A cheap microcap cooking up value

Shriro is an exciting prospect trading on a single-digit earnings multiple, no net debt, and an enticing dividend yield of around 9% fully franked. So while it appears cheap it also has a growth strategy that has the capacity to see a big earnings jump and a PE rerate providing 100% upside potential over the next year or so.

Shriro has been operating for over 30 years but only listed in mid-2015 at $1 a share. It has 2 key divisions:

1. It has the exclusive licence to distribute Casio products in Australia and New Zealand. This range includes the popular G-Shock watches and the range of Casio calculators that are used throughout Australian schools. This business is solid, profitable yet low growth.
2. The other business involved owning and distributing kitchen appliances including its own brands such as Omega and Robinhood. While this business is profitable, most of this division is low growth except for one exciting opportunity: Everdure barbecues.

The importance of innovation

Shriro has spent several years working on a new and improved, world-beating, charcoaled fired barbecue.  (Think Barbies meet Apple) The design was worked through with world famous chef, Heston Blumenthal. Heston will also be the brand ambassador as the products are marketed worldwide.

The new range of barbies were only brought to market in the last 6 months and sold well in Australia but the real test will be to see how they are received in the upcoming northern hemisphere summer. Europe is first this year and the US we hope will see the products next year. The potential upside is very big as the world market for barbies is over $8bn p/a. The product is attractive, functional and is passionately represented by a world famous chef. Fortunately the price we are paying doesn’t demand any success from the barbie strategy. We get it for nothing.

On an historic p/e of 8.3x we receive an earnings yield of 12%. Last year SHM dividends totalling 10c fully franked providing a fully franked yield of 8.7% or 12.4% grossed up for franking. In an age of low rates and a need for income, this is attractive.

If we look into the current 2017 (Dec) year, based upon my forecasts we get a p/e of around 7.5x and a div yield of 9% fully franked or 13% grossed up.

The balance sheet is clean with no net debt.

So in summary, this is a well-run, small cap in a challenging space but with a long-term track record of profitability and innovation. The dividend yield is terrific and there is substantial potential upside provided by a global strategy that we are not paying for in the current price. I would be surprised if we don’t enjoy satisfying investment returns from these prices over the next few years.

Heston Blumenthal with a couple of the Everdure Barbies.

Good investing,

Nigel Littlewood

14^th Mar 2017