The last FY results from Adrad weren't spectacular, but not unexpected and revealed some cause for improvement. Maybe that's far from a glowing endorsement, but when shares are on a single digit PE you dont need to expect a lot -- and it seems the market's reaction reflects this. Moreover, beyond any specific 12 month period, the business still remains sound with potential for decent growth. At least in my opinion.

So 1.2% growth in revenue is essentially flat, reflecting stable growth in the distribution segment (revenue up 4.3%) which is offset by project deferrals in the Heat Transfer Solutions (HTS) segment (a drop of 1.2% in revenue) -- which largely seem like a timing issue as they are expected to recover in FY25

The 10.9% drop in EBITDA isnt what you want to see, and while that partly reflects higher warranty claims, a big part is due to their product upgrade program -- about $1.5m worth. Excluding this, which you would hope is building the foundations for future growth, EBITDA would have been only 3.4% lower.

(Statutory NPAT was up, but largely due to favourable comps when you look at IPO related costs. Pro Forma NPAT was down 23%)

Also, the Thailand facility expansion required new equipment and a restructuring of the engineering and sales teams. These investments are expected to improve operational efficiencies, reduce costs of goods sold (COGS), and support future growth by increasing capacity to manufacture products locally rather than importing them​.

They also talked about an ERP upgrade (probably needed, but always makes you a bit nervous), as well as improved IT infrastructure.

Remember, the plan here is to transform a solid, but somewhat inefficient legacy business into a leaner, more optimised operation (something Darryl Abotomey has serious form in.)

We saw improved margin in distribution, inventory reduction thanks to improved processes, and range expansion. And customers continue to grow:

Speaking of inventory reduction, that drop in working capital helped boost operating cash flows from $7m to $14.7m (there was also a $2m tax benefit)

It was good to see the balance sheet improve -- cash increased 13.7% to $15.8m, while debt reduced 51.5% to $1.4m. The company paid out 40% of profit as a dividend, or 2.94cps. That gives a backwards yield of ~4% fully franked. Based on pro forma profit the PE is 9.3x (even after today's 9% pop).

I cant really see too much wrong with this picture. They will continue to modernise this old family business, build more capacity and capture more share. It's profitable, dividend paying and with a strong balance sheet. Yeah, capital orders will always be lumpy, but this is a proven business that has operated across many cycles, and I think low double-digit profit growth is absolutely in play for the next few years. (perhaps mid single digit revenue growth, boosted by efficiency gains -- and there's a good deal of low hanging fruit here)

I know it sounds a bit like a PE-type play, which is more about financial engineering rather than enhancing operational effectiveness and product-market fit, but based on what Darryl said when he spoke with us, this is much more about operating smarter and more efficiently, while still remaining focused on delivering value for customers.

Happily Held.

Radiators aren't a sexy product, but I must say Darryl did a good job of building some enthusiasm for me.

This is a profitable company with a well established presence and some real potential for genuine efficiency gains. And having followed Darryl since the Bapcor days (and Burson before that), I think he's definitely someone who can help drive those improvements.

Some notes from the meeting:

- Adrad has two main business segments: manufacturing and supplying radiators and other heat transfer solutions, and distributing automotive parts for the aftermarket.

- The company has a long history, with one arm celebrating 50 years and the other 40 years in business. They are the sole supplier of radiators for Kenworth trucks in Australia since 1974.

- Adrad manufactures bespoke cooling solutions for various applications including trucks, trains, data centers, power generation, and mining equipment. 

- The company is developing new aluminum radiator technology which is cheaper than traditional copper/brass. This requires extensive engineering and testing to get the specifications right for different operating conditions.

- Aftermarket parts are a significant portion of sales. Adrad aims to be the go-to supplier of cooling parts for the automotive aftermarket in Australia.

- The company is focused on improving inventory turns and return on invested capital. Current inventory levels are considered too high.

- Manufacturing is being shifted from Australia to a lower-cost facility in Thailand. This will improve margins while still allowing them to service the Australian market. Asian markets provide an additional growth opportunity.

- Electric vehicles are not seen as a major threat in the foreseeable future given the slow turnover of the car parc. Adrad is developing cooling solutions for EV and hydrogen applications.

- Some of their bespoke solutions have very long sales cycles of 5+ years from initial development to volume production. Securing the first major customer is key.

- Corporate costs are being tightly controlled as the company grows by keeping most staff in the business units rather than centralizing.

Shares seem decent value too. I'll post a rough valuation seperately.