Why I’ll Take Some Profits On DGL Group (ASX: DGL)

It has been an exciting couple of months for industrial chemical manufacturing, storage, distribution and disposal company, DGL Group (ASX: DGL). As a reminder, I first became interested in the stock since it seemed to have a quasi monopoly on some items, and had strong insider buying. I then bought more after seeing more insider buying.

Since that time, the company was recommended by a big stock recommendation newsletter, which pushed the price up a bit. Then, it announced a profit upgrade, announcing it now expects EBITDA before acquisition costs of approximately $65m for FY 2022. That pushed the share price even higher, to more than $4 per share.

Of course, the company has also continued to announce a number of smaller acquisitions such as Total Coolants and RLA Polymers. The acquisitive nature of the company should ensure some profit growth.

However, at the current share price of $3.87 it has a market capitalisation of almost $1.1b. Therefore, it is trading on about 17 times EBITDA. This seems reasonable, but not particularly cheap. Prior to today, it was probably in the hold zone for me.

Unfortunately, I didn’t previously note that almost 8.5 million shares would come out of escrow on May 1. These shares were issued to the vendors of Ausblue Group and Profill Industries.

Since listing the company has averaged about 550,000 shares traded per day. That means around 15 days of liquidity would hit the market, if the vendors wanted to sell everything (which is possible, though not at all guaranteed). This may weigh on the share price.

Therefore, I currently intend to sell some of my DGL shares tomorrow, before those escrowed shares hit the market, assuming it is still trading at around the current price of $3.87. My hope is that fund managers will make their traditional effort to bid up share prices into the close on the last day of the month (tomorrow).

Please note I hold shares in DGL, and plan to sell some, but not all of them, tomorrow. This article should not form the basis of an investment decision, and my thinking around any of these stocks may change at any time for any reason. It is an investment diary valuable only for the cognitive process it demonstrates and you should cultivate our own thinking. We do not provide financial advice, and any commentary is general in nature. Please read our disclaimer. If you are seeking financial advice, which you should, you are in the wrong place.

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