One of my favourite companies I own on the ASX is a small company called Supply Network Limited (ASX: SNL). Supply Network operates in Australia and New Zealand under the Multispares brand to provide after-market bus and truck parts.
Sound exciting?
I know, selling bus and truck parts may sound boring and lacks the excitement of hot growth stocks, like Afterpay Touch Group Ltd (ASX: APT). However, returns over a long period have been far from boring for SNL shareholders.
According to Morningstar, the average annual shareholder total return over the last 10 years is 34.5%. Whilst past returns don’t guarantee future returns, analysing past returns is useful to explain what to look for to outperform.
Supply Network has been a wealth winner, not solely attributed to management’s ability to maintain a high return on equity (ROE), but a change in the market’s valuation.
Due to its small size and the industry in which it operates, the company has gone under-the-radar which has allowed investors to purchase its shares at cheap prices.
Management Alignment
One of my top investment criteria is that the board and management are aligned with shareholders. Knowing that approximately 60% of Supply Network stock is owned internally provides shareholders with a level of comfort, in that decisions will generally be made in their best interest.
Illustrating this is managements continual investment for long-term organic growth and prudent capital management. With low levels of debt, management has consistently achieved high rates of ROE and grown EPS by approximately 15% per year over the last 10 years.
The large diversity of truck and bus vehicles in Australia and New Zealand, creates complexity and challenges for part suppliers. These industry characteristics, along with Multispares strong reputation and long-term relationships, supports high barriers of entry.
The defensive economics of the industry are attractive, with the view that companies are more likely to invest in maintaining their current fleet than purchasing new vehicles in an economic downturn.
What’s It Worth?
Currently, Supply Network shares trade at 20x trailing 2018 earnings, which is well above its historical average price/earnings ratio.
My current valuation is closer to $3, and although I am confident in the long-term prospects of the business and am happy to hold, I will not be adding to my position at the current price. But at the right price, its one to back up the truck and load up.
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Disclosure: At the time of publishing, Sam owned shares of Supply Network. But that could change at any time.
