken into account, we felt that there was still surplus cash in the business and, hence, the decision to return it to shareholders.
ALEC HOGG: That’s a manager talking. You’ve got a controlling shareholder, the guy who founded the business 30 years ago, run it in a particular way for a long time, keeping big cash balances so you can do the kind of acquisitions that you’ve done in the last little while. What is this about lazy balance sheets when you are in an uncertain economy?
BYRON NICHLES: Well, certainly, when you look at the business and over many, many years it’s been very cash generative and continues to be cash generative. The balance sheet structure and the asset underpin, the fact that we’ve got a very strong and large property portfolio. While we are certainly not wanting to introduce debt into the business, we are cognisant of the fact that, with interest rates at all-time lows, the business could certainly sustain a level of debt. Shareholders don’t look to us to leave their cash in the bank They’re looking for returns. Taking all of that into account we still felt that there was surplus cash in the business to return.
ALEC HOGG: Does Alan Burke (the founder) still have 50% of the equity.
BYRON NICHLES: Alan holds just over 50%, yes.
ALEC HOGG: And he voted in favour of this special dividend as well, presumably?
BYRON NICHLES: He is the chairman of the board and he voted in favour of that.
ALEC HOGG: It is interesting to see (what happens when) family business is run by professional managers. There is a different priority or a different focus that comes into it. Italtile also, yesterday, a special dividend being distributed; a family business that had a very heavily covered dividend in years gone by. I guess we should be looking for other stocks in the JSE with a similar approach?
BYRON NICHLES: Yes, and certainly not my forte, but dividends make up a big part of investment returns, particularly in uncertain markets. Whether that is something peculiar or unique to family run or family controlled businesses – I’m not quite sure. But certainly with strong cash generation, that can never be a bad thing.
ALEC HOGG: Family controlled businesses that get run by professional managers quite clearly.
BYRON NICHLES: Yes
ALEC HOGG: The financial results that you put on the table are very impressive again, 28% profit growth before interest and tax, your margins are up a little bit as well and you’ve made a couple of acquisitions.
BYRON NICHLES: Yes, certainly we were pleased with the results. There’s no secret that the going out there is tough, seems to be getting a bit tougher. Through the acquisitive strategy that we put in place a couple of years ago, we now start seeing now those benefits come through, both at the top line and the bottom line, and it’s a strategy that we’ll continue to pursue.
ALEC HOGG: Have you sufficiently consolidated in your industry or are there more opportunities?
BYRON NICHLES: There certainly are more opportunities. You know if you look at the electrical wholesaling sector as a whole it’s a very fragmented sector, a very fragmented industry so we do see consolidation opportunities from time to time. Although, as we’ve found over the years, we tend to be quite selective around which acquisitions we pursue and which ones make strategic sense for us. When those opportunities arise, we certainly will continue to look to consolidate them.
ALEC HOGG: You declared a 16c a share dividend which is up 18% on last year’s dividend, plus another 10c special dividend. What is your capital position now?
BYRON NICHLES: The cash?
ALEC HOGG: Well, you said you had excess capital so you wanted to give it back to shareholders. I’m trying to gauge whether you can have another special dividend next year.
BYRON NICHLES: That certainly would be something for the board. Where we sit right now is, at year end, we reported R203 million cash. After the payment of the dividends, which get paid on 9th September, that would take about R62-65 million of that cash out of the business, so still a very healthy cash position. We certainly believe that the business will continue to generate cash and I think the dividends reflect the board’s optimism and confidence in the business. At the same time we’re looking to deploy that cash through acquisitions, through growth of initiatives to generate a better return than what it currently earns in the bank.
ALEC HOGG: You know Byron, what’s worrying me here is we had a discussion with Wayne Sampson from Ellies just the other day. They’ve got a huge opportunity coming with the new television broadcaster and they decided to not pay a dividend because they wanted to keep the money on the side to take advantage of that. You’re in the infrastructure field. You’ve got a government in this country, in South Africa, who’s desperate to spend money on infrastructure. We haven’t seen it come through yet, but once those taps are on, one would presume that there would be as big an opportunity in your area as there is for Ellies. Yet, you’re paying special dividends now. I don’t get the long-term thinking here.
BYRON NICHLES: I can’t really comment on Ellies, but I think if you look at the structure of the two balance sheets, you know, they’re very different. ARB is cash generative, has absolutely no debt in the business. I think Ellies has got quite a lot of debt in the balance sheet so, yes, I don’t think the comparison is necessarily fair. We can gear up and the business will continue to generate sufficient cash to fund all the growth initiatives that we see in the foreseeable future.
ALEC HOGG: Byron Nichles is the Chief Executive of ARB Group, a business that is based in KwaZulu-Natal. The shares have really performed well over the past couple of years. I suppose the question has to be can it continue?
