Should you buy, hold or sell Redox?

The largest IPO on the ASX in 2023 was a family business founded by a migrant back in 1965.

Redox (ASX:RDX) listed in July 2023 with a market capitalisation of $1.3 billion. The market capitalisation has now grown to $2 billion. During the IPO it raised $402 million.

The business is dominated by the Coneliano family who hold about 50% of the shares on issue.

The CEO is Raimond Coneliano, grandson of founder Roland who died in 2017. Richard Coneliano is the chief operating officer and largest shareholder, and Renato Coneliano is an executive director. Three of the six board members are members of the family.

Effectively, Redox is a middleman.

It sources more than 1200 product groups from more than 1000 suppliers and distributes them to more than 7000 customers. It imports and distributes chemicals, ingredients and raw materials with products across a wide range of industry segments.

It is headquartered in Sydney and has more than 100 stock locations.

85% of sales are generated from Australia with the remainder coming from New Zealand, USA and a sliver from Malaysia.

North America is a particular focus for future growth. It was the only region to experience positive revenue growth in the last year.

Growth in written invoice sales in North America was 36% with strong volumes growth but muted revenue growth due to price headwinds. It is focused on expanding its North American footprint.

Overall revenue fell 9.6% in FY24. This was due to pricing pressure as prices continued to normalise following the disruptions caused by COVID and the subsequent supply chain crunch.

Despite the fall in revenue, Redox managed to produce an increase in profits driven by improvements in gross profit margins which increased by 2.6%.

It optimised its product mix and managed its costs to generate profit growth. One of its competitive advantages is its in-house software system which gives it an edge managing customer requirements and inventory levels.

As most of their products are imported, sea freight costs are an important factor. During COVID, sea freight costs accounted for up to 10% of selling costs. This stabilised in early 2023 but began to rise again in late 2023 due to conflicts in the Middle East. It is generally able to pass on increased freight costs to customers.

Redox is a high-quality business with steady growth, good profit margins, high profitability ratios, a strong balance sheet and good cash flow generation.

Over the past 30 years, revenue has grown at a compound annual growth rate of 10.84%. To maintain a growth rate above 10% for 30 years is quite amazing. Return on equity is 23.6%.

The balance sheet has cash of $179 million including $123 million in term deposits and only $13.6 million in borrowings. Cash generation is strong with free cash flow comparing favourably with earnings per share.

The share price has risen 50% from the $2.55 float price in July 2023 which has put pressure on the valuation metrics although they are not yet at excessive levels.

The stated dividend payout ratio range is 60% to 80% and 73% of earnings were paid out last year. The current forecast dividend yield is 3.6%, fully franked.

Despite only listing recently, Redox is a mature company with a 60-year history. But growth has remained strong over the recent past and it is still actively pursuing further growth opportunities.

In addition to organic growth, it is investing in offshore expansion, especially in North America. It also plans to use its flexible balance sheet to fund future acquisitions. During FY24 it acquired two additional businesses in ANZ, Optigen Ingredients and Element Raw Materials.

In July 2024 it acquired Oleum, a leading Australian distributor of surfactants and specialty chemicals and is currently in the process of acquiring AusChem a leading distributor of solvents and specialty products.

While management did not provide specific revenue or earnings forecasts for the 2025 financial year, it did note that it anticipates volume growth at or above the historical average and at the annual general meeting it revealed that this was the case for the first quarter.

It also believes that price deflation and de-stocking are largely complete. Gross profit margins may ease towards long-term averages as a result of expansion in the US and commodity sales volume increase.

Founder led businesses can be attractive as there is strong alignment between management and shareholders.

Redox represents a well established family business that - while still controlled by the family - is now accessible to all investors. Its first 16 months on the market have been very profitable for those who got onboard early.

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