Australia | Aug 01 2006
By Chris Shaw
Just as markets go through cycles so do sectors of the market, with this year the resources stocks being in favour and more recently the building materials stocks somewhat out of favour. From an investment viewpoint timing when sectors will be hot or not is difficult, so choosing a stock that offers solid growth is a much better (albeit more boring way) to make money.
An example of a company offering solid growth over the longer-term is Korvest (KOV), which is about as far from trendy as is possible given the company is a diversified manufacturer of things such as cables and pipes via its EzyStrut system. As well, it has galvanising operations that give it exposure to the steel grating market and it also operates in the general sheet metal fabrication business.
It isn’t glamorous but the company delivers, which has seen Credit Suisse rate the stock as Outperform with a price target of $5.75, up from $5.00 after the company beat forecast earnings with its result this week.
The profit of $4.1m was about 5% higher than the broker had expected and resulted from the company being able to increase margins, which reflects strong management given input costs have been trending higher for manufacturers in recent months.
Profit of $4.1m may not sound much, but it equates to earnings per share of 48.4c, which was up 34% on last year and compares to 17.9c in FY01. The broker expects further gains in coming years and has lifted its forecasts to reflect this, its profit forecast for FY07 increasing to $5m from $4.4m and in FY08 to $5.9m from $4.8m. This would equate to earnings per share of 58.4c and 68.6c respectively.
The stock is also a healthy dividend payer, this year’s payout equal to 25c per share and expected to increase to 32.1c next year and 37.7c in FY08, which would put it on a yield of around 8% fully franked at that time.
The broker suggests risk remains to the upside from potential acquisitions, though it points out management has indicated it has to date been unable to find any suitable purchases to expand operations. The only negative in the profit result in the broker’s view was an almost doubling in working capital, but it notes management has indicated this is to support some new product initiatives and to provide better service to clients.
The company is not the most liquid of stocks, as it is 45% controlled by Hills Industries (HIL) and is only capitalised at around $40m. This small capitalisation also means the stock is not widely covered, The FN Arena database showing only Credit Suisse among the major brokers and equity researchers spends time to study the company.
Korvest shares have traded between $3.62-$4.65 in the past 12 months, closing 3c higher today at $4.65.