for why...what, where and how

This post is in response to a point raised by WHY on a Telstra thread:

WHY,

I'm not sure how Capital IQ (whoever they are) defines their forward EV/EBITDA multiple. Based on their EV/EBITDA multiple of 8.25x, it sounds to me like the “forward” point in time they used is June 2012:

Mkt Cap = $625m; Net cash = $24m (I suspect they used the Dec 2011 balance sheet) for Enterprise Value of ~$600m
FY12 EBITDA = $72.5m (mid-point of recent guidance)
So, EV/EBITDA = 8.25x

If this is the case, then it is somewhat irrelevant as it is a bit backward looking, without due consideration for the growth prospects for the company.

How I prefer to evaluate the investment opportunity is to consider the drivers of future earnings, mainly the North America business, but also the Asian/Chinese opportunity in the medium term.

Looking at the North American business, I think they have just started gaining traction in product awareness in that market, with 12-month rolling EBITDA trends as follows:
For the 12m to Dec:
- 2008: $-0.3m
- 2009: $8.3m
- 2010: $15.6m
- 2011: $30m

For further context, the North American business is now BRG’s largest EBITDA generating geography, at 47% of total group EBITDA (Australia: 31%, Global: 18% and New Zealand: 5%).

North America’s ascendance has travelled as follows:
(North America EBITDA contribution share):
- 2008: 9%
- 2009: 26%
- 2010: 29%
- 2011: 47%

Moreover, sales into North America of $140m over the past 12 months should be seen in the context of a $50bn North American kitchen appliance market (source: http://www.prlog.org/10546588-kitchen-appliances-global-industry-guide.html ). I therefore think that BRG’s sales and earnings from North America could increase significantly over coming years.

Looking specifically, group-wise, under a reasonable sane scenario EBITDA for FY13 could exceed $85m (comprised contributions in the table below), even under a moderation in the rate of growth in the US and even assuming the Global business remains at a contribution level well off its peak, despite the investment in raising brand awareness and distribution in Malaysia, South Korea, and Singapore and the growing brand presence in China.


EBITDA DH10 JH11 DH11 JH12e DH12e JH13e
Australia 16.6 5.7 14.2 6.5 16.1 7.7
North America 12.5 7.2 22.8 14.6 26.7 18.4
New Zealand 1.7 1.0 2.3 1.1 2.4 1.4
Global 8.0 5.6 6.0 6.0 6.6 6.9
Other -0.2 -0.6 -0.2 -0.5 -0.2 -0.5
GROUP TOTAL 38.6 18.9 45.2 27.7 51.7 34.0


Making some reasonably conservative assumptions about:
- high working capital-to-sales ratios (22%, compared to 20.5% over the past 4 reporting periods),
- $4.5m of capex and intangibles purchases (in line with recent history), and
- an increase in the dividend payout ratio to 65%, from the current 60%

this would result in net cash at the FY13 balance date at around $30m.

So, with none of the above assumptions being overly hairy-chested, I don’t think, I see BRG in FY13 generating EBITDA around $85m (which would be 17% up on FY12’s $72.5 which, in turn, is 24% up on FY10) and EPS of 42cps.

This would value the stock on an EV/EBITDA multiple of 6.9x and a P/E multiple of less than 12x.
For a stock with the global organic growth prospects, the considered and prudent management team, and the pristine balance sheet, I think this is far from a demanding valuation proposition.

In my mind’s eye, I see BRG earning a dollar a share at some stage in the not-too-distant future. And given that this is mainly an pre-eminent brand, R&D business with outsourced manufacturing and distributorship, the capital-at-risk to achieve strong organic growth is minimal.

I don’t think I am paying anything for success in Asia, nor any meaningful recovery in the New Zealand or Australian markets, and I think I am paying for just one year’s growth in North America, but beyond this, not much more.

If these guys are today growing EBITDA organically at a clip of 40% in a world of a sharply rising A$, a static US economy and overwhelming despair in global capital markets - which is what JH2012 vs JH11 equates to - I suspect analysts will be spending a lot of the next 12 months upgrading EPS forecasts for FY13 and FY14, from their current 10%pa growth rates expectations.