Re-instating a previously suspended dividend re-investment program at a time of strained profitability is always the sign of a board acting with a little bit of prudence and foresight.
The ‘cheap’ capital from shareholders is usually ignored when things are going well; profits are flowing and there’s all that guff from analysts about the cost of equity versus tax effective borrowing.
But come a bit of financial pain, a strained balance sheet or profit or loss account, or an acquisition program that blows out the gearing, and suddenly there’s nothing as ‘cheap’ as the capital from a DRP and shareholders.
There are no interest payments; the shares issued only have to be serviced with dividends (which can be cut at any time) and don’t have to be repaid like debt: which can be a little inconvenient if times are tough and funds short.
Wesfarmers is one group which has brought back its DRP after a fall in profit and spending around $1.2 billion on acquisitions.
Yesterday Melbourne toy group, Funtastic, which has a few issues with lower than expected profits and cost problems, revealed it was bringing back its DRP.
That was after revealing it had cut the dividend for the year to 8c from 10.5c by dropping the final payout to 4c a share from 6.5c for the last half of 2005.
That’s another sign of a company pulling its horns in and trying to husband capital and cash.
“A discount will be offered which will be calculated as 5% of the weighted average market price over the period of the record date and the four business days prior to that date. Election notices will be forwarded to all shareholders in early March 2007,” FUN said in a statement to the ASX with its 2006 profit announcement.
On top of the profit problems, Funtastic revealed a week or so ago it was having talks with an unnamed third party and its major shareholder, ABC Learning Centres (which picked up a 17.99 per cent stake when it sold a toy company to FUN late last year) revealed that it was involved in the discussions with the third party.
There were no further details on that yesterday.
Funtastic’s net profit for the year to December 2006 plunged 44 per cent to $12.07 million on a four per cent lift in revenue to $362.6 million.
The result included one-off restructuring costs of $1.3 million before tax incurred in December after staff redundancies and costs from consolidation of sites. That happened after an earnings update in November revealed that the result for the year would be worse than expected.
But Funtastic sees an improvement in 2007 and yesterday forecast that net profit would range between $21 million and $25 million for 2007 year and earnings before interest, tax, depreciation and amortisation (EBITDA) would finish in a range of $46 million to $51 million, compared to $29.8 million last year.
The company believes that the educational toys and equipment joint venture with major shareholder ABC Learning Centres, which has 1,100 childcare centres across the US, will help the company grow internationally.
CEO, Tony Oates said that “The trading environment across all product categories in the lead up to Christmas was tough with difficult trading conditions driven by various economic factors. Mass merchant retailers were focused on driving inventory levels down having a detrimental impact on our top line revenue and subsequently impacting on our profitability. Macro economic factors such as rising interest rates and high petrol prices also impacted on the trading result”.
Mr Oates also said that “Given Funtastic’s 2006 result and a changing retail environment, management had implemented a restructure of the cost base.
“Staffing levels across the business were reduced in December and along with other cost synergies identified, will generate a minimum of $5.0m in cost savings in 2007.
“A strategic review is also underway focused on further reducing costs and gaining efficiencies in our business and we are undertaking ongoing reviews of all product categories to ensure that our approach of either fixing or divesting any underperformers is adhered to vigorously.”
Perhaps the biggest concern for the company will be the coming sale and or break up of Coles Group which accounts for around three quarters of Funtastic’s annual business across the various chains.
That could be a big opportunity or a company-changing situation.
