Somero not ready to fall flat

Somero remains subject to cyclical trends, and it would seem that memories of the last downturn linger. Its shares were a major victim of late 2018's market sell-off on the back of fears about the global economic outlook. The share price has regained ground since the start of 2019, but we feel the market may nevertheless still be undervaluing Somero's dominant position in the niche market of concrete laser leveling.

The company has recently completed a five-year plan that saw it go from strength to strength. Turnover from 2013 to 2018 rose by over 100 per cent from $45m to $94m while operating margins also more than doubled from 14.2 per cent to 31 per cent. Meanwhile, return on average capital employed now stands at a lofty 57 per cent, or adjusting for surplus cash (net cash over $15m), 68 per cent.

However, given the cyclical nature of the business, is the only way from here down? Last year revenue dipped 3.6 per cent in China to $5.3m and Latin America was weak due to election cycles. However, these were relatively minor blips. Sales in its largest market, North America, accounting for 69 per cent of revenues, were strong, buoyed by a high level of non-residential construction activity and a shortage of skilled labour. Encouragingly, management sees “continued strength in the underlying non-residential construction industry in the US”.

What's more, over recent years Somero has increased its geographic and product diversity, which should increase the company's resilience should markets turn south. The company's focus on training, customer service and collaborative product development has helped it forge deep relationships in its end markets while discouraging any noteworthy would-be competitors and underpinning impressive pricing power. The strategy has also helped it move into new product areas; a case in point being the launch of Somero's first high-rise leveling product, ‘SkyScreed 25', last year.

A substantial net cash pile also puts Somero in a strong position to weather any downturn, as well as pay out large returns to shareholders while trading remains good. Somero’s net cash soared by almost half to $28.2m in 2018. This underpinned not only a 19¢ normal dividend last year, but also an 11.7¢ special payment – up from 15.5¢ and 3.6¢ a year earlier. Management seeks to maintain a year-end net cash position of at least $15m, with 50 per cent of the excess distributed as a supplementary payout.

Notably, net cash is forecast to fall in 2019, due partly to a planned $3.5m investment in the 35,000 square foot expansion of Somero’s Michigan factory, to help with product output.