With a market capitalisation of just $264 million, Nick Scali Limited (ASX: NCK) is considered a micro-cap. It falls into the category of stocks with a market capitalisation between $50 million and $300 million. Today we'll look at why I think it's one of the best micro-cap investments on the ASX.
Nick Scali is an Australia-based company engaged in the sourcing and retailing of household furniture and related accessories.
The company operates two brands: the Nick Scali brand with 34 stores and Sofas2Go with five stores.
It offers a range of products, including dining chairs, dining tables, dining buffets, regular lounges, modular lounges, recliner lounges, entertainment units, television units, coffee tables, side-tables, recliner chairs, bar stools, outdoor furniture and floor rugs.
It operates stores in New South Wales, Queensland, Victoria, Australian Capital Territory (ACT) and South Australia.
One benefit of investing in a micro-cap stock is that its price can move very fast and make you money quickly. This ability to move fast is also one of the risks in micro-caps and can make them much more hit and miss.
Micro-caps don't suit everyone; especially given many do not pay dividends, and remember that past performance is no guarantee of what a stock will do in the future. They are more suitable for investors with a high tolerance for risk and in the growth stages of their portfolio.
Here are ten reasons why I think Nick Scali should be in your portfolio:
1 Revenue trend
Its revenues are positive and growing in the right direction (2013 was an exceptional year):
| Amounts in Millions | 2011 | 2012 | 2013 | 2014 |
| Revenue | 100 | 109 | 127 | 114 |
2 Net profits trend
Its net profits are positive and growing in the right direction (2013 was an exceptional year):
| Amounts in Millions | 2011 | 2012 | 2013 | 2014 |
| Net Profit | 11 | 9 | 16 | 14 |
3 Return on equity (ROE)
Its return on equity has averaged 48% since 2005. Here's the past four years:
| 2011 | 2012 | 2013 | 2014 | |
| ROE % | 49 | 34 | 38 | 37 |
4 Debt
It has very little debt compared to its cash:
| Amounts in Millions | 2011 | 2012 | 2013 | 2014 |
| Cash | 17 | 20 | 26 | 35 |
| Debt | (3) | (3) | (6) | (6) |
5 Margins
It has great operating margins and net profit margins:
| 2011 | 2012 | 2013 | 2014 | |
| Operating Margin % | 15 | 10 | 13 | 13 |
| Net Profit Margin % | 11 | 8 | 12 | 10 |
6 Cash flow
It has had positive free cash flow in the past 10 years. Here's the past four years:
| Amounts in Millions | 2011 | 2012 | 2013 | 2014 |
| Operating cash flow | 14 | 12 | 19 | 22 |
| Capex | (10) | (2) | (9) | (3) |
| Free cash flow | 4 | 10 | 10 | 19 |
7 Earnings per share (EPS)
With the exception of 2012, its earnings per share have grown significantly and are forecast for strong growth:
| Amounts in cents | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 |
| Earnings per share | $0.14 | $0.11 | $0.20 | $0.18 | $0.20 | $0.23 |
8 Dividends per share (DPS)
Nick Scali's dividends per share have grown and are forecast to continue to grow. The dividend yield is around 4-5 per cent, and is fully franked. The company typically pays out 70-80 per cent of its earnings as dividends, which is sustainable due to its positive free cash flow:
| 2011 | 2012 | 2013 | 2014 | |
| Dividends per share (cents) | $0.9 | $0.8 | $0.12 | $0.13 |
| Dividend Yield % | 5.29 | 6.15 | 4.15 | 3.94 |
9 Competitive advantage
Managing Director, Anthony Scali admits his business is unique in the context of the broader retail segment in that 80 per cent of its revenue comes from selling sofas, and the average spend by his customers is $3,000.
"With a purchase of this type and size people want to come in and sit in it before they buy," he says.
Nick Scali only sells its own brand, which Scali believes further predisposes the business to bricks and mortar retailing.
"If you are selling other brands and have a bricks and mortar business, you have to compete with other retailers who don't have their own stores. That's what's hurting other retailers, especially electronics businesses," he says.
10 Key highlights H1-15
According to Nick Scali's half year report released in February this year, highlights include:
Record net profit after tax increased 28% on the previous corresponding period.
An 8.3% increase in sales revenue to $77.6m for the half year.
Two new Nick Scali stores have opened since June 2014.
Plans for expansion into Western Australia are well on track with three new Nick Scali stores scheduled to open during H2-15.
Lease commitments for a further two new eastern states stores, which are planned to open in Q4 of FY15, are nearing finalisation.
Summary
Nick Scali remains one of the best growth and dividend stocks on the ASX, even if it is a micro-cap.
