MicroEquities Initiates Clover With A Buy

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This story features CLOVER CORPORATION LIMITED.
For more info SHARE ANALYSIS: CLV

By Chris Shaw

Having almost doubled in price late last year shares in Clover Corporation ((CLV)) have given back some of their gains, enough of a correction for MicroEquities to initiate coverage on the company with a Buy rating.

The group’s price target on the stock is 23c, which represents almost 40% upside from the 17c at which the stock is trading at today. The basis for the recommendation is the strong earnings growth prospects the microcap researcher sees for the company, with earnings set to more than double in both FY08 and FY09.

This strong growth reflects in part the company acquiring the 30% of Numega it didn’t previously own, full ownership giving it potential to pursue a number of strategic and commercial initiatives.

According to MicroEquities’ research these include overseas expansion, with Europe and the US obvious targets as the company seeks to expand its presence in the DHA omega-3 market. Such a move would significantly expand the group’s revenue base, as 89% of revenues came from the Australian market last year.

The deal itself should also boost earnings per share (EPS) as it will be cash funded, the researcher estimating it will add $270,000 to earnings this year simply by being fully owned.

Add in organic growth from the business and from the company’s 50% stakes in both Future Foods and JSR Clover and MicroEquities’ forecasts appear achievable, particularly as the company recently announced a sales contract to supply Mead Johnson in the US with 50% of its requirements of Hi-DHA Tuna fish oil Driphorm powder.

The five-year contract is estimated to add around $750,000 in revenues this year and $2.75 million in sales in FY09, while also increasing the group’s exposure in the US market and so potentially opening the door to other contracts.

Upside longer-term appears significant as MicroEquities notes the EPA and DHA omega-3 fatty acids market in the US is worth as much as US$489 million and continues to grow as the US currently has among the lowest DHA omega-3 intake levels in the world.

While there appears significant upside MicroEquities points out there are risks, as the company is a small fish in a large pond and may suffer from a market lacking in visibility given its products are in niche markets.

On the plus side the company has around $8 million in cash on its balance sheet and net tangible assets of around $20.6 million, while MicroEquities’ DCF valuation on the stock is 25c.

At the current share price of 17c the company has a market capitalisation of just over $28 million, meaning it attracts little coverage in the broader market. The strong share price performance at the end of last year means the stock has a wide trading range over the past 12 months, with a high of 19c and a low of 9c.

Directors of the company appear to be putting their money where their mouth is in support of the stock, with notices indicating director shareholdings in the company increased in December.

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