Al fresco

Looking at their website recently, I noticed that Gale Pacific seems to have attempted to make hay from the recent pandemic-driven boom in PPE, releasing their own 'Gale Guard' reusable face mask for sale in the United States early last month.

I initially assumed that these would have hit the shelves too late to benefit from the PPE shortage, but my assumption may be mistaken: a report on a construction site from the UK just last week stated that more than 60% of engineering services contractors are struggling to find dust masks for use on site as a result of the virus situation, and as a consequence some contractors are missing out on work.

And, according to an article on the Wall Street Journal a few days back, the virus resurgence in the US has been putting fresh strain on mask supplies in that country. Sad to relate, but in this instance the serious epidemic situation in the US may actually be a positive for this company.

This 'year of the virus' seems to have had a curiously bipolar impact on Australian stocks: it has proved to be a scourge for plenty, but as the months roll by, it has gradually become apparent that many other stocks are benefiting from this anomalous environment.

For Gale, it isn't really clear-cut as to which of these two camps this stock falls into, and you almost need to draw up a flow-diagram on a large sheet of butchers-paper to try and unpick where the company is situated after factoring for all the swings and roundabouts.

When the 'virus panic' started to emerge in back in February, Gale was one of the first stocks to take a hit, as Zhejiang, the region in which their plant is located, was one of the first of the Chinese provinces to go into lockdown as a result of the virus outbreak.

The lockdown in Zhejiang was eased after several weeks, but by then the virus had spread to the United States, which was also forced into lockdown mode.  Given that the US accounts for around 35% of Gale's revenue, it looked as if an already bad situation for the company might have become even worse.

In reality, evaluating the overall impact of the epidemic on the US side of the business  is complicated by a couple of factors.

Firstly, due to the seasonal nature of the business, the lion's-share of sales in the US are generated in the warmer months of June and July, a few months after the virus began to spread across the US.

Secondly, as mentioned previously, the US, unlike Australia and China, wasn't able to 'squash the sombrero', and at time of writing, in many regions of the US the virus is still raging out of control.

In consequence, many US states are having to emerge from the lockdown with the virus still unchecked, meaning that businesses are needing to implement measures to minimise the risks to their customers.

One such a shift is underway in the US food service industry, for example. For restaurateurs in the United States right now, 'Al fresco dining' has become 'a la mode'.

The chart below, from Google Trends, highlights the search trend for the aforementioned term in the US over the past five years: the latest surge in searches over that time frame appears to represent an all-time high, or at least the highest going back to 2004.




The rising pattern of Google searches reflects the coronavirus-driven demand surge for outdoor dining, and in response to this demand restaurants will have needed to invest in products that shelter their customers from the midsummer heat, which of course is Gale Pacific's specialty.

Given Gale's significant exposure to the United States, the shift to Al Fresco dining over recent weeks could prove to be a much-needed boost to the company. But here we have to factor in another 'wild-card', namely Trump's China tariffs.

Anything made in China that is imported to the US gets hit by a massive tariff, and so Trump is effectively taking a big bite out of the profit margin every time a Gale Pacific product gets sold in the US. Admittedly, it is looking increasingly likely that Trump will no longer be president before the year is out, and if so, there may be some sort of resolution to the US-China trade war. But by then, the 'Al fresco' boom in the US will probably be over.

One glimmer of hope for Gale is that the outdoor dining trend in the United States might shift to other countries that are still battling to contain the virus.

It does appear that we are starting to see something like this in the UK, where the government is set to relax planning laws to allow pubs, cafes and restaurants more freedom to operate outside, according to this report.

If the al fresco boom has resulted in a surge in US sales for Gale Pacific, I can't see how that is bad news for the company, even if the tariffs are compressing their margins. And given the outbreak in the US seems to be far from contained, the Gale-guard masks might also bolster revenue in this region.

If we see a comparable outdoor dining boom in other countries, such as the UK, that would be even more positive for Gale Pacific, bearing in mind that the Eurasia regions accounts for a much smaller share of the company revenue than the US.

Before winding up, it would be unwise to overlook the Australia/New Zealand region, which is a significant market for the company. In the presentation of 24/2/20, the company noted that in the first half of the year, revenue in the local market was up by 5.9%, compared to the same comparable period in 2019.

I suspect that the local revenue would have grown more considerably over the past six months, in part because of the rebound in the agricultural sector over this period, and also because the company noted in the half-yearly presentation that there had been a '...major new customer win secured for H2 FY20..'

In summary, it looks like the two major markets for this company, Australia/NZ and the United States, might have seen an improvement in sales over the past six months. Locally, improved sentiment in the agri sector should help to bolster sales in Australia, and in the United States, it is possible that the boom in al fresco dining over recent weeks might prove to be just enough enough to offset the losses recorded in the first half of the year in that region. Looking forward, the boom in outdoor dining could also boost the Eurasia division in the months ahead.

At the current share price, the company looks cheap. In the half yearly report, the company stated their net assets were 82 million, which of course is significantly above the current market cap of just under 45 million, even if you don't include the $8 million recorded for intangible assets.

But against that, given the profit downgrade back in January, and the disruptive impact of the lockdown to their operations in China, you would have to assume that there are going to be some write-downs once the full-year result is finalised, so I'd guess that $82 million net asset figure is set to fall in the next major report.

Still, as highlighted above, there is some reason for optimism about this company, and below the 0.18 level I'd guess that the risks would surely have to be much more to the upside.