worth looking into more details

Hi,

Just came across this company, which is a distributor of industrial products : 84 % from B to B and 16 % from retail sales.

Some interesting elements there :
- high level of free cash flow : 5.6 m AUD in FY 23 (25 % free cash flow yield) coming both from EBITDA (5.3 m) and decrease in working capital (despite sales increase),
- 68 % of revenues from WA, while economy there is now doing well.

Their level of cash flow/free cash flow looks high, while the company still has low margins (EBITDA margin of 4.8 % in FY 23 and net margin of less than 1 %). Part of it is due to the decrease of the working capital which is probably a one off.

It was a disappointing IPO 5 years ago, which is reflected in a poor share price performance during the last 5 years.
Since its listing, the company has done 7 acquisitions, mainly financed with debt which explains why the company has 7.2 m net debt now (+ 0.4 m of deferred payment in March 24).
After focusing on expansion by acquisition, the company has begun to focus more on profitability since FY 23, which explains why their EBITDA increased by 32 %, while revenues increased by 9 %.
This is mainly due to a large cost reduction (- 21 % for headcounts), while gross margin decreased by 90 bp in FY 23 (obvious effect of cost inflation).
The company has increased its prices in Feb 23, with no major push back from its customers, which should help their margin for H1 24.

The company wants to do more acquisitions (for 4 m to 12 m AUD, significant for a company which has a market cap of 16 m AUD), while they have a rather high level of debt. These acquisitions would be financed both via capital increase and debt.

The company has high targets for FY 25 : revenues of 200 m AUD (vs 111 m in FY 23) and EBITDA margin of 8 % (vs 4.8 % in FY 23).
My understanding is that these targets include potential acquisitions, so we can't really compare their existing market cap with these targeted results.
Not easy to assess their ability to reach these figures, as the company has not communicated on the expected cost savings going forward and the expected effect of the recent price increase.
Anyway, it looks logical to expect further increase in margin, thanks to the full year effect of price increase, probably more cost decrease (consolidating the different businesses) and the expected increase in revenues (the company expects double digit increase in FY 24).