Small Cap in focus: GAP.ASX – Gale Pacific

24/09/2019 - Sam Green

Australians are inherently familiar with shade cloth: the technical fabric covers our playgrounds, carparks, and other public spaces; increasingly it is also covering our balconies, patios, and private residential spaces as well.

Shade cloth also enjoys popularity in parts of the Middle East, where the intensity of the sun makes direct exposure unpleasant.

Despite the popularity at home, the market for shade cloth or sail shades is in more of an emerging phase overseas. Consumers in the US, Europe, and South America are still getting educated on the benefits of these fabrics – and in these areas the market for shade and sail cloth products still has a fair distance to potentially expand.

Shade cloth has the benefits of being easy to install, light, strong, and cheap relative to rigid sources of shade cover. Increasingly its also being seen as an architectural feature, easy to shape to fit the needs of a building’s designer.

Fortunately for Australian investors, we have the ability to invest in one of the leading manufacturers and marketers of shade fabrics, through the ASX-listed Gale Pacific (GAP.ASX).

Recognised as a global leader of research in the advanced polymer fabrics, Gale is a substantial player in its space, employing over 600 people and with production facilities in Australia, China, and the US. They sell their products in Australasia, the Americas, Japan, Europe, the Middle East, and a number of other export markets.

They work predominantly with sail and shade cloth, but also produce high-tech fabrics for the agricultural, architectural, industrial, horticultural and mining sectors. Including waterproof lining fabrics and coverings.

The appeal of Gale Pacific is that they are an Australian manufacturing success story, that is trading at a very attractive valuation relative to the results they’ve achieved. The stock has reported consistent profits and is currently trading at nine times its earnings (P/E: 9). It has a dividend yield of 6.9 percent and is trading below its book value.

Earnings growth has been fairly flat across the past few reporting periods, but this is after the company has done a fair bit of work in getting rid of non-synergistic products.

Gale is currently doing a share buyback, which appears to be a positive move given the current valuation, which is relatively low compared to ASX peers – especially the higher market capitalisation companies that fit into the larger indices.

Those larger market cap companies see the benefit of index buying in keeping their share prices high, but this also causes their valuations to become extremely stretched. The large caps will likely also suffer from disproportionate selling should a broad-based sell down occur. This is why we like looking for value in the small-cap space – because you can find low valuations for highly attractive companies.

If you are interested in hearing more about small-cap companies that might fly under the radar, please click here.

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