Description
Howden Africa is a high quality, industrial business with first-rate ROICs and a low valuation (more on this
later, but it trades on ~7.6x ’15 earnings). It primarily builds and sells parts for industrial fans and heat
exchangers and generates almost all of its revenue (95%) from South Africa. In 2014, 60% of revenues came
from the power industry, 16% from mining, 15% industrial, and the balance of 9% from several other
industries.
The business is comprised of two segments, with the largest, Fan & Heat Exchangers, accounting for over
80% of revenues and more than 90% of operating profit. This segment builds, sells parts for and maintains
industrial fans, compressors, and heat exchangers. It consistently generates ~25% EBIT margins and returns
on equity greater than 30%. The other segment, Environmental Control, is not the same quality but still
generates segment level ROEs in excess of 20%. Environmental control grew over 50% last year and will
likely drive growth in the future given the structural tailwinds behind increased environmental regulation,
particularly in power generation.
Howden Africa is 55% owned by Colfax. Colfax acquired Charter International in 2012, which owned
Howden Global. Howden Global is now a subsidiary of Colfax and has three global divisions, based on
product type, except for Howden Africa which is a standalone regional player. Colfax is largely known but
for those who don’t know it, it is controlled by the Rales brothers who were the architects behind Danaher
which has compounded book value at 18% annualized over the past 20 years. Danaher was created from a
real estate company but grew into a business that focused on platforms where the Rales brothers could
acquire additional businesses within the respective platforms. They focused on manufacturing businesses that
could be steadily improved with an emphasis on a close integration with the customer. The key operating
tool that Danaher has used is a lean manufacturing system called Danaher Business Systems, which has
driven incremental improvements and increased operating margins on acquired businesses. Colfax has filled
its management team ranks with ex-Danaher execs and is implementing a similar system, cleverly named
Colfax Business Systems (CBS). Howden Africa is also using this system to consistently improve its
operations.
The team is led by CEO Thomas Barwald, who joined Howden Africa in 1990. Although his tenure does
provide stability to the business, the key advantage of the business lies in the installed base so it isn’t
dependent upon a superstar manager. Unfortunately, management receives stock based comp in Colfax
shares rather than Howden Africa shares so the alignment is suboptimal from this standpoint.
Howden Africa has high barriers to entry and a durable competitive advantage from the installed based,
customer relationships, and the strong disincentive for an engineer to switch suppliers in a high risk
environment. Given the focus on services and spare parts, a new entrant would need to first create a
significant installed base and then wait out the first cycle of maintenance in order to gain access to the more
profitable component of the business. Additionally, they focus on the more technical parts of the market
which reinforces the higher switching costs. They also imbed themselves in their customers’ work processes
to increase customer stickiness. The majority of the airflow equipment in Eskom was installed by Howden
decades ago and this installed base is the key behind the attractive aftermarket business.
The business has generated five year average returns on equity of more than 50%, which reflects both the mix
of sales and the more technical areas that Howden Africa focuses on. The composition of revenues is 1/3 in
