Small Cap in focus: National Tyre and Wheel (ASX: NTD)

Sometimes a great small stock goes a bit unnoticed from the investment community. It might be because they don’t have the analyst coverage, or perhaps because the nature of the business is relatively boring. Whatever the reason, it doesn’t mean that the business is a bad investment. Quite the contrary, the lack of interest can lead to some great prices for the eagle-eyed investor.

One company that appears to not receive enough coverage or interest is National Tyre and Wheel (ASX:NTD). National Tyre and Wheel is an importer, wholesaler, and wholesaler of tyres and wheels. They provide tyres and wheels for all sorts of vehicles but have a specialty in 4-wheel drive and SUV segment of the market.

The stock trades at a very low multiple of earnings (PE: 6.19), as well as a very attractive, fully franked, dividend yield (8.57% + Franking), they’ve also paid a special dividend this month, which is not factored into the yield calculation. These fantastic numbers are in large part due to a sell-down in the share price following an earnings downgrade in late 2018.

The stock has also been hurt a bit by a weak Australian dollar, the tyres that they wholesale are imported – and as the Australian dollar weakens, the cost of the product increases for NTD. On top of this, some of the raw material prices necessary to make tyres have increased – which has also led to additional costs for NTD.

NTD has done some work in in addressing these issues and has hedged some of their exposure to the Australian dollar through the use of derivatives contracts. They are also addressing rising costs issues through discussions with suppliers, and through engaging with potential new suppliers from lower manufacturing cost areas.

Recent presentations from the company have indicated that the shares are currently trading at a PE ratio well below the ratio considered reasonable when the company went through its IPO in late 2017. This indicates that there is a potential the company is undervalued – and recent result appear extremely attractive compared to the current market capitalisation of the company.

However, NTD has a low market capitalisation, and is a relatively new listing to the market, having listed late in 2017. These factors can lead to higher risk for an investor but are also likely the reason that this stock is trading at such a discount relative to its fundamentals.