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 MARKET REPORTS |
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Analyst report - shares
Stock of the week: Saferoads Holdings
April 14, 2008
Tim Morris, wise-owl.com analyst
Stock: Saferoads Holdings
Recommendation: Buy
Code: SRH
Market Cap: $61m
We profiled Saferoads Holdings in early December, during the early stages of the market correction. The stock has not been immune to the turbulence, tumbling from highs above $3 to recent levels just around $2.40. As our investment philosophy involves cutting your losses and letting your winners ride, it is appropriate to revisit the stock, evaluate any fundamental changes and consider whether it is still worthy of a place within our portfolio.
For those unfamiliar with the story, Saferoads Holdings is involved in the road safety business, offering products designed to protect motor vehicle drivers, pedestrians, and road workers. Founded in 1992, the company's products include guide posts, flexible signage, crash cushions and barriers, workzone, traffic calming, traffic control products and public lighting.
With over 50% of business generated either directly or indirectly from various arms of government, our original 'buy' recommendation was based on the company's ability to benefit from the ramp up in government infrastructure spending taking place around the nation.
Since listing in December 2005, the company has been a reliable, but steady out performer, with management building a reputation for exceeding their targets. During FY07 management blew their 15% growth target out of the water as earnings increased more than 50%, mostly from organic growth in existing businesses. Net profit was up 55% to $4.46m, and diluted EPS was up 41.6% to 17.7c – driven by a 53% rise in revenues to $40.7m, of which 35% was attributable to organic growth.
Momentum remained solid during the first half of FY08, with net profit rising 33% over the previous corresponding period to $2.95m, on the back of a 64% rise in revenues to $28m. With the bulk of the growth again being organic, directors are confident of achieving their full year targets of 15% growth.
Saferoads’ strong organic growth has been boosted by its recently established national sales network from which it is pushing beyond its traditional Victorian base. The company has historically performed well in the Victorian market, and the focus for FY08 will be to grow the business in interstate markets. The last financial year saw Saferoads bolster its national marketing presence, and the company now has sales offices and warehouse premises in all states except for Tasmania. This national network has the potential to support strong organic sales growth in the years ahead, and provides synergies for future acquisitions involving smaller localised businesses.
Last time we profiled the company, it had only made one acquisition - Swift Tech Solutions Pty Ltd, which is a Drouin based manufacturer and supplier of decorative and standard street light poles. Now fully and successfully integrated under the Saferoads umbrella, the business is expected to contribute 15% to overall sales for the current financial year.
Since the start of 2008, Saferoads has made two subsequent acquisitions. 'Bob Panich Consultancy Pty Ltd' produces and supplies an extensive range of traffic signal equipment, and holds a 15% market share in Australia. The $3m price tag represents 3 times EBIT and has been flagged as immediately EPS accretive. The latest acquisition was 'Trans Tasman Engineering Ltd'. Costing $130,000, it marks Saferoads first voyage into the New Zealand market. Trans Tasman is the exclusive distributor in New Zealand for road safety equipment produced by US based Quixote Corporation. The deal makes sense because Saferoads is the exclusive distributor for Quixote in Australia.
In light of these acquisitions, gearing levels are set to rise slightly, but from a very low base. Overall, debt levels should remain conservative. With the balance sheet looking healthy and earnings growing at a solid pace, the company appears sound from an operational perspective. Combined with the recent retreat in the share price, the stock’s valuation has become more attractive – although, so have most in the market over recent months. Saferoads’ current PE of 13.4 is very modest, and dividend payments place it on a yield of over 4% - not bad for a small cap.
Therefore fundamentally, the stock remains an attractive proposition that seems to have been caught up in the broader market turmoil. From a pure technical (charting) perspective, the stock has remained true to its uptrend since listing in late 2005. This long term trend suggests the share price should hold above $2, however if the stock were to break this level, the technical outlook would turn bearish. For this reason we will monitor the share price movements closely over the next few months for any changes in the broader trend. However for now we are happy to continue holding as the fundamentals remain solid and the valuation modest.
Tim Morris is an analyst at wise-owl.com, one of Australia's leading independent stockmarket research houses. Click here for your complimentary report.
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Stocks: Stock of the Week – Saferoads Holdings
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CFDs: Top ten share CFDs for the week
Retirement: Global turmoil hits retiring baby boomers
Companies: Another Opes Prime? Lift Capital collapses
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Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions.
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