It's not often you find a small growing company trading at less than 7 times earnings, but authorised Indonesian Apple reseller Story-i Ltd (ASX: SRY) is just that.
Of course, there aren't many people looking at Story-i, because not many people can buy shares in the company — and its market capitalisation is tiny, at under $10 million.
At present, it is so illiquid that every trade makes a difference, and it would be very difficult to accumulate a position without moving the price.
However, this only goes some way to explaining why it is trading on such a low multiple of earnings. Indeed, because it is a small foreign-based company it is quite possible that some market participants would be skeptical of the company's corporate governance. After all, it doesn't matter how cheap a company is, if shareholders won't receive fair treatment.
Yet there are plenty of reasons to believe that Story-i will take an honourable path. After all, the company is majority owned by established Indonesian property developers, so there is some reputational risk attached to poor treatment of ASX investors. On top of that, the company's accounts have their negatives, and a weak balance sheet sits in contrast to some of the less reputable ASX companies — who seem to have plenty of cash, but no desire to pay it to shareholders.
In fact, Story-i is yet to raise capital on the ASX and need not have listed here, but for a desire to impose transparency and high corporate governance standards upon itself. To quote the annual report:
"the Company listed on the ASX to provide improved visibility with a high standard of corporate governance as it deals with well-known international brands like Apple, Samsung, Lenovo and Citrix. The ASX listing also serves as a platform for the Group to grow organically in Indonesia and across the South-East Asian region."
To me, this suggests that the company has more to gain by playing fair and by doing the right thing, so I purchased a very small parcel of shares (some time ago).
Importantly, investors should note that the company has outlined it intends to open at least 7 more stores in the current financial year. Such expansion is rather capital intensive, and new stores do not start making profits immediately. Rome wasn't built in a day.
Furthermore, distribution agreements like the company's agreement with Lenovo can also be rather capital intensive, depending on the terms of trade required by both suppliers and end customers.
As a result, it's not entirely surprising to see that the balance sheet shows a bothersome build-up of receivables. With generally reliable counterparties, the directors may well be confident of being paid, but that won't help the company rectify its rather weak cashflow position. These factors create a strong incentive for the company to issue shares to raise capital.
It may take some time for the Story-i investment thesis to be proved or disproved, and much will depend on how the company funds its growth. Having said that, at current prices, the company looks very attractive given its growth ambitions and opportunity set. Yet, the directors have not made it clear when the company is likely to become cashflow positive (and when they are likely to pay dividends.) This uncertainty may discourage investors from buying shares.
Within the micro-cap sector of the ASX, a small but regular dividend payment builds trust and appeals to Australian investors — who (perhaps unfairly) expect most companies to pay a dividend if they can. This can be seen in successful growth stories like G8 Education (ASX: GEM) and Capitol Health (ASX: CAJ). Both these companies paid dividends while also issuing equity to expand.
All in all, Story-i may struggle to achieve a reasonable price for its shares if it does not follow this example. Nonetheless, with a strategy that is so clearly suited to a growing middle class in Indonesia and Vietnam, Story-i should be in a position to generate massive returns for shareholders — if its growth strategy is managed well.
Story-i shares are highly illiquid, and only experienced investors with developed risk management skills should even consider such an investment. However, for those who can handle investing in illiquid microcaps, Story-i might pique an interest. I, for one, can't help wondering why anyone would sell shares so soon after the reverse listing, at current prices.
Edit: An earlier version of this article incorrectly suggested that the majority holders of Story-i (surname, Widodo) are related to the president. This was based on incorrect information and has been rectified.
