Tenon mulls mergers, acquisitions as US housing recovery picks up

Thursday 4th December 2014

Tenon, the wood mouldings manufacturer which posted its first annual profit in ten years, is considering merger or acquisition opportunities to capitalise on the recovering US housing market.

The Taupo based company returned to profitability this year, as the US housing market, where it gets 90 percent of revenue, began to recover after being hit by the US sub-prime mortgage fiasco and subsequent global financial crisis. As the market picks up Tenon expects to see more merger and acquisition activity, and is looking to refocus in the new housing market, Chairman Luke Moriarty told shareholders at the annual meeting in Wellington.

"We do want to grow further in the pro-dealer segment, we'd like to rebalance a bit more to new housing, relative to retail, and you can do that several ways," Moriarty said. "You can organically grow, which is what we are doing now, and you can do it by acquisition, and we are looking at both. We've got to be conscious, while we're looking at others, they're probably looking at us. This is a very good company so I am sure the eyes are going both ways with this one."

"We're more comfortable with where our earnings growth profile is looking now, our balance sheet is more solid than it has been at any point in the cycle and that's the same for everybody else participating in this recovery," Moriarty said.

The company didn't provide earnings guidance, saying the outlook was dependent on the recovery, in particular the impact of the US Federal Reserve's ending of quantitative easing, which has seen the central bank pump cash into the economy in a bid to stimulate growth. The recovery in the US housing sector is yet to reach the mid-point in the cycle, with low wage increases, uncertainty around interest rates and mortgage restrictions in the US holding back new, younger home owners, Moriarty said.

"We haven't given forward guidance, and nobody in our sector has," Moriarty told BusinessDesk after the meeting. "Everybody is waiting to see the effect of QE and easing and people want to see what's happening with interest rates."

Another element in holding back guidance is a historically high New Zealand dollar, which crimps the value of US earnings, Moriarty said.

"For currency, every cent is $650,000 of operating earnings to us, so we had headwinds this half because (the kiwi) averaged probably 82 (US) cents to 83 cents, while the corresponding period last year was 79 cents, so that's four cents times $650,000," the chairman said. "It has been a struggle for the first six months in terms of FX but now its off significantly, this morning it is 77.5 cents, so who knows, that's part of the reason we're not giving guidance."

Tenon shares have more than doubled over the past two years, having dropped as low as 50 cents during the sub-prime mortgage crisis and subsequent global financial crisis. In August the company embarked on an on-market share buyback scheme of 400,000 shares and has flagged further buybacks in the future.

"We have just had a board meeting and the five directors all had different views," Moriarty said. "It's going to be dependent on the recovery, but there is an independent report on the company by Edison which says mid-point value at $2.50, it's a $1.74 today, so clearly there's some upside there."

BusinessDesk.co.nz

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