Valuation based on 9c EPS and 8% growth rate for next 5 years with a PE of 12. (Limited history as it's a newer listing but PE of 12 is well below the market average and the bottom end of the range for comparator companies.

Why would I own it?

# Founder led and very experienced Board for the current size of the business, with Directors who have recently been CEO's at other very successful ASX listed companies.

# Manufacturer and distributor of cooling systems for auto and industrial use, with over 7000 customers. They have two divisions. One is Aftermarket that supplies repairers, mechanics and franchises including Natrad who they acquired 20 years ago of “Nip into Natrad” fame!

The other division supplies Original Equipment (OE) manufacturers for their heavy vehicles including CAT, Kenworth and Hitachi. The industrial customers include Rail networks, power generators, mine sites etc.

Revenue is about 50/50 between the two divisions but the OE division is twice as profitable as the aftermarket division.

# Have their own in house R&D and manufacturing facilities including two in Thailand that were purpose built, to ensure they are well prepared for future growth and to lower costs. They also have 16 warehouses across ANZ to service Aftermarket customers.  

# This manufacturing facility investment has impacted FY23 and FY24 profit but should see a quick improvement in FY25 as the spend drops.

# Planning to expand in South East Asia from Thailand base, especially within Industrial segment.

# Have been adding new talent to the management team, who can hopefully leverage their experience and manufacturing capabilities.

# Low debt to equity of 30% and healthy cash position despite recent investments in manufacturing. ROE/ROC is only 6% and 8% however I would expect that to double in FY25 as capital expenditure drops while revenue grows.

# Gross margin and net margin have both been improving nicely for a few years in a row now.

# MOS is good at 90c share price in Mar 2023, on a trailing PE of 10. Expecting high single digit p.a. earnings growth for the next 5 years, so should be able to achieve our 15% p.a. return target with a little multiple expansion. Paying dividends at approx. 35% payout ratio.

# There are quite a few examples of companies like this doing well in Australia after listing and adding talent – for example ARB, PWR Holdings, Supply Network and Bapcor which have all been solid multibaggers for early investors.

What to watch?

# Founder or Board members selling down or leaving early.

# Profitability and ROE/ROC not improving significantly in FY25 if revenue grows as expected.

# Loss of major customers in the OE division.

What about the risk in the move to EV’s and the impact on traditional cooling systems for automotive business?

They are aware of this and plan to address as follows –

The very popular SUV’s (Ford Rangers, Toyota Hilux, Mitsubishi Triton, etc.) are likely to move towards plug in hybrid technologies meaning that a conventional internal combustion engine will still be utilized along with battery power.

Large horsepower engines (trucks etc) are moving towards hydrogen as a fuel source and the OE team is already working on multiple projects for cooling hydrogen fueled engines.

Hydrogen fueled engines present a significant opportunity for the OE business as the demands on the cooling systems are greater than for conventional diesel or gas fueled engines.

EVs will continue to require service parts (heaters, condensers, evaporators, compressors brakes, filters, etc.) as well as thermal management systems for the battery packs all of which are traditional products supplied by Adrad.