The Insulated Panels and Boards business is the primary driver for profitability in Kingspan. While performance held up reasonably well in 2008, the year-end results make reference to orders in this division plummeting in the second half of 2008. With this trend only set to continue in 2009, it's clear that sales still have some way yet to fall.
The Off-Site and Structural division was an even worse performer, the reason for that can be directly attributable to CEO Gene Murtagh. Three years ago, Murtagh spent €140mn on Century Homes and two other timber-frame home manufacturers. These purchases were made at the height of the Irish and British property booms. Now that these the Irish sector has collapsed and the British sector is following suit, Murtagh has been forced into writing down the value of this part of the business by €40mn. Indeed, with glut of empty property in Britian and Ireland, it's likely that profitability in the Off-Site and Structural division of the group is going to take an even greater hit in 2009.
After this large write down, it's quite frankly baffling that Murtagh has repeated the same mistake with the purchase of insulation competitor, Metecno for the sum of $115mn. With Metecno delivering only €4.8mn of profit in 2008, it's impossible to see that Kingspan will get a decent return with the recession set to impact further in the Americas. With this unlikely prospect of the Americas improving, it will be hard not to see a write down of the value of the Metecno purchase. Considering that both Gene, and father Eugene Murtagh have repeatedly overpaid for acquisitions over the years, it's little wonder that the share price has generally under-performed. However, with the father and son pair having a combined 20% stake in the business, it's hard to see the younger Gene being ousted after his dismal performance as CEO.
Also announced in the year-end results was the scrapping of the dividend. With the probability of future impairments to the business, this is a prudent measure and should provide a greater margin of safety. What is not acceptable however, was the way in which Gene conducted a share buy-back. €36mn was spent by the group buying back shares in 2008 at an average price of €6.14. Considering that Gene was well aware of the deteriorating position of Kingspan, it's amazing that he squandered a significant amount of cash trying to catch a falling knife.
It's clear, that at this stage, the fall out of the global recession still has some way to go and that things will get worse before they get better for Kingspan. In the short-term, we do not see a resumption of the dividend during 2009. Also, we expect that the group will also have to further write down the value of some assets. The Metecno acquisition is one that is particularly vulnerable. Another factor to be aware of the currency risks that Kingspan are exposed to as over 60% of profits are not denominated in Euro. As the UK accounts for 50% of overall profit; if Sterling remains weak throughout 2009, we can expect this to make a significant detrimental impact to the company.
Our overall feeling is that we expect Kingspan to fall further from the level of €2.12 that it's at now. However, we do feel that this is a definitely a company to keep on the radar.
