Painting the Balance Sheet red?

Ownership of the Wattyl paint business is going out of Australia.  A story pretty much in line with our analysis in 2009.  Question is, will Dulux brush past the CasflowNAV trend in the global industry?

CashflowNAV INDEX explores the numbers of 4 paint manufacturers: Wattyl, The Valspar Corp, Dulux Group, Akso Nobel N.V.

Through a number of presentations in late 2009/early 2010 we made much of Wattyl’s poor Cashflow Structure and how it appeared to belie the rise in share price it was receiving.  So for Wattyl to be the subject of an opportunistic takeover is not surprising.  What probably does surprise us is the positive attention its unaudited financials have received on their release this week.

Certainly, Wattyl has improved profitability, off a very low base.  What was interesting for us was to see how Wattyl was managing working capital.  Receivables and Inventories were blowing out, a position only covered by pushing Payables out over 90 days.

Wattyl shareholders were left with little alternative, holding shares in a business that is likely to lose 11c in cash flow for every extra dollar it grows by (Operating CashflowNAV Factor of -11).

*Cost of Sales not disclosed, only EBIT.  #Anualisation of six months performance.

Wattyl is being bought by Valspar of the US.  Valspar appears to be holding its Cashflow Structure steady half way through its 2010 financial year, and presumably can derive some efficiency gains from its Australian acquisition.

Dulux’s numbers released as part of its spin-off from Orica present a company with operating profitability and working capital structure ahead of the industry globally.  Together with its own financing and taxation structuring to come, let’s hope Dulux lives up to those promises.

The company to watch for guidance on how to structure a paint manufacturing business may be Akzo Nobel of Amsterdam, Netherlands – owner of the Dulux brand elsewhere in the world.  Akzo Nobel managed a strong turnaround in Cashflow Structure in 2009 with both improved profitability, and better working capital control to move from an Operating CashflowNAV Factor of -3 to +3.

CashflowNAV Factor reveals the cash flow structure of a business - indexed against the income of that business.  Multiplying CFNF by planned income growth gives a quick guide as to likely cash flow outcomes.  It allows for comparability between businesses, and a guide for strategic improvements in a business.