A nanocap with a 30% Return on Capital, 37% FCF/EV yield, and 100% shareholder yield on earnings.

Oh the deals you will find in nanocap land.

Note: All figures unless otherwise denoted are in AUD.

This is a no-brainer stock and my biggest position.

I have always heard of those neglected securities in microcap land that have no analyst coverage, but have a solid balance sheet and earn 30%+ earnings yields. I finally found one.

Here is this company's record of return on capital, and its earnings yield as FCF/EV.

Unlike the rest of the cigar butts I have been huffing, this one has no regulatory uncertainty or complex accounting. It is not in a declining industry. It has no shady management. It is just a simple, safe, well run company that earns consistent profit. Even more than that, this is the most shareholder friendly management I have ever seen. With a consistent payout ratio over 100%!

It is undervalued simply because it is a nanocap (~36mn Market Cap in USD). The only way a small-time analyst would find this is by going through every stock in the ASX (no one) or by talking their way into access to a Bloomberg terminal (me).

It has a market cap of 54.5mn

It also has net cash of 8mn, and 14mn in capital lease obligations. They have been liquidating net working capital and PPE, and also still have the potential for further inventory liquidation (moving to 3pl model) and capital asset liquidation (exiting warehouses). I personally give them 5mn for that. But to be conservative for this write up I will not include that in my calculation.

That gives me an EV of 60.5mn.

Over the last 3 years, EBIT has averaged 13mn a year, EBITDA/ has been 19.4mn, FCF has been 19.2 mn, capex has been 1.5mn, and it has returned 20mn a year to shareholders via dividends, stock buybacks and a return of capital. That is a payout ratio far over 100%. They have had some one-off expenses that temporarily depress EBIT (ERP upgrades, restructuring costs) ; these were $1mn for 2024.

Going forward I will conservatively assume that normalized earnings will be $16mn.

The return of capital allocation choice stands out to me. Essentially, management did something incredible, they said, "We had excess cash on the balance sheet to pursue acquisitions. We didn't see any targets priced at a discount. So we returned the capital that shareholders invested initially. We did this because a return of capital avoids capital gains tax." And then they did the same thing, but with a tax advantaged share buyback. If I had a nickel every time I saw a management team do this, I would have two nickels, and they would both be from this company.

Putting it another way this is like buying a bond with a 27% yield. (normalized earnings/EV)