9th of Feb - Half year results to be announced, page-3

Lost,

If I may be so brazen, I’ll have a stab at what the DH14 result will look like based on my modelling (% change from previous corresponding period, i.e., DH13, shown in parentheses):

Revenue = $300m (-7%)
EBITDA = $12m (-20%)
EBIT = $7.5m (-26%)
Net interest = $3.0m (-36%)
Pre-Tax Profit = $4.7m (-18%)

Modelling the tax expense for COF is notoriously difficult, so I don’t, save to comment that the effective tax rate in the pcp was just 19%, which provided an artificial boost to DH13 NPAT.


Other salient features that I expect from the result:

No dividend will be declared.

The reason is that the Net Interest Bearing Debt (NIBD) situation will not have shown much improvement in the half, compared to the June 30 balance date. I expect NIBD @ 31 Dec 2014 to have been above $55m (down from $68m in pcp, but up from $51m @ 30 June 2014).

The reason for this reversal in the NIBD trend in the half is because the accounts are struck in A$ and in excess of $30m of COF’s $77m of Gross Debt is US$ denominated, so the dramatic weakening of the A$ will increase the value of those US$ borrowings n A$ terms.

Also, seasonally, COF's Operating Cash Flow tends to be weakest in the DH.

So don’t have too many expectations of an dramatically improved debt position with this result.

Net Debt-to-EBITDA will be around 2.3x to 2.4x (unchanged from the past two halves), I estimate, and EBITDA-to-Interest Cover will be 4.1x (up from 3.3x, 3.2x and 2.3x in JH14, DH13 and JH13, respectively).

None of these metrics allow for any capital management yet, meaning the $15m franking credit balance (equivalent to 6 cps) will simply have increased, to be harvested at a later stage.

On the flipside, this result will herald an improvement on JH2014’s financial performance, where EBITDA, EBIT and Pre-Tax Profit were, respectively, $11m, $6.7m and $3.2m, which would signal a bottoming in earnings, although the market is unlikely to strip that out.

In summary, I don’t expect too much evidence of a wholesale turnaround in the underlying performance of the business in the upcoming result.


The full-year result will be a different story, however, starting with the little known fact that each 10% reduction in the A$ translates into some $0.6m in increased profit, according to the guidance provided in the notes to the last financial accounts, that deal with risk management.

So, given the collapse in the A$ in recent weeks, we start the current half with more than a $1m NPAT tailwind, compared to pcp.

And given that pcp NPAT was just $2.3m, in % this is a significant benefit, and I don’t believe it is something the market has spent too much time considering.

So I reckon second half (JH15) NPAT result will be almost 50% up on the half just gone by (DH14), and will be more than double the JH13 NPAT result (which happened to be a 10-year low, incidentally).

And that, I think, will signal to the market for sure that earnings have well and truly troughed.

But that’s a matter for 6 months’ time only, I’m afraid.


Some closing points:

1. Investing in turnaround situations is mostly tough going, and invariably the success – when it does finally eventuate – is usually less profitable than one thinks, and it has invariably taken longer than one initially expects. Case in point, COF has been on a near 5-year “recovery” path.

2. Financial modelling, by its very nature, is an imprecise science, so please no one take my figures as set in stone. I am highly liable to be wrong, but I always try to adopt a conservative approach in order to err on the side of being pleasantly surprised.

3. No discussion is complete without the all-important issue of valuation: If my forecasts are correct, then COF is trading on a P/E of 8.5x and EV/EBITDA of 4.7x, neither are which are overly stretched, even if demand for COF’s services don’t recover much. But if we are indeed at the stage of recovery from cyclically low earnings, then the stock is not just a little bit – but a lot – undervalued.


Adam