Coventry Group Ltd (ASX: CYG) is an ASX-listed business selling fasteners and industrial fluid products.
The Coventry Group Trade Division sells steel fasteners – products that fasten one thing to another, such as bolts, cabinet hinges, rivets, washers, and screws. Meanwhile, the Fluid Systems Division provides various fluids and small components for use in hydraulics systems such as on a digger, or other industrial machinery.
It does not get more boring than bolts, nor are rivets riveting, but these are necessary products for a wide range of industries from mining, manufacturing to agriculture, infrastructure, and construction. Boring is easy to understand and less likely to be disrupted or suffer a deluge of new competitors.
On the other hand, Coventry is unlikely to provide asymmetric returns, and you can see below the share price has not done much in ten years. Past performance is not necessarily an indicator of future performance, but there would likely need to be some significant changes to the business before we see better returns.
Coventry Group FY 2024 Results
Financial year 2024, saw Coventry achieve its seventh consecutive year of incremental revenue growth. Unfortunately for shareholders, profits were down 73.3% to just $0.7 million ($2.5 million in FY23). This was mainly due to costs of $9.1 million related to Coventry’s ongoing migration to a new ERP system (ERP stands for enterprise resource planning – a software system that helps run business processes from finance, human resources, manufacturing to supply chains). There were also costs relating to the Steelmasters acquisition of $0.8 million, and a sluggish NZ economy affecting the trade division.
While debt increased over the financial year, it is still manageable on a Debt-to-Equity ratio of 39%. If taking lease liabilities into account, the ratio is 94.63%. On 30 June 2024 Coventry Group (ASX: CYG) had Net Debt of $47.3m ($33.5m FY23). The increase in Net Debt was predominantly due to taking on $13.4 million in debt to acquire Steelmasters.
Coventry Group FY 2024 Profit Impacted By Significant Items
Profits have been decreasing for the last three financial years, as significant items like the ERP rollout, acquisitions, and increasing wages have squeezed already thin operating margins of 7.44% for FY24.
The below chart shows profits declining vs rising wage growth, and the ERP rollout costs. The ERP roll out is expected to be complete in December 2024, so you could assume at least half of FY24’s $9 million would be allocated as ERP rollout costs for FY25. Of course, these things can often take longer than anticipated, as anyone who has worked on big corporate projects can attest.
Whether can recover in the coming years remains to be seen, but the ERP rollout will finish, and that should be a positive.
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The Coventry Group (ASX: CYG) Acquisition of Steelmasters
The Steelmasters acquisition which finalised in April 2024 appears to be a good one with the target having higher margins than Coventry. Steelmakers also aligns with Coventry’s core business, as Steelmakers sells industrial and specialty fasteners through four branches in New Zealand and eight in Australia.
The acquisition price of NZ$45.5 million represents a reasonable multiple of 6.1 times 2023 EBITDA. Acquisitions can be fraught with danger, but you would hope a simple steel fastener business would be easier than most targets to value and not throw up many surprises after acquisition.
The total consideration for Steelmasters was funded via a combination of proceeds from an institutional placement, raising $31.1 million, a share purchase plan raising $1.1 million, resulting in the issue of 20.6 million shares at $1.45; and a new NAB Revolving Cash Advance Facility of $13.4 million.
Should I Buy Coventry Group Shares?
Coventry Group has products that are essential to a wide range of industries. While some of the industries are defensive in nature, like infrastructure and defense, Coventry is still not immune to periods of lower growth, plus the mining and mining services industries are highly cyclical.
While Coventry supplies the industrial sector, it is essentially a retailer, and any growth requires new stores, which increases lease liabilities, employees, and spending on sales and marketing.
Four different directors have been buying Coventry shares on-market this year, including Non-Executive Director Alex White who has been buying up shares recently.
Catalysts for increasing profits may come from the completion of the ERP system installation, which is expected in December 2024, a drop in wage inflation, or faster GDP growth in the Australian (86.22% of revenue) and NZ (13.8% of revenue) economies. Apart from that I don’t see a lot of potential catalysts for significant profit improvement.
Coventry trades on an astronimical Price to Earnings (P/E) ratio based on its terrible statutory result in FY 2024. However, the one broker covering the stock on S&P CapIQ (Bell Potter) estimates $9.1 million in profit for FY 2025. At the current price of $1.225, Coventry Group has a market capitalisation of $143.3 million, indicating a forward P/E ratio of 15.7 based on this single forecast.
The Coventry Group trailing dividend yield is about 3%, fully franked, which grosses up to about 4.3%. Coventry is a boring, under the radar, dividend paying small-cap with increasing revenues. It is not a terrible stock but it is not attractive to me because I don’t see much profit growth in the coming years. I also feel there are more attractive dividend paying small caps with better growth prospecgs on the ASX, several of which I have written about here.
Disclosure: The author of this article Chris Coe does not own shares in Coventry Group (ASX: CYG). The editor Claude Walker does not own shares in Coventry Group (ASX: CYG). Neither will trade Veem (ASX: VEE) shares for at least 2 days following the publication of this article. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Equity Story Pty Ltd (ABN 94 127 714 998) (AFSL 343937).
The information contained in this report is not intended as and shall not be understood or construed as personal financial product advice. You should consider whether the advice is suitable for you and your personal circumstances. Before you make any decision about whether to acquire a certain product, you should obtain and read the relevant product disclosure statement. Nothing in this report should be understood as a solicitation or recommendation to buy or sell any financial products. Equity Story Pty Ltd and BlueTree Equity Pty Ltd t/a A Rich Life do not warrant or represent that the information, opinions or conclusions contained in this report are accurate, reliable, complete or current. Future results may materially vary from such opinions, forecasts, projections or forward looking statements. You should be aware that any references to past performance does not indicate or guarantee future performance.