Coventry Group Ltd – H1 2017

H1 2017 – 0,66 A$– ASX:CYG

1kr50öreCoventry Group Ltd is engaged in trade distribution, including distribution and marketing of industrial fasteners, stainless steel fasteners and hardware, construction fasteners, specialized fastener products and systems, and associated industrial tools and consumables, and importation, distribution and marketing of hardware, components and finished products to the commercial cabinet making, joinery and shop fitting industries; gasket manufacturing, and fluids business, which includes installation of fire suppression systems, and rock hammer service and repairs. The Company’s segments include Trade Distribution, which includes the importation, distribution and marketing of industrial fasteners and associated products, and cabinet making hardware; Fluids, which includes the design, manufacture, distribution, installation and maintenance of lubrication and hydraulic fluid systems and hoses, and Gaskets, which includes manufacturing and distribution of automotive and industrial gaskets. – Google Finance.

1. The company is currently a net-net with an adequate margin of safety: 

  • P/NCAV < 1x
    • 0,48x 
      • MoS = 52 %

Assessment of margin of safety:

Coventry Group is one of those classic Graham net-nets that you come across once in a while, its simple and boring. Distributing fasteners and other small parts to the construction and mining industry in Australia is no rocket science business model to say the least. The company consists of three segments, Trade (61 % revenue), Fluids (30 % revenue) and Gaskets (9 % revenue) where the two smaller segments are profitable. The third and largest segment Trade is struggling and the reason why the company’s overall profitability is currently negative. Besides the fact Coventry Group makes it through my checklist there are four other points that in my opinion makes the company at the current share price a good addition to a diversified portfolio of net-nets:

1. Regarding margin of safety in relation to NCAV burn rate. Coventry Group is today selling at a large margin of safety to NCAV, 52%. The relationship between the margin of safety and the NCAV burn rate for QoQ (-12 %) and YoY (-18%) is good enough for me to conclude that there is enough gas in the tank to keep the ship going for a while at current speed.

2. Regarding historical profitability. Except for the three most recent years Coventry Group has historically posted good figures on an operating income level. The average operating income over the last ten years in relation to the current enterprise value gives us a multiple of 6x. While this is not extremely appetizing it should be noted that the company is currently focusing on cutting cost and restructuring the Trade operating segment. In combination with hopefully some form of mean reversion for the mining industry I think there is a good chance that Coventry Group again will be a profitable company on a consolidated basis. On this note it should also be taken into consideration that Coventry Group has a couple of solid and profitable businesses that could be sold at reasonable multiples if the company was broken up. In other words, from a sum-of-part perspective I would also argue that there is good margin of safety in Coventry Group.

3. Regarding capital allocation. Coventry Group has over the last ten years continuously paid a good dividend to shareholders and for most of the years simultaneously bought back shares.

4. Regarding ownership structure. Although insiders don’t have any real skin in the game (owner of 1 %) there are two activist shareholders, Sandon Capital (owner of 6,1 %) and Dorsett Investment (owner of 3,6 %), that have been successfull over the last couple of years putting pressure on the management team and encouraging the return of excess cash (link 1, link 2). Because they are still owners of Coventry Group I would argue that they will continue to push for shareholder friendly outcomes.

2. The risk of permanent loss is low:

2.1 The risk of bankruptcy is low (criterion a) or b) must be met):


  • Debt/Equity < 25 %
    • 13,5 % 


  • Z-score ≥ 3
    • 1,9 X

2.2 The company’s business model has historically been profitable (criterion a) or b) must be met):


  • Positive retained earnings:
    • -33,9M A$ X


  • Positive aggregate operating income for the last ten years:
    •   48,4M A$ 

3. The company does not have a shareholder unfriendly capital allocation:

  • Shareholder yield TTM ≥ -2 %
    • Dividend yield TTM = 3,8 %
    • Net buyback yield TTM = 0 %
      • =  3,8 % 


Disclosure: The author is long ASX:CYG when this analysis is published. Also note that ASX:CYG is a micro-cap stock (20M $ in market capitalization). The trading is illiquid.

10 thoughts on “Coventry Group Ltd – H1 2017

  1. Thanks for this. I will have a look as this is in my neck of the woods ! One you might want to look at is TCN.AX. Probably not a net net but has some interesting businesses. One is equity accounted due to a 50% ownership, which obscures its value to some extent.


      1. Unfortunately the CEO resigned recently. I’ve not followed much of the company, but I think this is a bit of a red flag. He seemed to be doing a good job and the turnaround is still occurring. On the plus side, the chairman is still there and from what I’ve read, he seems very forthright and calls a spade a spade.


  2. Great to read about some austrailiean net-nets. I do have some concerns about the last two companies you wrote about though (and netnets with high operating leasing off balance sheet in general) regarding to the new accounting standard for IFRS starting 1.jan. 2019. They both hold operating leasing of almost 2 x market cap, i do not know how the market will react to companies that will increase their reported liabilities substancially after the change in accounting, but it will probably have a negative impact since alot of key ratios will look alot worse. Theese last two analysed companies will probably not be net-nets after the change for example.

    Its 1,75 years left but if you have a maximum holding period of longer than that it might be wise to consider operating leases allready now. Dont know austrailien accounting standards but seems to be in complience with IFRS.

    Click to access IFRS_16_project-summary.pdf


    1. What you bring up S&U is really important and something I have thought a lot about over the last couple of months. This is not only due to our Twitter discussion on the subject but also due to the fact that I have changed my approach a bit for how I invest and analyse net-nets. My analysis process has evolved more towards a semi-quantitative approach where I allow myself freedom for how I come to the conclusion about the margin of safety I require for net-nets. So now more than before I share your concern and especially what the market reactions will be when the rules change. But I think I will have to come back with a post about the subject when I have made up my mind about how I view the whole problem/situation.

      Again thanks for a great comment and link!

      Just a quick restatement about the net-net multiples including operating leases for the two Australian companies:

      CYG = 0,9x (note that the company has 39,750 thousand AUD in operating leases but the company is also a lessor of 15,159 thousand AUD, i.e net off balance sheet effect = 24,554 thousand AUD).

      CND = 1,3x

      Liked by 1 person

  3. Kippax,

    I’m not so sure that his resignation necessarily needs to be seen as a red flag. Although he has been the CEO for the last four years and he has been involved in the two last years restructuring process the outcome has not been great… But time will tell I guess 🙂

    Thanks for your comment!


    1. Fair enough. I will take a closer look. Sometimes I have a greater aversion to buying companies in my own neck of the woods rather than a company thousands of miles away !

      Liked by 1 person

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