WAM Microcap Limited (ASX: WMI) is a listed investment company (LIC) that focuses on the small end of the Australian share market. It looks for small caps with market capitalisations of less than $300 million at the time of acquisition.
It has had a roaring start to listed life with the portfolio growing by 23.6% before fees since inception in June 2017.
I thought it was a very interesting move that WAM Microcap announced it, along with other WAM LICs, became a substantial shareholder of Adairs Ltd (ASX: ADH) on 14 May 2018 by taking a 6.19% stake.
Adairs is a nationwide home furnishings company with over 160 stores with five different store formats of Adairs, Adairs Homemaker, Adairs Kids, UHR and Adairs Outlets.
The company says it's a vertically integrated product design, development, sourcing, distribution and retail operation. Around 90% of Adairs products are its own private brands, whilst the other 10% is third party national brands.
It also has a membership programme of $19.95 for two years which provides access to lower prices in-store and online, access to exclusive offers & events and free delivery for online orders.
The Adairs share price has recovered strongly over the past year, with the share price rising by 193%.
Last month Adairs upgraded its FY18 guidance to have slightly higher sales, a better gross profit margin, higher earnings before interest and tax (EBIT) and lower capital investment than previously guided.
It's a fairly common feature that once a company has upgraded its guidance it is fairly likely to improve its guidance again, or at least continue on an upwards trend.
The Adairs CEO said that the company is confident in its momentum for the rest of the financial year and will provide a solid platform for continued growth into FY19.
Foolish takeaway
Even after the strong share price rise, Adairs is only trading at 18x FY17's earnings, with a sizeable increase in EBIT expected in FY18. The Adairs share price could do well between now and its report, but it's not the type of investment I'd make. I'm happy to get my exposure through WAM Microcap.
