Tenon on a tear as US housing recovers, says Edison report

Wednesday 11th September 2013

Taupo-based moulded wood products manufacturer Tenon is due for further share price growth as preparations made for the recovery of the US housing market start to bear fruit, says Edison Investment Research in a new report on the company.

With 87 percent of its sales in North America, Tenon has struggled with losses in recent years with the high kiwi dollar and the collapse in US housing starts following the severe market shakeout that occurred in the wake the sub-prime mortgage crisis, one of the triggers in 2008 for the global financial crisis.

Now, Edison says Tenon's current share price of $1.33 is at least 34 cents below the bottom of an estimated valuation range of between $1.77 and $2.27, with the company poised to benefit not only from stronger US housing starts, but also a weaker kiwi dollar.

Today's price is still a 90 percent gain over the last 12 months, and the share has traded as high as $1.51 as recently as July 16.

"A confirmed recovery in US housing activity was reflected in Tenon's FY13 results, which showed an improving performance as the year progressed," says the anlaysis by Edison, which conducts independent research on behalf of listed companies that struggle for analyst coverage.

"Upgrades to our underlying profit before tax estimates are enhanced by exchange rate effects, together lifting headline FY14 and FY15 equivalents by 20 percent and 44 percent respectively. Valuation metrics continue to suggest healthy upside from current levels."

Edison is estimating a net profit after tax of US$6 million in the year to June 30, 2014, more than doubling to US$13 million in the following year, with revenues rising from US$364 million in the last year to US$420 million in the 2015 financial year.

Tenon turned in a lower than expected US$3 million loss for the year to June 30, and showed positive earnings of US$5 million on an earnings before interest, tax, depreciation and amortisation basis - a result made stronger by its absorption of US$1 million in business restructuring costs that Edison says will position it well for the emerging upturn in the US.

Particularly strong is its sales growth through major home renovation and hardware outlets in the US, including market-leading chains Lowe's and Home Depot, which now account for 45 percent of total group sales.

Sales through these professional dealer channels in the US grew by more than 25 percent in the last year, compared with total group sales growth of just 9 percent, which takes into account non-dealership sales and growth in Australasian sales.

Adding to that positive outlook, both Lowe's and Home Depot have issued fresh market guidance, including stronger growth in same store sales than previously expected, with Edison describing the US housing market as still being in an "early cycle pick-up" phase.

"It is clear that the underlying business momentum was strengthening in H2 (the second half of the last financial year," says Edison. Dropping its assumed average New Zealand-US dollar exchange rate from US82 cents to US79.5 cents adds US$1 million to the bottom line estimates for 2014 and 2015.

Edison also affirms Tenon's decision to increase net debt by US$10 million to US$49 million to increase working capital in the US and build up US$19 million in inventory.

"Product availability and high service levels are key operational characteristics of Tenon's US business," says Edison of the firm, which is 17.6 percent-owned by Rubicon and uses geothermal heat to process New Zealand-grown plantation forestry timber to turn out high value moulded wood products.

The company was looking to expand to into China, in part because of the collapse in US demand, but has put that strategy on hold now that the North American market is recovering.

"A new five year US$70 million facility provides 30 percent greater debt capacity than under the previous facility and will allow Tenon to advance through the cyclical recovery in the US housing market on a much stronger financial footing."

Edison suggests the valuation range for NZX-listed Tenon could stretch out to a top end of $2.55 per share if US28 cents per share of tax losses available to write off against future profits are taken into account.

BusinessDesk.co.nz

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