Questor: the divi may have gone but Grafton feels like a survivor and worth holding on to

Questor share tip: shareholders can console themselves that the foregone income gives their company greater financial strength

Russ Mould 31 March 2020 • 5:55am

People in builders’ merchant — Grafton, the builders’ merchant, has suspended payment of its final dividend

Grafton’s decision to suspend payment of its 12.5p-a-share final dividend may look alarming, but the builders’ merchant was not the first to make such a move and nor will it be the last.

The decision, which keeps some £30m in cash on the balance sheet, looks eminently sensible in the current environment.

There can be no denying that life is going to be tough, and fathoming what the next few weeks and months could mean for the business is going to be nigh on impossible for management, analysts and investors alike.

As a result, profit predictions are not likely to be much use and the forecast price-to-earnings ratio could as easily be 90 as nine if the viral outbreak and public lockdown last long enough.

Under such circumstances investors probably need to forget about earnings forecasts, at least for now, and focus on balance sheets to ensure that their holdings can make it to the other side intact and be well positioned to benefit from the eventual upturn in business, as and when that may come.

Grafton looks capable of weathering a storm. Granted, the balance sheet as of December 2019 showed about £550m of net debt, but that reflected the firm’s lease liabilities. It actually had more cash than debt. Unused bank facilities worth £275m offer the prospect of more liquidity, should it be needed, and no debt is due for repayment until 2023. As a result, the annual lease bill of £55m should prove manageable.

That buys management welcome time to plan, reassess and make the most of the benefits offered by government schemes with regard to rates, salaries and VAT.

No one is pretending that these are easy times, and they remain thoroughly unpredictable. But Grafton looks capable of toughing it out and the loss of what would have been valuable near-term income for shareholders can be exchanged for long-term financial solidity.

For all that the operating (and stock market) environment could get worse before it gets better, Grafton feels like a survivor and worth holding on to.

Questor says: hold

Ticker: GFTU

Share price at close: 527p

Update: Strix

With many firms suspending or even cancelling their dividends it is reassuring to see Strix, the kettle control and safety devices maker, increase its shareholder distribution by 10pc for 2019 alongside its full-year results earlier this month. The 7.7p-a-share payment equates to a 5.2pc yield.

This is not to say we can be complacent, given the importance of China to both Strix’s supply chain and demand in its market. The company’s manufacturing site at Guangzhou in China was subject to an additional one-week shutdown at the time of the Chinese New Year holiday, but utilisation rates have since bounced back to exceed 95pc and management has noted that all 20 leading customers in China have resumed production.

This sounds encouraging but even if there is a second-wave outbreak of the virus, or an unexpected setback, Strix has some protection. Interest cover last year was 18 times and the firm ended the year with £13m in cash at hand and £9m headroom on its banking facility. Moreover, a £40m loan does not have to be repaid until 2023 and next year’s lease payments come to just £1.5m.

Strix still offers long-term income potential.

Questor says: hold

Ticker: KETL

Share price at close: 150.8p

Update: Zytronic

Shares in Zytronic, the rugged screen maker, have proven a poor pick but the fault lies with this column, not the company. We simply got in far too early as an important product cycle – for screens for gambling machines in bookmakers’ shops – turned down. The Covid-19 outbreak is an additional complication.

But at 102.5p its market value of £16.5m compares with a last stated net cash pile of £13m and there is no debt. Times will remain tough but it would be wrong to panic out now.

Questor says: hold

Ticker: ZYT

Share price at close: 102.5p

Russ Mould is investment director at AJ Bell, the stockbroker

Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am