There are 2,200 stocks listed on the Australian Securities Exchange (ASX), and not all of them are well-known. For some, that’s because they haven’t really done much worth noticing: but plenty are solid achievers, with good businesses and working in interesting markets. Here are three industrial stocks that I believe fly under the radar, despite having a good story to offer investors.
- Johns Lyng Group (JLG, $5.75)
Market capitalisation: $1.6 billion
12-month total return: –10.7%
Three-year total return: 25% a year
Estimated FY24 yield: 1.7% fully franked (grossed-up, 2.5%)
Analysts’ consensus valuation: $7.33 (Stock Doctor/Refinitiv, 11 analysts), $7.05 (FN Arena, four analysts)
Johns Lyng is a building company that specialises in emergency repairs and rebuilding, with work typically done for insurance companies. The major work is building repair and contents restoration after damage from insured events – such as weather, fire and impact events – as well as disaster and catastrophe response for insurers and governments. Johns Lyng also does hazardous waste removal and emergency household repairs; strata and property management; and essential home services, including smoke alarm compliance and fire safety services.
In this regard, whenever the news is full of natural disasters, Johns Lyng’s business units are usually out in the affected regions and beginning the process of rebuilding. The company operates under 18 brands, with more than 100 operating subsidiaries, and more than 14,500 sub-contractors.
In 2019 the company embarked on a plan to expand into the US. It bought US water and fire damage restoration company Steamatic for $US3.1 million ($4.3 million); and in 2021, it made a bigger step, buying Colorado-based Reconstruction Experts for US$144 million ($201 million). In FY23, the US business contributed $247.6 million in revenue, a 25% lift on FY22, and 19.3% of the total.
Johns Lyn Group (JLG)
In FY23, revenue rose 43.2%, to $1.28 billion, while earnings before interest, tax, depreciation and amortisation (EBITDA) increased 42.9% to $119.4 million, and net profit grew 64.3%, to $62.8 million. The final (second half) dividend of 4.5 cents brought the FY23 total payout to 9 cents, up from 5.7 cents in the 2022 financial year.
Johns Lyng describes its business as “defensive growth,” in terms of investment. The core insurance building and restoration services (IB&RS) division generates almost 90% of its revenue, and the company says these revenues are non-discretionary spending for customers, with recurring (annuity-style) revenues materially insulated from economic cycles. Having mainly blue-chip insurance companies and governments lessens credit risk, while client diversification mitigates concentration risk – the largest individual insurance counterparty contributes less than 4% of revenue. Large job volumes offset project concentration risk: Johns Lyng completed more than 135,000 individual jobs in FY23. The strength of the balance sheet ($71 million in net cash) offers protection from rising interest rates.
Johns Lyng’s guidance for FY23 is for a small dip in revenue, to $1.18 billion, but a 7% increase in EBITDA, to $128 million. The guidance implies about 20% business-as-usual (BAU) year-on-year growth.
Analysts are fairly bullish on Johns Lyng: the most optimistic, Macquarie, has a price target on the stock of $7.80.
- IPD Group (IPG, $3.87)
Market capitalisation: $669 million
12-month total return: 69.1%
Three-year total return: n/a
Estimated FY24 yield: 3.1% fully franked (grossed-up, 4.4%)
Analysts’ consensus valuation: $5.27 (Stock Doctor/Refinitiv, three analysts), $5.25 (FN Arena, two analysts)
Electrical products distributor IPD Group listed in December 2021, at an issue price of $1.20 – and promptly slipped 13%, to $1.05. But by September 2023, that was well and truly forgiven, with the stock cruising to $4.95. A little bit of the shine has come off IPD Group since then, with the stock retreating to $3.92. But that looks to be offering an attractive entry point.
IPD Group (IPG)
Originally a division of British industrial conglomerate English Electric Company – maker of the Canberra bomber and Lightning fighter of the 1960s and 1970s – IPD was formed through a management buyout in 2005 and according to Stock Doctor, it has since generated compound annual revenue growth of about 12%, over 17 years, through organic and inorganic growth. The company represents 30 international equipment and technology manufacturers, servicing clients in commercial buildings, high-density residential, resources, utilities, healthcare and infrastructure sectors.
One of its biggest deals is with Swedish-Swiss giant ABB is one of the largest electrical equipment manufacturers globally, with a market share of about 30%. IPD is ABB’s Australian distributor.
Stock Doctor says IPD has long-standing relationships with key manufacturers and customers, reflecting the business’ long-term sustainability. IPG’s average tenure across its top ten suppliers is larger than 15 years, while the average time that its customers have been with it is more than 25 years.
The company is particularly strong in the systems security, data centres, renewable energy and electric vehicle (EV) markets. In the latter, IPD sells the equipment to install EV chargers in both residential homes and EV charging stations. The stock represents one of the only industrial exposures to the growing EV thematic on the ASX. The company won an introductory part of the NRMA’s $100 million “charging blackspots” public charging roll-out, and broker Bell Potter believes that if IPD can win bigger-ticket future NRMA tendering rounds, it would be a “highly relevant trigger event” for the stock.
In FY23, IPD lifted revenue by 28.3%, to a record $226.9 million, while net profit rise by 45% to $16.1 million, also a record. The final dividend of 4.7 cents a share took the total for the year to 9.3 cents, fully franked, up more than 3 times the FY22 dividend of 3.7 cents. IPD ended the year with a very robust balance sheet, with cash of $20.8 million and no borrowings.
Analysts are looking for earnings growth of about 29% in FY24, and about 27% in FY25. From that is projected a very solid fully franked yield, at the current price of $3.87, of 3.1% (grossed-up, 4.4%) in FY24, and 3.9% (grossed-up, 5.5%) in FY25. Given consensus price targets, that implies a very attractive total-return situation brewing at IPD Group.
- Adrad Holdings (AHL, 86 cents)
Market capitalisation: $139 million
12-month total return: –30.6%
Three-year total return: n/a (listed September 2022)
Estimated FY24 yield: 4.3%, fully franked (grossed-up, 6.2%)
Analysts’ consensus valuation: $1.475 (Stock Doctor/Refinitiv, two analysts)
South Australian family-owned radiator business Adrad Holdings came to the ASX in September 2022, at an issue price of $1.50 a share. The stock reached $1.635 on its first day, but it has been a disappointing performer since then, drifting lower to the current 86 cents. But that looks like a good buying opportunity.
Adrad Holdings AHL) – last 12 months
Adrad, which has its headquarters in the Adelaide industrial suburb of Beverley and a substantial manufacturing facility in Thailand, is a manufacturer, importer and distributor of radiators and other products for the Australian automotive and industrial aftermarket, and a designer and manufacturer of industrial radiator and cooling solutions. It operates 46 workshop outlets for radiator repairs around Australia under the Natrad brand and makes about half of its annual revenue from selling radiators to the automotive aftermarket through mechanics and workshops.
The company supplies about 90% of radiators for the on-highway market to truck manufacturers such as Kenworth, and also has a 60% market share in the off-highway radiator market, for heavy vehicles used in mining and heavy industry, with customers such as Caterpillar, Hitachi and Terex Cranes.
Although electric vehicles are rising from a small base, at the time of its IPO Adrad said there were 20 million vehicles with radiators in Australia, and there will be many years of supply to legacy vehicles.
In any case, Adrad is not just vehicles: it also supplies cooling systems for back-up power generation infrastructure for office buildings and hospitals and makes sophisticated cooling systems for large data storage centres that need to run 24 hours a day and need to keep temperatures under control. Adrad has also established a presence in other markets, including military, process cooling and rail.
Adrad is developing its Alu Fin cooling module product to support the introduction of hydrogen fuel cells into the mining sector and other heavy industry. Other major growth prospects for Adrad include power generation facilities and data centres in South-East Asia, to meet which needs the Thailand manufacturing plant is being expanded.
The FY23 result came in slightly below expectations, against prospectus estimates. While revenue, at $141.1 million (up 15%) came in above management’s guidance range of $135 million to $140 million, underlying EBITDA (earnings before interest, tax, depreciation and amortisation), at $15.6 million, was down 5% due to higher costs, and net profit, at $8.5 million, was a 1.5% increase.
There are not many analysts following Adrad, but those that do expect it to return to its issue price – which from the current price, would represent upside of abut 74%.
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