CLOVER (CLV): ASX Small Cap Share

Almost seven years ago we covered what was then a little known ASX small cap share that was an iinnovator in the world of pill encapsulation.

Patience brought BIG Returns for ASX Small Cap Investors

Almost seven years ago we covered what was then a little known innovator in the world of pill encapsulation. We talked to management a number of times to understand the biology and potential for the Sydney based group. Having suffered a decline from around 30 cents through 2012 to below 20 cents at the end in 2015, after a market wide health scare dampened demand. Under the Radar Report twice recommended investors invest at below 20 cents. The stock price is now FIFTEEN PLUS TIMES what it was in that period when sentiment was at its worst!

We even repeated our Spec Buy call as recently as September 2017, at 46 cents and this recommendation has shown the best annualised returns. The Under the Radar Report portfolio managed to take a triple from Clover’s run, on a small stake, but is disappointed that we sold all our stock too early (se la vida).

Undervalued Stocks on the ASX

Clover illustrates the potential for drastic undervaluation in some of the companies we cover, and it is key to maintain a relatively clear head about how valuations can change relative to sentiment. The share price doesn’t always reflect what’s really going on.

FY19 results were very positive, showing a 22% increase in sales revenue to $77m, and an increase of 33% in NPAT to $10.1m, although the balance sheet is now net debt rather than the net cash of the past few years. A final dividend of 1.75 cents was declared, for 2.38 cents total. This was due to a more than $10m investment in a 35% interest in a new NZ spray drying facility operated by Melody Dairies. This capacity won’t be available until 2021, so there may be the potential for a slowdown in growth before that facility comes online.

Clover’s business has long lead times as manufacturers of food products extensively test the ingredients that Clover supplies. Its end markets have now gone well beyond infant formula, to include adult products like health bars, protein powders and gummies. There are a number of new business lines and potential opportunities developed over FY19 that should deliver growth through FY20, although the company pointed out that it was expecting some margin compression due to increased competition, despite continued growth in its market share in FY19 in infant formula.

Under the Radar Report Small Cap Rating:

All the elements for long term demand growth are in place, and Clover is well positioned to deliver on its potential. But we believe that the valuation remains stretched with a P/E over 40, and any slowdown in growth may cause a problem. Having taken profits a couple of times, we hope some subscribers are in a position to run the rest of their holdings on the house, and if the price does fall, perhaps another buying opportunity will emerge. HOLD.

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