In the wake of COVID-19, supply chains are already moving to become more local. For instance, there were acute shortages in healthcare, car parts and construction. In South Korea, Hyundai closed its plants due to a lack of car parts. Moreover, we all felt the impacts of a lack of hand sanitiser and face masks in the early days.
When we talk about Australian manufacturers, thoughts go immediately to PPE manufacturer Ansell Limited (ASX: ANN) or shipbuilder Austal Limited (ASX: ASB). Yet there are several smaller companies selling at share prices I believe are below their intrinsic value.
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Local supply chain manufacturing
Reliance Worldwide Corporation Ltd (ASX: RWC) manufactures and sells plumbing accessories – a core product in the residential and commercial supply chains. Over the past 4 years since its initial public offering (IPO), the company has grown its sales by an average of 46.5%. At the same time, it is continually improving its net profits.
Reliance has been acquiring companies to provide a comprehensive product offering. In addition, it operates in Australia, the UK and the US, providing exposure to the US housing market. The Reliance share price is selling at a price-to-earnings ratio of 20.51. This is well below the company's 10 year P/E average and I believe Reliance is currently selling at a discount to its intrinsic value.
Orora Ltd (ASX: ORA) manufactures packaging products. This includes bottles, boxes, cartons and aluminium cans. It operates in Australia and the US. Over the 6 years since its IPO, Orora has an average return on capital employed (ROCE) of 11%. This is a measure of how well the company can transform available capital into earnings. As companies move to localise supply chains, Orora is likely to see increased sales.
This share has a one-off payment this year after the sale of one of its business. When combined with the dividend payment, this share pays a 18.8% yield (based on last Friday's share price). However, it must be purchased before the ex-dividend date of 19 June.
High tech manufacturing
Of the 3 companies, Electro Optic Systems Hldg Ltd (ASX: EOS) is the smallest. It manufactures components for the defence and space sectors. Sales for this company have doubled for the past 2 years. It has recently completed the acquisition of Audacy Corporation, a US satellite communications company, which will provide the manufacturer with greater product diversity. Electro Optic provides high technology solutions, including the space situational awareness network in conjunction with the United States.
The SpaceX launch over the weekend, combined with the recent Space Force announcement in the US and increases in defence spending, will likely see an increase in sales for this ASX mid cap. These are considered security critical areas. In my opinion, it would be a mistake to leave these areas in any concentrated and offshore manner, given the lessons from COVID-19.
