Clover Corp could grab a slice of the huge infant formula market in China. Picture Getty
Experts
Taylor Collison has initiated coverage on aluminium specialist, Capral (ASX:CAA), with an Outperform rating (no target price).
As Australia’s largest aluminium extruder, the $155m market-capped Capral dominates the domestic market in both capacity and footprint.
With capability to extrude around 65,000T annually through a six-plant network, the company’s ability to service large scale customers nationally, and in bulk, provides a significant advantage over smaller competitors.
Capral services a range of customers with end markets split across the residential building, commercial building, and industrial sectors. Alongside its manufacturing operations, Capral maintains an extensive distribution network supplying window and door fabricators, general industrial users, and distributors through in-house sales teams.
Taylor says Capral operates in a cyclical industry experiencing constant margin pressure from low-cost importers.
But with operating leverage, scale advantage in production, an increasingly diversified distribution network, and enviable balance sheet, the broker believes that Capral is well placed to weather the storm.
“Sustained margin benefits from expansion of product offerings and investment in plant efficiencies appear set to continue,” said Taylor Collison, adding that Capral is a mature player in an established market.
“Capral’s organic growth opportunities appear nominal at first glance. We believe this belays the underlying opportunities. Considerable untapped scope exists in industrial markets,” said Taylor Collison.
The broker believes that industrial volumes will likely avoid a rapid drop in FY24, bolstered by thematic tailwinds including green energy, cladding rectification, and new truck builds.
Capral is also primed to gain traction in the under-penetrated 15,000T solar market through its Low Carbon Aluminium offering.
“Additional headway in the company’s building systems offering and exploration of the thermally broken product space (touted at 10% of residential volumes) should consolidate the residential sector whilst expanding margins,” said the note from Taylor.
From a financials perspective, Capral also has ample headroom to pull away further from its leading market position. The company has a zero net debt position, $41m of cash, and a $80m financing facility which could provide opportunities to strengthen market dominance.
“A healthy balance sheet allows Capral to profit as smaller competitors feel the oncoming macro squeeze more acutely,” said Taylor.
The key risk to Capral’s business is the fluctuation in aluminium prices.
“To the extent that price variations cannot be passed on to customers, Capral is exposed to movements in the price of aluminium,” said Taylor Collison.
Taylor Collison has also slapped an Outperform rating on Clover Corporation (ASX:CLV), with an average target price of 95c (versus current share price of 81c).
The $135m market capped Clover is the world leader in the manufacture of encapsulated Docosahexaenoic Acid (DHA), predominantly sold to infant formula manufacturers.
DHA is an Omega-3 fatty acid that is a primary structural component of the human brain, cerebral cortex, skin and retina. It is found in breastmilk and when used as a supplement, DHA has been shown to help brain development in babies and children.
Minimum amounts of DHA in infant formula are mandated in many jurisdictions globally, however high levels of DHA produce a fishy odour/flavour, which is undesirable.
Taylor Collison believes that Clover’s competitive advantage is its unique encapsulation technology, which enables higher levels of DHA to be added through the dry mixing process without the undesirable fishy smell/taste.
The technology was developed by CSIRO and patented in 1999, with CLV holding the exclusive license to the technology. As a result of the CSIRO patent expiring in 2019, CLV brought its research and development in-house. CLV now holds its own unique intellectual property and patents relating to micro encapsulation.
In terms of potential demand, it’s estimated that the total global market for infant milk is $36 billion.
The Chinese infant formula market commands 50% of the world’s market – which is 89 billion renminbi or around $18 billion.
“DHA is around 3% of the advertised price of a tin of infant formula. Therefore, we estimate the total market for DHA in infant formula is approximately $1.1 billion,” said the note from Taylor.
“With many jurisdictions moving to a 15mg/100kcal DHA requirement and powdered form needed to avoid a fishy flavour above 8mg/100kcal, we have estimated the total market for CLV products at $500m.”
CLV has also been a consistent payer of dividends, and has not needed to raise capital in order to fund growth.
“These are all positive attributes for potential investors.
“We continue to believe that once back at scale [from Covid], CLV will reach return on equity percentages in the mid-teens.
“Based on our estimated FY25 NPAT of $9.1m and a ASX300 market multiple of 17.3x, we have a target market capitalisation of $157.4m or $0.95 per share,” said the note from Taylor Collison.
The views, information, or opinions expressed in the interview in this article are solely those of the broker and do not represent the views of Stockhead.
Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.
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