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):

a)

  • Debt/Equity < 25 %
    • 13,5 % 

b)

  • Z-score ≥ 3
    • 1,9 X

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

a)

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

b)

  • 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 % 

MoS

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.

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