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Hills Ltd FY14 report: Should you buy?

Earlier today Hills Ltd (ASX: HIL) announced a strong set of FY14 results which saw management execute on a number of strategic priorities, culminating in a rapid transformation from a struggling steel business into a growing technology and communications company.

Hills, a $400 million company headquartered in Sydney, has a rich history in Australia dating back to the manufacture and distribution of the Hills Hoist, an iconic clothesline fixed into many backyards across Australia and New Zealand.

Prior to the GFC, Hills sported a share price as high as $6 but it was slapped down to just $1.50 within 18 months. Today, five years on, Hills’ share price opened at $1.73.

But could its fortunes be about to change?

In recent times, Hills has sold-off steel assets such as Orrcon and Fielders to BlueScope Steel Limited (ASX: BSL) and moved its focus into the technology sector.

Despite acquiring a seemingly large portfolio of businesses which appear to have little in common (it provides everything from in-hospital entertainment to security and lighting for commercial business), Hills’ strict investment criteria and search for profitable businesses means it’ll be able to leverage its success in niche market areas and provide a holistic service to customers. It has identified health and security as areas of growing importance.

So will it be successful?

Whilst only time will tell if the company will be able to execute on its strategy, there are promising financial results which investors can take away from today’s FY14 report, including:

  • Statutory profit jumped $118.9 million to $24.8 million (it reported a loss in FY13)
  • Underlying NPAT attributable to owners was $27.3 million, up 42.2% year-on-year
  • A final dividend of 3.60 cents per share, fully franked (taking the full-year payout to 7 cents)
  • Underlying earnings per share grew 46%
  • It bought back around 5% of issued shares (the board continue to believe its stock is undervalued)
  • It reported $8.5 million in cash (no debt); and
  • Achieved a return on funds employed (ROFE) of 23.1%

In terms of strategy, Hills fulfilled a number of its FY16 strategic priorities early, including:

  • 75% of revenues from technology and communications; and
  • ROFE greater than 13-15%

What we’re likely to witness from here

Despite a rapid transformation – which includes a clean out of its balance sheet – Hills is likely to grow mostly acquisitively over coming years as its new businesses find their feet. For example, the group’s FY15 outlook is for between $22 million and $24 million in NPAT attributable to owners (before acquisitions) – largely flat.

CEO Ted Pretty said, “We have entered FY15 with a very strong balance sheet, reduced structural and operating complexity and a lower operating risk profile. We have ample capacity for further acquisitions that are accretive to our core and or offer medium to long term growth opportunities.”

Therefore investors should, in my opinion, be 100% confident in Hills’ current management and its ability to deliver on the FY15-FY17 strategy and objectives (which will be updated at this year’s AGM). Investors should also focus on its ability to make acquisitions that will become earnings per share accretive within two years, as per its investment criteria.  In addition, investors must also expect unfranked dividends in the short to medium term, due to a low franking credit balance.

To buy, or not?

In short, I think Hills is doing all the right things by shareholders but it’s still got a long way to go. I think a significant number of risks persist but it has provided a foundation for outperformance in the long run. Shares trade on a price-earnings ratio of 16 and trailing dividend yield of 4.2% fully franked.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned.  

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