The Motley Fool discovers one small, unloved car parts seller and panel beater trading at a compelling price.
In investing, boring is sometimes beautiful.
There are no headlines in the news. There is no excitement to titillate analysts, reporters or speculators. Small and boring is even better. Small illiquid and boring stocks are on few investment research lists. They are too much of a career risk to stake an opinion on. And they are too small for a fund with tens of millions to swing around.
These factors give rise to several opportunities for stacking the cards in favour of small investors with patience and a long term horizon. A small and boring business is much easier to understand. Management is more accessible. Small volumes and wide bid-ask spreads allow for patient position building. Pricing dislocation caused by a big volume selldown may create bargain prices.
Occasionally, a small investor gets the chance to invest in a small, growing company at a value price. It's as close to investing nirvana as you can get. It does not take much from there to make a motza – you just need to wait for the market to inevitably rerate the stock.
Cars often make titillating news. A business selling car parts and offering panel beating services is the ugly cousin, especially when the business is less than $30 million in market cap. It is a cyanide pill to a budding and ambitious fund manager.
Yet, when such a boring business churns out over $6.4 m in cash per year from its operations, even after paying a hefty interest bill of $1.2 m, it is difficult not to get excited. This leads us straight to AMA Group Limited (ASX: AMA).
Much to like
There is a lot to like about AMA. We like Ray Malone running the show. Over the last 24 years, Ray built Mr Gloss into a premium panel beating business in Victoria.
The panel repair business did over $16m of business last year. And the great part of this story is that the business came mostly from customers choosing Mr Gloss as a service provider, rather than the insurance companies. This in itself is a stunning achievement in a tough yakka industry. Further, we like the fact that Ray holds 30% of AMA, and that he is only 51 years old.
We like the industry characteristics. Car parts and accessories pricing appears to be dictated not so much by demand and supply but by availability.
Five separate business divisions sell high-end niche automotive parts. Demand is underpinned by a steady rise in car ownership in Australia. We also expect increasing business for the panel repair division as Melbourne's population and car usage increases over the next few years.
Ray has stated publicly that he hates debt with a passion. He backed up his words with decisive action, slashing over $7m in debt in the last year alone. We expect that Ray will pay off the remaining $18m debt in 3 years, maybe less if things improve.
The Foolish bottom line
AMA is currently priced at 11 cents. Including its debt, it has a market enterprise value of $49m. The operating cashflow before interest payments is a healthy $7.5m per year, which puts AMA on a cashflow multiple of about 6.5. That's cheap, even if the business stays unchanged.
But as we said earlier, Ray is only 51 years old. AMA's businesses are mostly still in their infancy. For example, the panel repair business comprise of only three workshops in Melbourne, doing $16 million of business in a billion dollar industry. The car accessories division's total sales is $9.2m, compared with much larger competitor ARB Corporation's (ASX: ARP) total sales in Australia last year of roughly $160m.
We see a long runway for growth ahead for AMA, but in the words of Ray himself "we are talking medium term".
If you're looking for more ASX shares with long runways ahead, look no further than this one large company we think has some serious long-term potential. Get this free special report from the Motley Fool – The Best Stock For $100 Oil. Click here to sign up now.
Fool contributor Peter Phan owns shares in AMA Group Limited, his last purchase being on September 7 2011. The Motley Fool's disclosure policy is no car wreck. This article has been authorised by Bruce Jackson.