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GUD Holdings Limited reports $43 million loss: Should you sell?

The shares of GUD Holdings Limited (ASX: GUD) are likely to come into focus today after the company reported a full year net loss after tax of $43 million.

This was a result of the company taking a $75.7 million non–cash impairment at Dexion and an earn-out payment of $10.6 million associated with the acquisition of the Brown & Watson automotive business.

Key highlights include:

  • Revenue up 20% to $595.5 million
  • Net profit after tax from continuing operations down 241% to a $40.9 million loss.
  • Underlying profit from continuing operations after tax up 44% to $44.4 million.
  • 4 cents loss per share.
  • Final dividend increased 5% to 23 cents.
  • Operating cash flows up 133% to $70.2 million.

Although the headline makes for terrible reading, it was thanks to the company’s solid performance and its positive outlook that it took the decision to impair its holding value by $75.7 million pre-tax. Following the impairment the holding value of Dexion now stands at $44 million and all goodwill has been written off.

Underlying net profit after tax from continuing operations increased 36% year-on-year to $44.4 million. This was achieved thanks to strong contributions from its Automotive businesses and Davey Water Products, although partially offset by a loss in its Dexion business.

Whilst management has acknowledged that there is still a lot of hard work ahead for its struggling Dexion business, it is confident signs are pointing towards a recovery. Although the business produced a disappointing loss this year, it was profitable in the final quarter. It is believed the approach of Dexion’s new management team is starting to take the business in the right direction. It also revealed strategic options for Dexion are being considered.

Managing director Jonathan Ling had this to say on the results:

“The year represented one in which the portfolio structure of GUD was rebalanced with the acquisition of Brown & Watson and the sale of the interests in the Sunbeam joint ventures. We anticipate the consequences of this to be more consistent and stable revenue and profit streams, as the relative focus shifts from consumer markets to trade and industrial markets.”

Outlook

The company’s financial position continues to remain strong with high cash conversion and a reduced net debt position. It believes this supports further organic and acquisitive growth initiatives in the future, which is very positive in my opinion. Thanks to its strong Automotive business, management is confident underlying earnings will grow in FY 2017.

Foolish takeaway

Whilst I’m a big fan of some of GUD Holdings businesses, as a whole I’m not convinced the company makes a great investment today. I don’t believe these results were anywhere near as bad as they look, but I do feel there are far better businesses such as Premier Investments Limited (ASX: PMV) and Burson Group Ltd (ASX: BAP) for investors to focus on instead.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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