Ann: Barminco Releases FY19 Q1 Results, page-5

Perhaps the devil is in the detail. The results look great on the surface, but a closer look at the numbers has me a little concerned. 

My motivation for looking at the numbers was to try and explain the unusually weak share price of ASL, and determine whether it is safe to re-enter this stock. I was fortunate to sell my holdings at $3.00 back in February due to what I felt was a share price that was somewhat over-valued. But never in my wildest dreams did I expect ASL to fall back to $1.20. So, why are we here?

I'm no wizkid when it comes to reading financial reports, so perhaps the following points that I find concerning are in reality no concern at all. I look forward to others' views on the following:

(1) From the chairman's address:

Based on the level of workcurrently in hand and expected contract renewals, we are targeting 20-30 per centunderlying profit growth in FY19, before taking into account the proposed acquisition ofBarminco.

I can read this two ways: (a) profit will be even greater than 20-30% due to the Barminco acquisition; or (b) profit will be less than 20-30% due to Barminco implementation costs, etc. So how is Barminco going financially? This leads us to the recent Barminco Q1 update:

(2)

• "– Barminco Proforma EBIT up 64.8% on PCP" - sounds great
• "EBIT $12.9m" - not too bad.

But:

1. EBIT of $12.9m was on $141m revenue, so that is a margin of less than 10%; in a downturn that will quickly go to zero or negative, IMHO.
2. Note this: "Financing costs, net ($10.8m)". So Barminco appear to have large borrowings costs of close to $11m. Subtract that from EBIT and we're left with a measly $2.1m profit, on $141m of revenue. And last year's borrowing cost was $11m for the same quarter, so borrowings are not reducing, and we can thus expect around the same costs for future quarters.
3. Looking at borrowings:

• "Total liabilities $614.9m", including "Borrowings $489.1m", so that explains the large quarterly interest payments of over $40m per year. Seems they're paying close to 9% interest on their borrowings. And last year's borrowings were $479.5m, so they are not being paid down. How can they pay it down, with only $2.1m profit for the quarter? And in a downturn with decreased revenue and margins, we all know what happens.

There is also this strange entry in the quarterly:

• "Share of profit from equity accountedinvestments, net of tax $7.4m"

This $7.4m, when added to their $2.1m profit, allowed them to report NPAT of $10.2m for the quarter. So what is "equity accountedinvestments"? Something like interest earned in a bank account, or perhaps foreign exchange gains (that can easily turn to losses)? This figure for last year was only $3.5m, so it seems to be quite variable.

So in the end I'm very confused as to whether Barminco will be a cash cow or a poison chalice to ASL. I'm looking for an investment thesis for ASL as I would like to reenter around these price. However, the above has me second-guessing. I would much appreciate comment from others who understand the financials better than I do.