Supply Network (SNL)

Market Cap: 17M
P/E: 9.2
P/B: 1.31
Dividend Yield: 6%

With a market cap of only $17M and thin trading volumes, a sensible investor would shy away from a company like Supply Network, which supplies truck and bus parts. Fortunately these disadvantages are minor enough not to be insurmountable, and Supply Network's niche operations generate a decent cashflow.

SNL's dividend history goes back to 2001 and at 7.9 x earnings is selling for an attractive price. Dividends are high and can be re-invested at a 5% discount.

What you do get when you buy SNL, is a steady business selling for not much more than book value, which continues to produce steady earnings. The 4 company directors are all subscribed to the Dividend Reinvestment Plan, collectively owning 17.6% of the company.

Supply Network are currently in year 2 of a 3 year growth strategy, aimed to grow organically by increasing network capacity and customer service. FY10 saw modest profit and revenue growth around 7%, which is net of a recent investment in new staff, branch expansion, and IT systems. The unaudited half year FY11 report showed a 40% increase to NPAT pcp which will be largely offset by an increase to 2nd half costs associated with new systems and the opening of the Mackay branch. Regardless, full year EBITDA has been revised upward from 3M to 3.1-3.3M.

Long-term, I see Supply Network as a business which will grow roughly in line with the economy, with potential for a bigger profit jump short-term by improving current business processes. While it lacks the prospect for spectacular earnings growth, this steady business has survived the GFC with no material impact and focusing on their core market means a more certain future.

Given the limited prospects for high growth, I plan to sell my holdings in SNL should it ever reach 15x earnings. If not, I anticipate continuing to hold this business for years to come.