Overview:

Atlas Pearls is a South Sea Pearl Farmer with 7 farms based in Indonesia. The Pearls are sold to trade and consumers. During COVID they pivoted to a new channel of sales through online direct to consumers while trade shows were not able to occur. This has created additional sales that have in recent times have enabled the company to operate on a profitable basis. This purchase is based on a value buy/bet with Atlas Pearls trading at very low single digit multiples, if current profitability can be maintained a high return should be expected in terms of dividend yield (if money is returned to shareholders). While the potential return appears very attractive, given the agricultural nature of the business it is not without high potential risk.

Main Thesis Summary:

• Value play. Company is undervalued at it's current value based on the profitability. This company will never operate at a high multiple but at current profitability provides highly attractive "owner earnings" in terms of return. The asset backing is strong reference to the valuation, though it must be remembered that the book valuation could be considered as "on paper" only given the assets could be destroyed through one natural disaster event.
• Has demonstrated free cash flow paying down director loan which was used to get the company through the initial COVID downturn. 
• Cheap valuation provides a margin of safety.

Positives:

• Strong insider ownership.
• Base valuation is very cheap:
• EV/EBIT = approx. 2.5x
• PE = approx. 4x.
• ROE 20% over past 2 years
• NTA/share = 6.4c
• Net cash

Negatives/Risks:

• Some of the management works "part time".
• Indonesia base.
• Agricultural related risks.
• Natural disaster event could wipe out assets.
• Very illiquid stock.
• COVID tailwinds subside.
• Insiders run the business for their benefit only.
• Australian based management with ops in Indonesia.
• The pearls being grown run on a two-year cycle.
• Market price takers. If value of pearls decrease margins will be hit.

How I expect this will play out:

If things went wrong:

• Slipped back to become unprofitable and sell.
• Natural disaster

If things go right:

• Company continues at current levels of profitability. 
• Market values company at a higher multiple as a result. Or
• Insiders distribute earnings to shareholders providing a high yield return.

When to get out:

When the following KPIs indicate something might be wrong:

• The number of available pearls keeps falling.
• Profitability is not maintained.
• Risks above are realised and will have a significant impact.
• Company doesn't return profitability to shareholders.