The wheels of good fortune may continue to turn for investors in NTD
National Tyre and Wheel (ASX:NTD) is the largest independent importer and wholesale distributor of tyres and wheels in Australia and New Zealand, and also has a presence in South Africa.
It is primarily a wholesaler but also has a chain of retail stores under the Tyreright brand. Primarily the business services commercial vehicles such as trucks and buses as well as agricultural vehicles and four-wheel drives.
2021 results were very impressive. Revenue and profits hit record levels, margins and cash flow increased and it paid record dividends.
In addition to organic growth, it has also been expanding through acquisition. The acquisition of Tyres4U in August 2020 was a transformative transaction resulting in revenue increasing from 160 million to 460 million. It has since made a couple of smaller acquisitions as well, including Black Rubber, a truck tyre business acquired for up to $26.3 million in November 2021 and Access Alloys purchased in late November 2021 for $1.12 million.
The business is well-positioned with a strong balance sheet. Net debt to equity is only 12%. Further, it is generating strong cash flows and paying out about 45% of earnings as dividends.
It is now starting to build up a stronger competitive position. While tyres are a fairly generic product, competitive advantages can be built through relationships with suppliers, relationships with customers, greater efficiency through scale and the ability to focus more intently on specific segments, again as a function of scale.
Of course, it would be unrealistic to expect everything to be rosy. Indeed, management has highlighted that it does not expect 2022 to be as favourable as 2021 and have declined to provide any earnings guidance due to the level of uncertainty particularly with the lockdowns that occurred in New South Wales and Victoria in the first few months of the year, along with the prevalence of shipping delays.
The two market analysts that provide coverage are forecasting revenue to increase by only 1% in 2022. Bear in mind, that Tyres4U was only included in 2021's results for 11 months, so on a like for like basis, this represents a small decline. Likewise, earnings per share are forecast to decline by 1.7%.
Despite this slight decline, the business is still operating at a highly profitable level with return on equity likely to be over 25%.
National Tyre and Wheel is only a small company with a market capitalisation of $172 million. The founders maintain significant shareholdings and are active in the business. Over half the shares outstanding are held by strategic investors.
The rest of the market seems to have garnered onto the idea that this is a mundane business that has carved out a niche and is executing very well. Over the past year, the share price has increased by 70%, including 18% in the last few weeks.
With the growth in profits and the sharp rise in the share price you would expect the valuation to be high, however, that is not the case. The forward PE ratio is only 8.4 and the expected dividend yield is 6.4%, fully franked.
With the potential for further margin improvement, strong demand from the commercial vehicle market and ongoing strength in the new and used vehicle markets, combined with a modest valuation, the wheels of good fortune may continue to turn for investors in NTD. But the performance is likely to be more tractor-like than Formula 1 in the near term.
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