Recently, while I was researching stocks to add to my portfolio, I came across a few Singapore-listed companies that I thought were interesting. A quick search on the internet also showed that these companies are not extensively covered by big-name investment analysts.
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Samurai 2K Aerosol is an aerosol coating specialist with a focus on the automotive refinishing and refurbishing industry. According to its initial public offering (IPO) prospectus, the company had a 27% market share in Malaysia in 2015 and a market share of 5% in Indonesia in the same year. Some of its brands include Samurai 2K, Samurai, and Kurobushi.
Samurai 2K Aerosol is headquartered in Malaysia, and its products are manufactured in its production facility located in Johor. Its products are distributed in Indonesia, Malaysia, Thailand, Vietnam, the Philippines, and Cambodia.
The majority of the company’s revenue comes from selling aerosol spray paint cans to motorcycle owners in Southeast Asia.
The financial numbers
One of the main things to look at before investing in a company is its financial performance.
For its past four fiscal years (the company’s financial year ends 31 March every year), Samurai 2K Aerosol’s revenue has increased consistently in each year, from RM15.9 million in fiscal 2014 to RM39.4 million in fiscal 2017. This gives an annual growth rate of 35.3%.
The company continued its solid streak of growth into the 2018 fiscal year. For the six months ended 30 September 2017 (1H2018), revenue doubled to RM34.5 million from RM17.1 million a year ago. The firm expects to report significantly higher revenue and profit for the whole of fiscal 2018 due to stronger demand for its aerosol paint products as compared to the previous year.
Samurai 2K Aerosol’s profit after tax improved from RM1.3 million in fiscal 2014 to RM1.8 million in fiscal 2017. In fiscal 2017, it had a one-off IPO expense of RM4.4 million. In 1H2018, profit after tax recovered to RM6.3 million.
The company also has a strong balance sheet, which would enable it to tide through harsh economic conditions. As of 30 September 2017, Samurai 2K Aerosol had RM20.8 million in cash and bank balances, and RM9.2 million in total borrowings. This translates to a net cash position of RM11.6 million.
Samurai 2K Aerosol generated free cash flow of RM1.5 million in 1H2018. In comparison, it had a negative free cash flow of RM1.8 million a year ago.
The growth drivers
The number of two-wheelers in Malaysia, Indonesia, Thailand, and Vietnam is expected to increase from 177 million units in 2015 to 239 million units in 2020, representing an annualised growth rate of 6.2%. Meanwhile, the aerosol spray paint market is predicted to grow at an annualised rate of 6.2%, from 117.5 million cans in 2015 to 158.8 million cans in 2020. Even if Samurai 2K Aerosol does not expand its market share, it could grow along with its industry.
Samurai 2K Aerosol’s growth in the years ahead, other than from its core markets, could also come from the United States. In its 1H2018 earnings release that was released on 10 November 2017, Ong Yoke En, the company’s executive director and chief executive officer, said:
“In addition to the untapped area in our current markets, we have identified the United States of America (“USA”) as our next engine of growth. According to the statistics from the United States Department of Transportation, USA has approximately 254 million registered vehicles on the road in 20151. This is clearly a huge market not to be ignored. We have incorporated a wholly-owned subsidiary in USA and have just participated in the prestigious Specialty Equipment Market Association Show 2017 in the last week.”
The Foolish takeaway
I like Samurai 2K Aerosol’s strong financial performance in the past few years. It also has growth potentials in both its current markets and new markets such as the USA.
However, one risk could come from its valuation. Currently, the firm is valued at a whopping 73 times its trailing earnings (based on the FY2017 fourth-quarter and FY2018 nine-months earnings). Any blunder in its growth could see its share price plummet. It also has not paid out any dividend so far.
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Editor's note: An explanation on the trailing earnings used for valuation has been added.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.