SMALL CAP IDEAS: Laser-guided equipment maker Somero Enterprises rides the e-commerce boom as demand for warehouse space rockets

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Somero Enterprises is a former stock market star that has emerged from a sticky patch to regain former glories.

The company is a manufacturer of laser-guided equipment that is used to level concrete.

For most of the previous decade, it grew both revenues and earnings at a prodigious rate and shareholders were rewarded with some mind-boggling returns.

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Between the beginning of 2012 and May 2018, shares rose from 11p to 395p, after which the shares traded sideways for a year or so until a profit warning in June 2019 – ascribed at the time to miserable weather conditions in the USA – had the share price dropping like a concrete parachute.

The US company’s home market is its main source of revenue but it operates globally, with customers in more than 90 countries.

Its technology enables concrete flooring contractors to install concrete slabs more quickly, using fewer operatives and just as importantly ensures the concrete slab is flat.

Somero’s customers tend to specialise in commercial projects, so it is not a company that is dependent on the housing market; rather its fortunes are, instead, tied more to how many warehouses, factories, car parks, shopping centres and the like are being built.

After several years of strong top-line and profits growth, turnover and profits fell back in 2019 and 2020, for which the company’s share price was severely punished. Few things fall faster than a glamour stock that goes ex-growth.

The company appears to have rediscovered its mojo, however, with revenues in the first half of 2021 rising to US$64.4mln from US$35.3mln the year before led by a “very strong and highly active US market”.

Adjusted underlying earnings (EBITDA) soared to US$24.6mln from the previous year’s US$8.7mln. The board raised full-year guidance and now expects revenues will be around US$120.0mln, adjusted EBITDA will be in the region of US$ 42.0mln, and year-end net cash will total roughly US$ 36.0mln.

Previously, the company had expected revenues of around US$100mln and adjusted EBITDA of circa US$36mln. The company generates lots of cash and is not shy about distributing dividends to shareholders, albeit in dollars and cents. In 2020, it paid 16.81 cents in regular dividends plus a supplementary dividend of 18.1 cents.

The amount of the supplementary dividend is set by a formula; until recently if the year-end net cash total was more than US$15mln it would distribute 50% of the excess but the bar has recently been raised to US$20mln, as the company wants to retain the flexibility to invest in long-term growth initiatives.

This year, the board has declared a nine cents per share interim dividend representing a 125% increase compared to the first half of 2020, an increase commensurate with the growth in profits. Net cash at the end of June stood at US$16mln.

According to Jack Cooney, chief executive officer, the cash pile leaves the company well-positioned to make investments that will drive long-term growth in both new and existing markets and different products.

The company introduced two new products in 2020 while this year it has unveiled one new product, the Somero SkyStrip, a plywood sheet stripping machine that reduces lost labour time due to common injuries incurred during the shoring removal process.

The company also finished the development of a new product that extends its reach to another slab-on-grade market segment currently unaddressed by the company’s product offering, which is anticipated to be released at the end of 2021 or early 2022. So, there is more to the company than concrete. The September interim results update revealed three of the company’s five international regions saw year-on-year revenue growth.

Trading in the US during the first half benefited from customer efforts to catch up on projects previously slowed by COVID-19 restrictions as well as from demand for new warehousing required to keep pace with growth in e-commerce transactions.

The only fly in the ointment appeared to be supply chain difficulties but the company is not alone in experiencing these. The response to the coronavirus (COVID-19) pandemic by many countries has been to increase spending allocated to infrastructure, and this ought to benefit Somero in those markets.

The shares, languishing at around 278p a year ago have doubled in the last year but the explosive growth in e-commerce has seen a boom in the warehouse construction industry that is showing no signs of stopping, which means investors have not necessarily missed the boat and there is still time to get on board.

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