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Why DuluxGroup Limited paints a great picture for growth investors

The share price of DuluxGroup Limited (ASX: DLX) surged to a fresh record high in late morning trade after the paint and building products company posted better-than-expected full year results and increased its dividend.

The news sent the stock surging 2.7% to $7.75 as investors cheered the 9.6% increase in net profit to $142.9 million as sales improved 4% to $1.78 billion for the year ended 30 September, 2017.

The bottom line was bolstered by a write-back of a tax provision but even without this, net profit is still up a respectable 7.3%.

There aren’t many large cap industrial companies that can deliver these growth rates in what has been a volatile year.

The headline numbers are noteworthy, but here are four other important details in the results you may have missed.

Margins: Profit and revenue growth are pleasing but the thing to be more impressed with is the expanding margin with adjusted net profit growth well ahead of the increase in revenue. This is particularly noteworthy because DuluxGroup had to endure a sharp increase in capital expenditure (capex) in FY17 of $96 million vs. $61 million in FY16 due to the construction of a new paint factory in Merrifield.

The factory is in the final stages of commissioning and is expected to start commercial production in the first half of FY18. Capex for FY18 is expected to fall to around $68 million and this could mean a further expansion in margins for the group.

Overseas Exposure: DuluxGroup is not only leveraged to the domestic market. It is expanding overseas to markets like the UK and Ireland. The results so far are encouraging and offshore markets are likely to contribute more substantially to group revenue and profits going forward. This is exactly the thematic that investors should be looking for.

Cash and Dividend: The amount of operating profit reported by a company often doesn’t match the amount of cash it receives. This is called cash conversion. There are exceptions, but companies that have a high cash conversion ratio are seen to be better run and managed. DuluxGroup’s cash conversion remains robust at 86% and this has allowed it to increase its full year dividend payment to 26.5 cents a share (final dividend is 13.5 cents), which is a 10.4% uplift over the previous year.

While this still puts the stock’s yield at a modest 3.4% thanks to its record high share price, DuluxGroup is well placed to increase its dividend again next year based on its outlook.

Outlook: Management has painted a rosy picture for FY18 (all pun intended!). The group has managed to deliver growth across all of its key business divisions in the last financial year and all signs point to another positive year for these divisions.

What is also interesting is management’s comment on new housing construction, which accounts for around 15% of group revenue. There are worries about a slowdown in this sector but DuluxGroup says it is seeing no signs of it and is expecting new housing construction to “remain relatively strong”.

This will be a welcome relief for investors exposed to stocks like building materials company CSR Limited (ASX: CSR) and residential developer Mirvac Group (ASX: MGR).

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Motley Fool contributor Brendon Lau has no position in any of the 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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