Should you buy shares in Royal Wolf Holdings Ltd?

Royal Wolf Holdings Ltd (ASX: RWH) this morning released its financial results for the year ended 30 June 2016.

For those of you who aren’t aware of what Royal Wolf Holdings does, the company provides a variety of storage container leasing and sales solutions, and its range includes shipping/refrigerated containers, accommodation units for construction sites, removal and self-storage containers.

It’s a business though that has had significant exposure to the resources industry which the company is attempting to diversify away from.

The key takeaways from the financial results include:

  • Net profit after tax down 39.6% to $7.867m
  • Total revenue up 11.1% to $164.315m
  • Cost of sales up 33% to $93.888m
  • Net Debt/Equity down from 81.4% to 61.9%
  • Gross margin down from 52.3% to 42.9%
  • Cash flows from operating activities up 9.7% to $37.250
  • Return on average shareholders’ equity (ROE) 5.0% down from 7.3%.
  • Dividend halved from 5.0 cents to 2.5 cents on the prior corresponding period

It appears that the resources slowdown is still a significant headwind for the company. Despite a 23% increase in lease revenue to the non-residential construction and infrastructure sectors, this was still not enough to prevent an overall fall in lease revenue.

Leasing revenue is important because it comes with a higher yield when compared to sales – which is a major reason why gross margins have fallen so far. Unfortunately, although sales were up 32.3%, the margins on these sales weren’t enough to offset the slowdown in leasing, and net profit was smashed down 40% as a result.

Overall, it was a mixed report with both good and not-so-good items to come out of the results.

Cash flows from operating activities continues to rise showing there’s a strong underlying business here, albeit exposed to challenging sectors of the Australian economy.

But it’s ROE is simply not enough to get excited in my opinion.

Since the company listed in May of 2011, the company’s economic performance has been scratchy at best with revenues, earnings-per-share and even dividends fluctuating rather than showing a steady upward trend which is what I’d ideally like to see in any potential business I’m about to invest in.

Still, this is no doubt a function of the industries and sectors it’s trying to serve, and in this regard, if you’re going to consider buying shares in this business, you should adjust your expectations to account for this.

Being in a fragmented industry, there is still a lot of scope for expansion with potential improvements to customer engagement and attracting new customers, but the financial outlook was light on financial detail.

Taking into account the reduced dividend, the yield today is just over 4.7% fully franked which may attract some investors.

But you need to be cognisant of the cyclical nature of this business and accept that the company’s earnings will continue to fluctuate, with potential ups and downs in the dividend over time.

Foolish takeaway

As a potential home for my investment dollars, I’ll pass on this opportunity, despite the high yield. There are simply better quality businesses on the ASX.

If you are interested in quality dividend shares, then I would recommend this top dividend share instead. A strong yield and potential share price gains make this a great investment idea in my opinion.

Our resident dividend expert names his Top Dividend Share for 2016. Not only are the shares dirt cheap, the company is trading on a fat fully franked dividend yield. Simply click here to gain access to this comprehensive FREE investment report, including the name of this fast growing ASX dividend share. No credit card required!

Motley Fool contributor Edward Vesely 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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