If asked to name some retail stocks on the Australian market few investors would have any problems with the obvious answers of Woolworths (WOW), Coles Group (CGJ), David Jones (DJS) or more specialty plays such as Billabong (BBG) or Just Group (JST).
One stock few in the market would know was even a retail player is Allomak Limited (AMA), which Patersons rates as a Buy. There are two main reasons the company is virtually unknown, the first being a market capitalisation of just over $50m at current levels.
The second reason is the company operates primarily in the wholesale automotive aftercare market, meaning it is in businesses such as transmissions, brakes and smash repairs.
The latter business is one that has Patersons excited as it notes the company has just acquired Mr Gloss Holdings, which gives it a market presence and the opportunity to effect some consolidation in what is a very fragmented business.
It has also acquired the business on attractive terms, Patersons estimating the purchase has been set on an EBIT (earnings before interest and tax) multiple of 3-5 times, so it will be earnings accretive immediately.
This boost to earnings has the company set to do better than current guidance, which is for EBIT for FY08 of at least $10m, revised up from its previous guidance of $8.5m. The broker suggests this is still far too conservative and is forecasting $13.5m, while it has also lifted its net profit forecast for FY08 to $8.7m from $7.9m.
Even allowing for the issue of shares to Mr Gloss as part of the terms of the acquisition this puts the stock on a P/E (price to earnings ratio) of about 6.4x for FY08, which for Patersons is good enough for it to be its number one pick in the retailing sector.
Those chasing yield will also be attracted to the company, as on the broker's numbers FY08 dividend is expected to be 4.2c, rising to 4.9c in FY09. This puts the stock on a FY08 yield of around 7%, fully franked.
The market is clearly picking up on the stock after the Mr Gloss acquisition as Allomak shares today are up by 9% or 5c to 60c as at 2.40pm, which is a new year high for the stock.
No brokers in the FNArena database currently offer research on the company.