By Robert Miller | Portfolio Manager at NAOS Asset Management
What is the stock?
Saunders International Limited (ASX: SND) is a small-cap industrial business which has two key operating divisions. One division focuses on the design and construction of liquid storage tanks, and the other division on infrastructure (bridges, road and rail) engineering, refurbishment and construction.
How long have you held the stock?
It is a relatively new stock in one of our portfolios. We’ve held it for approximately 9 months.
What do you like about it?
Saunders has a strong net cash balance sheet and has a history of paying healthy dividends. The business has been in operation for over 60 years, which gives us confidence that it provides a proven service throughout the cycle and that there is low likelihood of disruption.
The industry tailwinds through the current infrastructure cycle should drive the business for the medium to long term as there is a large backlog of bridge, road and rail construction/maintenance projects and the demand for storage tanks is increasing.
How is it better than its competitors?
Saunders’ operations are relatively niche. There are only a few players in the storage tanks business and long-term relationships with large multinational clients are key to winning new contracts. A recent example of Saunders capitalising on their reputation in the market is the expansion of operations into Papua New Guinea as a result of existing client relationships.
On the infrastructure side, Saunders has a strategically located casting operation north of Sydney, which provides a good platform for meeting the requirements of the infrastructure projects in the greater Sydney area.
What do you like about its management?
Firstly, the board, founders and management are substantial shareholders which provides excellent shareholder alignment. Secondly, the current managing director Mark Benson has come into the business in the past two years, with the objective of growing Saunders in a sustainable manner. An example of this is the acquisition Saunders completed of its infrastructure operations business in FY17, allowing it to diversify its earning base and generate synergies.
The business remains conservatively managed with management being incentivised on total shareholder return (TSR) and earnings per share growth (EPSG) remuneration targets.
What is your target price?
Saunders’ current margin profile is significantly below historical levels. We believe the margins should continue to improve from depressed levels. We are comfortable it meets our internal hurdle return rate of 20%p.a. growth over a 3-year period.
At what point would you sell it?
Either around our valuation price or if there was a significant deviation from our initial investment thesis.
How much has it added (subtracted) to your overall portfolio over the last 12 months?
It was a small positive contributor to the portfolio. Saunders recently completed a placement and rights issue which we used as an opportunity to increase our position.
Where do you see the value?
We see value in numerous areas:
- The current infrastructure economy is a long-term tailwind.
- The potential for strong margin expansion.
- Conservative and highly aligned management team.
- Revenue synergies and vertical integration opportunities for the different operating units
- Improving cash generation allows for potential future acquisitions.
- Strong balance sheet and dividend profile.
- Opportunities in the Papua New Guinea market.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
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