Ann: Ava Group Achieves Record Result for H1 FY2021 (unaudited), page-28

I think one thing that most people overlook with AVA is the exceptionally STRONG DIVIDEND that the company will and can pay.

In Oct they paid a 1c special dividend, which falls in this financial year.

Based on this release they have cash of $13.6m which was up almost 16% in a quarter!

Canaccord forecast FY21 NPAT of $18.7m and a 3c dividend. With 1c already paid that somewhat implies a 1c interim and a 1c final dividend for a yield of 5% on a 60c SP.

That is exceptional in a low interest rate environment for a growth stock on a low PE.

I’d actually argue that there is UPSIDE to the dividend. With 242 million shares on offer, every 1c dividend is $2.42m in profit/cash paid out. If we’re baselining with Canaccord’s numbers of NPAT of $18.7m and EPS of 7.9c then a 3c dividend implies a payout ratio of ~38% for the full year.

But with almost $14m in cash on the balance sheet, which is growing incidentally, and with 1c already paid, if they paid out just 2 more cents then they’d still have $8.8m in cash! ($13.6m less 2c * 242m shares).

I think that they could go to 4c or 5c for the full year. At 5c then if cash stayed the same for the full year (simple conservative assumption) then they’d still have almost $5m in the bank, which would still be very strong given they are not a capital intensive business.

At 5c then that would imply a payout ratio of 63%, which is not outlandish but it would imply a dividend yield of 8.3% on 60c.

When investors work out the cashflow they will bid the stock up to get the yield down. If I use a simple dividend valuation model with a target yield of say 3% then that gives me a SP of $1.66!!!

Personally I think instead of 5c it they might be conservative and do 4c ie 3c more for the rest of the year after the 1c special.

This would still be above market and be a strong yield. Using the same target yield of 3% on a 4c dividend gives me a SP of $1.33. Just to test whether that makes sense, at $1.33 and using Canaccords 7.9c EPS that gives me a PE of 16.8x, which is still below the Small Ords average.

This remains a screaming buy IMO