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Hellaby Holdings

-Jenny Ruth

Monday 4th December 2006

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Jenny Ruth
The share market can be very unforgiving once a company has disappointed it and investment company Hellaby Holdings is no exception.

After years of exemplary performance with both steadily increasing profits and a strongly appreciating share price, the company shocked the market in October last year with a profit warning. Based on its first quarter, its underlying earnings for the year ended June 30 this year could be about 15% below the previous year, it said.

The share price promptly fell more than $1 and, although it has been reasonably volatile ever since, the trend has been going nowhere and at $4.69 last week was about where it was a year ago.

That's even though the warning turned out to be much more dire than the actual outcome. By its half-year report in February, the company was able to modify its warning. First-half net profit was about 10% lower than the previous year and the full-year results was likely to be between 5% and 10% lower than the previous year, Hellaby said.

The actual full-year net result was only marginally lower at $23.13 million compared with $23.19 million the previous year. While that was boosted by just over $10 million in one-off gains from asset and share sales, the company's tax bill was also sharply higher. And the result still represented a net 21% return on shareholders' funds.

But another reason for the market's loss of faith was that, after years of successful acquisitions, the company proved it was capable of getting it wrong when it bought the BBQ Factory retail chain in August 2004.

While the company has never said how much it paid for the chain, it was likely between $20 million and $25 million and it had to write $5 million of that off its books in the latest result.

Given that Hellaby's is again on the prowl for acquisitions having built up an $80 million warchest over its last financial year, investors are understandably wary of a repeat mistake, although it is the first dud in a swag of acquisitions current managing director David Houldsworth has made in his near nine-year tenure.

Under his management, the company has changed from the traditional Brierley-type of opportunistic buyer of diverse distressed assets, fixing them and then selling out at a profit into an accumulator of related businesses which it has tended to buy and hold.

After a year of repositioning its portfolio, selling several which no longer fitted Houldsworth's view of the future, it now has three core divisions. These are its automotive division which imports and distributes a range of products from car parts to batteries, its industrial division which imports and hires heavy equipment such as forklifts, excavators and cranes and its retail division, currently the BBQ Factory, Hannahs shoes and the No 1 Shoe Warehouse.

It still has a few other legacy businesses including Levana Textiles and Bombay Petfoods.

While Houldsworth admits BBQ Factory wasn't a good acquisition and that it will be "a bit of a millstone around our necks" for another two or three years, he is sure the company can fix its problems and get it back to performing the way it was expected to when the company bought it.

Hellaby does have experience of turning around a failing retailer. It bought 82.5% of upmarket retailer Rodd & Gunn through 2001 when it was losing money and in June this year was able to sell it to its managing director Michael Beagley for $13.6 million, a $6 million gain on book value.

To begin with, BBQ Factory's IT and reporting systems were "woefully inadequate" and a new system is now in place and its teething problems should be sorted by January, Houldsworth says.

It is also expanding the chain's product range from BBQs, spa baths and wood and gas fires to include a much wider range of "outdoor living" goods including furniture.

The chain's other major problem is that its stores are mostly located in semi-industrial areas and Hellaby plans to progressively move the stores to busier locations such as malls, which is why turning it around will take time.

But the two stores already re-located are showing significant increases in turnover and plans to move another half dozen of the 21 stores are underway.

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