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This exciting small cap just grew profit by 20%

Last night, commercial vehicle aftermarket parts business Supply Network Limited (ASX: SNL) reported its annual result for the year ending 30 June 2018 showing that revenue grew by 14.8% to $112.1 million.

Australian revenue grew by 16.5% to $90.9 million and New Zealand revenue grew by 7.6% to $21.2 million.

Earnings before interest, tax, depreciation and amortisation (EBITDA) grew by 19.6% to $13.1 million. Earnings before interest and tax (EBIT) grew 21% to $12 million.

Net profit after tax (NPAT) grew by 20.7%to $8.2 million and earnings per share (EPS) increased by 20.7% to 20.06 cents. Return on average total equity improved by 220 basis points to 24.7%.

Net cash from operating activities improved by 9.6% to $6 million, but cash on the balance sheet decreased by around 25% to $2.4 million. However, the overall balance sheet has improved with net tangible assets (NTA) per share increasing by 10.6% to 85.4 cents.

Pleasingly, the full year dividend increased by 35% from 10 cents to 13.5 cents per share. The dividend payout ratio remained a healthy 67.5% of earnings.

Supply Network said that the Truck Parts segment remains the dominant driver of growth. During FY18 the company opened a new branch in Port Hedland, Western Australia, to improve services to workshops in the Pilbara region. This region is dominated by high horse power trucks hauling bulk products.

Despite positive trends for the Bus Parts segment, it has been a challenging year with fleet renewal resulting in more efficient fleet operations and deflation in the price of parts. The Bus Parts segment now only comprises 22% of total revenue.

In the last quarter of FY18 the company transferred New Zealand distribution operations to its new site in Hamilton. The old site in Auckland had been a drag on growth and served its useful life.

During FY18 the company invested $2.9 million into assets that, for example, will improve efficiency and stock pick accuracy. Supply Network has begun testing the technology in branch operations and for remote sites.

Outlook

The drought is affecting rural areas and there is a tapering of housing construction starts, however the substantial pipeline of large infrastructure projects provides a strong platform for Supply Network’s FY19 business activity.

Construction of a new facility in Christchurch will begin in the next few months and Supply Network is also exploring opportunities for new branch locations in Australia and New Zealand.

The growth rate for the second half of FY18 was higher than forecast and over the next two years the company is targeting compound organic growth of 8%. It will also keep an eye out for acquisition opportunities that would complement the core business.

The Supply Network Board are pleased with the financial strength of the business and have changed the preference for the dividend payout ratio to 60% to 70% of earnings.

Foolish takeaway

Supply Network is currently trading at 23x FY18’s earnings with a grossed-up dividend yield of 3.3%.

Although I’m not personally investing in Supply Network, it could be one of those under-the-radar growth businesses that does quite well over the next few years.

Instead, I’d rather buy shares of this top stock which is a leader in the auto industry.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Supply Network Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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