If Verimark were a product, it would be a pretty good buy
While the juicy dividend yield looks extremely tempting, its volatility makes it a classic case of buyer beware
Michael van Straaten, the CEO of specialised retail product group Verimark, is an irrepressible character. Always positive, even in the worst of times, he is the perfect leader for this volatile stock.
The family-owned business has been around for a few decades and recently reported an outstanding set of results for the year to end February 2018. Revenue rose by 16% to R508-million and headline earnings per share by 33% to 31.9c. This performance was especially relevant considering that the South African durable goods retail market is taking major strain. The main reasons for this robust performance were the stronger rand and a good crop of new, innovative products.
And in true Verimark style, that’s not all, as the dividend was increased by 33% to 15c, placing the share on an extremely rarefied dividend yield (DY) of 12.8% at a 117c share price.
The share price has moved up by 62% since the beginning of the year, with speculators no doubt anticipating a healthy improvement in earnings and dividends. And this highlights the dilemma faced by investors thinking about buying Verimark shares: it is a highly volatile stock and, while the juicy dividend yield looks extremely tempting, it is a classic case of caveat emptor.Verimark is a tightly-run family-controlled business with a tried and tested business strategy developed over many decades. However, all the products are sourced from offshore and this feature exposes an incipient risk, being the impact of the extremely volatile rand.
The group is nothing if not innovative and at the recent results presentation Van Straaten demonstrated how it turned a growing problem into an opportunity. He highlighted how the well-known but very expensive Bauer non-stick frying pan has been reincarnated as the Bauer Lite frying pan which sells at a fraction of the cost of the longstanding original product. The original Bauer became increasingly expensive as the rand weakened and was becoming unaffordable to many potential customers. So Verimark commissioned the Bauer Lite, a pressed rather than a cast aluminium pan. This retails at R199 and is flying off the shelves.
Another area of innovation is that of service centres. Verimark sells a range of high-quality vacuum cleaners under brand names such as Genesis, Hausmeister and HydroVac. Very early on it realised that it would need to establish service centres to cater for machines that broke down. Without this critical backup capability, Verimark’s success in this area would have been limited.
Another clever Verimark feature is that all its products are given clearly identifiable names. So apart from Bauer and Genesis, other well-known products include the Floorwiz, the Twista, Diamond Guard, and Shogun. This helps differentiate Verimark lines from the myriad of equivalent products and embeds its offerings in the minds of the buying public.Provided the rand remains stable, and the company can continue with its long-established ability to innovate, the outlook appears good. Operating profit margin is healthy at 9.2% and the balance sheet contains hardly any debt. Inclusions in the company’s strategy for the current year and beyond include the rollout of skincare products and reactivating its international market presence.
But potential investors need to be very circumspect. Earnings have been extremely volatile over the time it has been listed, and much of that is directly ascribed to its susceptibility to rand weakness.
Its all-time high share price was April 2006 at 410c, so it is significantly below that, also trading well below net asset value of 165c per share.
This is a small cap, with all the health warnings that accompany these types of shares. But given a fair wind and absence of own goals (for example, the Van Straaten family attempt a few years back to buy back the company in full and delist, and its BEE transaction financing difficulties), the prospects of further share price improvement appear good.
Chris Gilmour is an investment analyst.