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Royal Wolf is howling at the door

The stock market is currently trending away from high yielding defensives toward cyclical growth stories. This, along with a well received profit release, has provided a howling tail wind for the share price of Royal Wolf Holdings (ASX: RWH).

Royal Wolf provides portable container solutions to the construction, resources, retail and manufacturing industries in Australia and New Zealand. Established in 1995, it was taken over by the US-based General Finance Corporation  (NYSE: GFN). It subsequently floated on the ASX in May 2011 at an issue price of $1.83, with General Finance retaining a 50% holding. Since that time, by dint of acquisitions and organic growth, the current share price has appreciated to $3.63.

The broking community is attracted by the annuity stream model, diverse product range (portable storage, portable buildings and portable freight) and wide customer base (no single customer represents more than 3% of total revenue).

Along with General Finance’s 50% holding, Perpetual (ASX: PPT) owns greater than 10% and Commonwealth Bank (ASX: CBA) and National Australia Bank (ASX: NAB) each hold around 7%. This results in very few shares traded on a daily basis, which can make it difficult for investors to get in or out of a position quickly.

Looking forward

Deutsche Bank research suggests that Royal Wolf benefits from a housing recovery, as 20% of total revenue is generated by the construction industry. Confidence for the coming year has been bolstered by a number of specific contracts that will be delivered. One contract is for a sales value of $12 million with Aurizon (ASX: AZJ).

At the results briefing on August 14, Royal Wolf reaffirmed the pursuit of further value accretive acquisitions. This has already been proved on September 10, via the acquisition of Intermodal Solutions and Kookaburra Containers.

Price and performance

In the last 12 months the stock has traded up from $2.20 to $3.82. At the current price of $3.63, the unfranked dividend yield is 2.62 and there has been a 65 % return, excluding dividends.

Foolish takeaway

Royal Wolf is an outstanding prospect with both organic and acquisition growth prospects. However, the low liquidity may be detrimental in a falling market, as would the perceived overhang of General Finance’s 50 % holding. Most of the containers are built or remodelled in China and consequently some exchange rate risk applies.

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Motley Fool contributor Mark Woodruff does not own shares in any of the companies mentioned in this article.

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