Adrad doesn’t make the most glamorous products -- it’s in the business of radiators and heat exchange systems. But while it may not sound thrilling, cooling systems are absolutely critical infrastructure for everything from heavy machinery to data centres. Without effective thermal management, engines overheat, electronics fail, and operations grind to a halt. It's the kind of behind-the-scenes necessity that just quietly keeps the world moving.
The company operates through two main divisions. Its Heat Transfer Solutions arm designs and manufactures custom cooling systems for demanding applications like mining trucks, power generators, and rail locomotives. These are engineered products, often tailored to specific customers and environments, and they sit in high-barrier segments with strong recurring demand. Then there’s the Distribution business, which imports and sells a wide range of automotive aftermarket parts across Australia and New Zealand. This part of the business is more volume-driven and serves workshops, mechanics, and resellers.
Adrad’s roots go back to 1985, starting as a small radiator repair shop before gradually evolving into a full-scale manufacturer and distributor. It listed on the ASX in 2022 at $1.50 per share, with revenue at $134 million and NPAT at $12 million. Fast forward to the most recent full financial year (FY24), and revenue is up to $143 million. But profit has been cut in half, down to $6 million. The market hasn’t looked kindly on that... shares now trade around 60 cents.
But the devil (as always) is in the detail. The market is only looking at the drop in NPAT without really understanding what's behind it. And, to my mind, there's nothing structurally wrong here.
First, inflation has driven up input and labour costs, and that’s crimped margins. But more importantly, Adrad has been going through a bit of a transformation -- investing in new equipment, consolidating operations, upgrading systems, and generally dragging itself out of the “family-run business” era into something more efficient and scalable. That stuff takes time and money. It hurts margins in the short term, but it's the right kind of hurt if you're thinking long term.
The company just ate the cost increases initially, but it’s been re-pricing its contracts and passing costs on where it can. A key OEM contract was successfully renegotiated in January 2025, and that should begin to show up in the numbers from the second half of FY25 onward. Meanwhile, they’ve been consolidating manufacturing in Australia and ramping up production at their expanded Thailand facility, which should help a lot on the cost side too.
Moreover, capacity has been increased, and so long as volumes continue to grow, we should see a good deal of operating leverage emerge. Rising gross profits against largely stable fixed costs can do wonders for the bottom line!!
This is a solidly profitable business with a strong balance sheet. It even pays a very attractive dividend (7.5% grossed-up, thank you very much, which is generated off just a 40% payout ratio). Adrad sits on $7.9 million in net cash, which is about 16% of its total market cap.
On a trailing 12-month basis, the business is trading on an EV/EBITDA multiple of 2.5x (not a typo). Not terrible for a company with consistent and steadily growing revenues, positive cash flow, strong cash conversion, and loads of real assets.
As operating margins normalise, you don’t just get earnings growth, but also the potential for multiple expansion as well.
This setup is reminiscent of Stealth Group a few years ago: small, underfollowed, temporarily depressed margins masking solid fundamentals and a growth plan already in motion. Adrad isn’t flashy, but it’s building something real. If management executes and the market wakes up, the rerating could be meaningful.
The "smart" money can’t really touch it for now..it’s just too small and illiquid. But us mere "retail investors" can front-run them... assuming revenues do indeed continue to march higher and margins improve with scale.
That could take a few years, but at least there’s a tidy dividend to receive along the way.
