Ann: Market Update - 22/04/15, page-3

"The question is how much more they can squeeze out of asset sales in these grim market conditions. Debt has fallen, yes, but profits are now collapsing.
More pain before gain, I feel."


jamwolf,

Profits have been in collapse mode for some time now... they have been in steady decline since DH2006, when they made $26m in Pre-Tax Profit in that half, down to Pre-Tax losses of $5.0m and $4.0m, respectively, in the last two half-years.

Commensurately, the share price has fallen from a gobsmacking $3.50/share to some 11c today.

So I think it is too late to start wailing and gnashing teeth.

The fact is that this company is currently being run by its bankers, meaning that even if they sold off assets at fifty cents in the dollar, given the deep discount of the company's market value to current NTA, it would still make sense to do so in order to restore value to shareholders.

So I think they will continue to sell assets (the banks will continue to compel them to do so), albeit those asset sales might achieve at prices below their carrying values.

And besides, they aren't beholden to asset sales alone to reduce the debt; over the past four half-years - which have been pretty crummy in terms of business conditions, and in which they have made a cumulative total of sweet ZERO at the Pre-Tax profit level - BOL has generated Free Cash Flow in each of those periods (excluding asset sales).

So it is de-gearing organically, despite things being very tough for the company.

But the thing that needs to happen to drive up the share price is the re-calibration of the cost base:

BOL currently makes as much EBITDA as it did at the start of the mining boom in 2004.
Yet its Revenues today are twice as high.

In 2004, when the company was reporting similar operating profit as it does today, total cash operating costs were around $80m pa; today the cost base sits at $200m pa.

Wages and salaries are currently annualising at around $110m; in 2004, they amounted to $40m.

Employee Costs-to-Revenue have averaged around 40% over the past decade, getting to below 35% during the absolute peak of the cycle in 2006 and 2007.

Today, Employee Costs-to-Sales are at a record 50% level.

(Clearly there is still a great deal of largesse from the good old days sitting in the system.)

At some stage the excesses will normalise, but there is obviously a timing lag (truth be told, the timing lag is more enduring that I expected, but that's often the case with turnaround situations, I find, which is why one cannot invest too heavily in them).

And if the current management team can't bring about that normalisation, then I suspect someone else will at some stage come along, boot them out, and do it for them.

But - all that said - it would be naïve to think the share price-to-NTA gap is going to close any time soon.

I have to concede that what looked initially like a One-Year Potential Opportunity Cost story looks very much like becoming a Two-Year Opportunity Cost situation.

Well, that's deep-value, microcap investing for ya'.

I duly bought some more, taking my holding to 0.8% of my Invested Capital.

My self-imposed risk budget allows for 1.5%.

I suspect I might have some time at my disposal to get there... on the other hand I might be able to get there via an equity raising before long (!).