Gale Pacific Limited (ASX: GAP) almost became one of the victims of the GFC, thanks to the company’s relentless pursuit of acquisitions and corresponding increases in debt, which in 2006 resulted in a debt/equity ratio of over 200%. As revenues started falling, so did profits, and then the banks came calling. The company was forced to sell assets and raise substantial amounts of equity to pay off its debts.

Since 2010, the company has turned its fortunes around and now looks to be trading at a cheap price. Since December 2009, the company has reported steady growth in net profits, net debt is now just $4.4m (as at 31 Dec 2011, compared to $99m in Jun 2006), margins are growing, and returns on capital ratios are steadily improving.

In 2010, the company resumed payment of dividends and has continued to do so, paying out over 80% of earnings.

The company

Gale Pacific is engaged in the manufacture, marketing, sales and distribution of screening and shading products to global markets such as Coolaroo branded shade cloth, umbrellas, gazebos, shade fabrics, window blinds etc. The company also now offers exterior window furnishings, such as custom made blinds and sails through its Riva Window Fashions business. The company also offers garden and pet products such as gutter guards, weed mats, garden screens and pet beds and accessories.

2012 first half results

Revenues were up 18% to $55m, resulting in net profits up 14% to $4.1m and earnings per share up 12% to 1.4 cents. Net Debt has been reduced to $4.4m, with a net debt/equity ratio of 6%. Cash flow from Operations jumped 267% from $1.5m to $5.5m, compared to the prior corresponding period.

The company reported increased growth in the Middle East, U.S.A., Japan and South Africa and from the Zone Hardware and Riva Window Fashions businesses acquired in June 2011. Sales in Australasia were down due to subdued consumer demand and cool and wet conditions in many areas.

The company has stated that it is seeking further acquisitions to provide growth and additional scale, with funding to come from internally generated cash flows and substantial unused bank facilities, while maintaining dividend payments to shareholders and a conservative debt position.

The company expects increased sales in the second half of the year, particularly in the Middle East, USA and Japan, with sales expected to grow by 15% for the full year to 2012.

Risks

The major risk to this business is that directors make the same mistake again and take on too much debt through acquisitions. Given the CEO and 2 of the 5 directors have left since 2006, we can only hope that the current management team have learnt from past mistakes.

Another major risk is the increased competition in the home improvement market, although Gale Pacific already sells its products to many of the major home improvement retailers including Bunnings, owned by Wesfarmers Limited (ASX: WES); Mitre 10, 50.1% owned by Metcash Limited (ASX: MTS); and Home Hardware, now owned by Woolworths Limited (ASX: WOW).

The Foolish bottom line

As consumer sentiment improves, especially in the USA and Australasia, further organic growth should be likely. The company also has plans to release new products into the United States market. Any fall in the USD/AUD exchange rate should also help the company.

The rollout of Riva Window Fashions business through the Bunnings network was to be completed by March 2012, and 2012 financial year results will see full year contributions from both Zone Hardware and Riva.

Trading on a relatively undemanding forecast P/E of 8.6, and paying a fully franked dividend yield of 9.8%, the company looks fairly cheap and deserving of further research.

NOTE: The shares in Gale Pacific are fairly illiquid with three shareholders holding over 68% of the stock.

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Motley Fool contributor Mike King owns shares in Woolworths. The Motley Fool’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool’s disclosure policy

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