The annual result of Australian-based US building products group, Rinker, contains a number of positives for shareholders wondering about the takeover bid from Cemex.
In what may be its last results announcement as a stand-alone company, Rinker reported a 5.7 per cent lift in net profit to $US782.4 million ($A937.7 million) for the year ended March 31 which was a pretty good effort in the face of the worsening slump in the US housing market, especially new home building in Florida and around Arizona, Utah and Nevada, the states where the company has much of its Americanbusiness.
At the same time, the cement maker warned its fiscal 2008 profit could drop byaround 10 per cent if the company’s main US housing markets stay depressed, which is on the cards.
“In summary, this is a good result delivered in difficult circumstances but the outlook is mixed and the shape of the recovery is difficult to predict,” said Rinker chief executive officer, David Clarke said in a frank statement issued with the results on Friday.
This result shows the quality of the management of the company, its assets and why Cemex is willing to pay around $17 billion (which was $19.41 when recommended a fortnight ago but which has now shrunk to $18.68 with the rise of the Aussie dollar).
Cemex lifted its offer for Rinker to $US15.85 cash per share earlier this month, up from the first rejected offer of $US13 last October (which was a serious mistake).
The earnings commentary also shows the board and management have been pretty frank with shareholders: explaining the possibility (which is quite strong) that the depressed US housing market might not recover for a year or so.
It also puts the weight on big shareholder, Perpetual, to announce its stance towards the higher and recommended offer from Cemex. It owns more than 10 per cent of Rinker and is sitting on paper profits of more than a billion dollars.
Rinker earns more than 80 per cent of its income from the US and the 2008 financial year performance will hinge largely on whether the Florida and Arizona markets rebound from their depressed state.
Should they remain in the doldrums, profits could fall by up to ten per cent which is something very much in prospect judging by comments in the US last week with the release of the poor new housing numbers for March.
Analysts said recovery for the industry was still a year or so away.
Perpetual has opposed the Cemex offer because it undervalues Rinker.
On the basis of Friday’s announcement the offer still undervalues the earnings capacity of Rinker’s operations in the US, even at these depressed levels.
The Rinker board has recommended shareholders accept the $17 billion takeover of the company by Cemex, the world’s third largest cement maker. Shareholders have until May 18 to accept.
Rinker really had no choice according to the statement issued when the ‘accept’ recommendation was announced a couple of weeks ago.
The combination of an uncertain outlook, uncertain currency position with the strong Aussie eroding the $A price (because the offer is priced in falling US dollars) and the lack of any worthwhile alternative, forced the change of heart from the board.
And yet the details of the result, even taking into account the rough final quarter of the year to March when earnings were knocked about by the steepening slide in housing, shows this is not a badly run company.
Margins rose during this difficult year and in Australia the Readymix business rode out the housing slump and exploited the resources and infrastructure booms.
The thing that will test the eventual fate of the Cemex offer is that the price, although higher, it is still cheap and in the bottom of the valuation range from Grant Samuel.
For that reason you can’t rule out a repeat of the Qantas bid situation with a group of hold out shareholders defeating or threatening to defeat the offer.
CEO Clarke said the broader outlook was positive and “in Australia, strong construction activity should continue and pricing is expected to improve.
“We are confident about the long term fundamentals which underpin the value of Rinker.”
Rinker’s trading revenue rose four per cent to $US5.34 billion ($A6.4 billion) in the year to March.
Comparable net profit was $US778 million ($A932.5 million) up seven per cent excluding $US43 in takeover defence costs, a tax consolidation gain and the previous year’s profit on the sale of the Emoleum asphalt business in Australia.
Earnings before interest and tax (EBIT) rose six per cent to $US1.22 billion while comparable EBIT was $US1.23 million, up 10 per cent.
Rinker said its results for the fiscal 2007 year also showed that margins increased with the EBIT/sales margin at 22.8 per cent, up from 22.4 per cent.
The main US unit, Rinker Material, delivered EBIT growth of eight per cent to $US1.06 billion, despite the housing slowdown which impacted heavily in the fourth quarter, while the Australian Readymix business delivered EBIT of $A239 million, up one per cent.
Rinker declared a final dividend of 25 Australian cents per ordinary share, up from 24 cents in the corresponding period last year, making the total 41 cents, up eight per cent.
