GALE Pacific Ltd (ASX:GAP)

July 20, 2016 | Price: $0.37

Growth Portfolio

Overview: GALE Pacific Ltd (“GALE”, “the Company”) is an Australian manufacturing company focused on building products and home improvement, distributing a range of commercial and domestic applications and polymer textiles. The company’s product portfolio comprises shade cloths, leisure products, DIY household, and glass products and is typically sold to professionals in architecture, building, and construction, agriculture, transport, or the mining industry. GALE operates in Australia, New Zealand, the USA, Middle East, and China.

Catalysts: GALE is on track to post revenue growth for the fifth consecutive year. A strategic review is expected to improve the supply chain and reduce costs which should result in higher profit margins. The company is witnessing strong demand in its key markets Australasia, the Americas, and the Middle East, and management targets the distribution of a dividend-yielding nearly 5%.

Hurdles: Despite continuous revenue growth, earnings have been volatile and there is no guarantee that the strategic review will yield cost savings. Approximately 30% of GALE’s revenue is derived from overseas and is therefore subject to currency exchange fluctuations. With net debt at ~2x EBITDA, these borrowings may constrain the company’s ability to expand.

Investment View: GALE offers profitable exposure to construction and consumer discretionary industry trends. We are attracted to the company’s revenue growth trajectory, increasing demand for its products, and improved operational performance, which is expected to improve profit margins. Earnings volatility and balance sheet gearing are primary hurdles. Witnessing growth across most of its key sectors, management may direct surplus cash towards higher dividend payments or reinvest in growth initiatives. We initiate coverage with a ‘buy’ recommendation.

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