Eco Investor December 2017

Core Securities

Cleaner Eco Focus for Gale Pacific

Gale Pacific has come a long way in its plan to become a focused technical fabrics company as it has now sold most of its non-core businesses. In the process it has improved its environmental focus.

For many years Gale's main business has been making and selling shade and screening cloths and it has increased this commitment by moving into specialist technical fabrics for the architectural, retail, horticultural and agricultural markets.

Over the past three years it has been selling non-core businesses, with the most recent being the sale of its unprofitable Everton glass business in June. The divestments have included products like pet kennels, hammocks, splashbacks, bath mats, soap dispensers, balustrades, and pool fencing.

The company now expects fabric products to generate about 96 per cent of its revenues and 100 per cent of its profits this financial year, said managing director, Nick Pritchard.

Gale Pacific's main products are architectural shade fabrics, exterior window shades, shade sails and specialized fabrics for crop protection, irrigation, water storage and screening.

The company's goal is to become a fabrics technology company and a leader in the development, manufacture and marketing of shade solutions for the retail market, and high performance technical textiles for the commercial sector, said Mr Pritchard.

This focus is good for environmental investors. Shading is a simple and passive cooling technology that reduces the need for energy driven solutions such as airconditioning and fans. In large outdoors areas it can also help reduce the urban heat island effect.

Gale Pacific's revenue and net profit.

The company has also worked to rationalize and improve its business operations. It has upgraded its manufacturing capabilities in Australia and China. It has rationalized its Australian distribution by closing four warehouses and upgrading the remaining facilities. A new and larger warehouse in California opens this month. And it continues to invest in R&D to develop new shade and commercial fabrics.

But the changes have brought some pain. For 2016-17 the company reported a loss of $8 million after a profit of $1 million in 2015-16. The loss was due to an $18.4 million non-cash write-off on the sale of the Everton glass business.

Nor is the company out of the woods. It said trading during the September quarter was impacted by a poor Australian grain season, which led to reduced demand for grain cover fabrics, and by hurricanes which affected key markets in the southern USA.

The company said it expects sales and earnings in the first half will be below the prior corresponding period. The effect on pre-tax earnings will be around $4 million, so it anticipates the first half pre-tax profit to break even compared with $3.9 million for last year.

It is however "confident of a strong second half performance"... "largely driven by the Americas region where we have already secured significant product ranging commitments in our core window shade and shade sail categories."

So despite some good longer term news, the current results and immediate outlook seem to have contributed to Gale Pacific's shares now trading at very close to their one year low of 34 cents last December. Since late October, the time of the annual general meeting and most recent outlook statement, its shares have fallen from 40 cents to 35 cents. Are they value?

The analysis by Eco Investor shows that the company has many positives.

The book value of 28 cents per share is below but close to the current share price.

The balance sheet is solid with low debt and gearing of 17.9 per cent over total assets and 28.4 per cent over net assets.

The loss for 2016-17 makes both the earnings per share and the price/ earnings ratios difficult to make sense of; however the underlying result was a profit of $10.1 million compared to a $10.2 million profit for 2015-16. If we use the underlying profit, then Gale has a return on equity of 12.1 per cent. The earnings per share is 3.4 cents, and the price/earnings ratio is 10.3

The company has an on market share buyback underway so it thinks there is value in the current share price. And having only 296 million shares on issue shows good capital management.

For the past three half years the company has paid half year dividends of 1 cent per share unfranked. Two cents per year is a current yield of 5.7 per cent and the payout ratio is 59 per cent on the underlying 2016-17 profit.

All of those numbers look sound.

Mr Pritchard said the company has achieved compound annual revenue growth of 8.5 per cent and compound annual underlying earnings growth of 10 per cent. If it can maintain the momentum, and its looks like it is seriously trying, there is good reason to believe its share price will recover some time in the future. (ASX: GAP)







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