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September Newsletter

Company Profile, Peter Lynch's strategy and NZX Partnership.

Company Profile: DGL Group Limited

Source: Investify financial insights dashboard (as at 07/10/21)

Business Summary

DGL Group Ltd. is a fully integrated, end-to-end specialty chemical supply chain management company. The company was founded by Simon Henry in 1999 and is headquartered in Auckland, New Zealand. Operating across Australia, New Zealand, and internationally, DGL serves over 1,300 customers and offers specialty chemical formulation and manufacturing, warehousing and distribution, waste management, and environmental solutions. The company was listed on the NZ stock exchange on 24th May 2021 for an IPO offering of $1 per share.

Investment Merits

Strong growth in revenue, EBITDA, EBIT, and NPAT, with results, also exceeding prospectus forecasts
Strong balance sheet, with net cash of $43.8 million
Expect to exceed prospectus forecast for FY22
Completed few acquisitions since listing and these new businesses are expected to increase the revenue and profit contribution
Managed to increase Operating cash flow, Earning per share and a growing Free cashflow will open the possibility of future dividends
CEO & Founder Simon Henry has the biggest shareholding showing a vested interest in growing the company

Investment Risks

Bottom-line profit increased significantly due to the one-off other income addition which is primarily a $40.3 million debt forgiveness by a related party
The company has been on an acquisition spree following capital raise and hopefully do not end up paying too much for new acquisitions in the future following the strategy of growth by acquisition
As new businesses are acquired, the value of intangible assets will increase which cannot be cashed out as they are primarily goodwill
Currently, the company has got a higher Price to sales ratio than its peers but is lower than peers in terms of Price to book and Price to earnings. Ideally, all three should be lower than peers

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Peter Lynch's Investing strategy

During his tenure at Fidelity between 1977 and 1990, renowned investor Peter Lynch helped to grow the assets of the Magellan Fund from $18 million to $14 billion. Here are some of the concepts he widely talked about, which made him the icon of investing.

Stock Familiarity

If you follow Lynch's work, you may already know this famous mantra."Know what you own, and know why you own it." Taking this relatable approach can lead you to great retail stocks before analysts catch on because you know about certain business niches than an outsider.

Company Size Matters

Peter Lynch's quote "Big companies have small moves; small companies have big moves" reveals that small to medium companies are generally better stock picks than large ones because they have more to gain.
If you expect the company to rise in value, one of three things must happen:

The company expands through organic sales and store growth.
The company's earnings, sales, and profit margins improve.
The market undervalues the stock, or its quality is not fully seen.

Good small companies often fit two of these factors. This is not to say that you shouldn't buy large-cap retailers, but rather that you should not expect the same things from them. In this case, being richly valued but having limited growth potential is a bad mix.

On Avoiding a Stock

"If I could avoid a single stock, it would be the hottest stock in the hottest industry." They may see huge growth at the start but burn out quickly as investors realize that they do not have the earnings, profits, or growth potential to back the buzz.
Peter Lynch's investing strategy pick a stock if it has these things in common.

It's in a stable industry that won't change or attract fierce competition.
It is growing its earnings at a level that can be sustained (10%–25%).
It has a niche and happy clients.
It is under the radar. You won't hear many analysts bragging about it.

Summary

While you can't expect to match Peter Lynch's performance, you can improve your stock-picking abilities using his strategies. You still have to do your research and factor in both the financials and your instinct to choose the stocks that you think have the largest upside.

Inside Investify..

We have been working with NZX for the last few months and are now very excited to announce their support for Investify. We are stoked to be a part of the NZX Investor Education Resource Centre.
It is indeed great to see that the market operator showing all the support to empower the retail investor and encourage the new breed of Kiwi investors (as well as the existing ones) with many initiatives.

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