"This has fallen more than 98% from its peak 10 years ago. Calling it out of favour or unpopular would be understating it a little."
@stockanalysisguru ,
Be a wee bit careful with this sort of stat; in the 10-year period you mention, the company raised capital on several separate occasions, the first occasion, in late 2005, 37m shares were issued @$2.20/share ($81m raised).
Then in JH2006 there was a really was a doozy of a raising: they raised $70m by issuing 16.1m shares at a whopping $4.35/share (the absolute all-time high for the stock price) to some poor souls.
But there was some serious dilution in H2010, when a massive 290m shares were issued at just 30cps (a further $87m raised on that occasion).
So, adjusted for this dilution, the stock price is really "only" around 55% down from its peak.
No matter, it's still down a lot. And the extent of the permanent destruction of the capital of some who have invested in this company has been simply breathtaking.
But that's all history. The issue, for investment purposes, is what happens going forward.
Like you (as in your "
Simultaneously a P/B and earnings turnaround investment, in my view the two are interlinked..."), I see an investment in BOL having two distinct elements that warrant consideration, namely:
1.) The discount of the Market Value of the equity relative to the Net Tangible Asset Value (as the basis for monetisation of the asset base in order to repay the company's lenders).
2.) The Mis-Alignement of the Cost Base with current reduced business activity levels
And I think that the focus of most people (most likely because there is a perception that this company almost went belly-up) is overwhelmingly on the former point, and the latter is mostly overlooked as an investment driver.
I think that while Item 1), namely that an understanding of the size and nature of BOL's asset base, in relation to the market value of the company (i.e., the discount of market cap relative to net asset value), was initially an important consideration (when net debt was over $120m around 3 years ago).
However, I think that this is becoming less of a consideration, as the debt position reduces with the passage of time, to a level which is manageable and no longer presents financial risk to the business.
For context, I expect Net Debt to be around $40m (Gross Debt of $38m and Cash of $2m) when the company reports its full-year result.
At the current EBITDA run-rate of $14.0m pa (which is effectively annualisation of the current half EBITDA as implied by latest guidance), that leaves the NIBD-to-EBITDA currently at 2.9x for which, while not exactly providing vast fiscal freedom, still marks an improving trend, and is below the level reported over the past few years of the commodity slump.
NIBD-to-EBITDA (times)
DH13: 3.0
JH14: 3.5
DH14: 3.4
JH15: 13.7 (EBITDA was just $2.7m in this half)
DH:15: 3.9
JH16 (forecast): 2.9x
And this improvement is occurring despite the denominator (EBITDA) having collapsed. Which means - self-evidently - that Net Debt is currently falling faster than EBITDA.
As long as this continues to be the case, there will come a point where it ceases to be a consideration for both the company's bankers, as well as for the equity market.
I think that that watershed point occurs when Gross Debt falls to a level below the banks' final $37.5m amortisation cap.
Importantly, if we are not at that watershed now, then we are very close to it.
Because, reaching that critical level will get the banks off BOL's back (mind you, the banks being on its back for the last two years has not been an altogether bad thing, and has - ironically - probably saved the company from itself), and will allow the company to re-finance the balance of the debt at rates that I'll wager are a lot lower than the 7.5% currently being charged.
This $37.5m final debt figure - in the debt amortisation schedule set by the banks at the end of the FY2015 year last year - was due to be reached on 1 January 2017, at the expiry of current debt facility.
But, as indicated above, I reckon it will be very close to this important Gross Debt level by the end of the current financial year (depending on the timing of payments and receipts), and gross debt is almost certain to be below $37.5m by the time the company reports and roadshows its results in mid-August.
I am happy to go on the record as predicting that, absent the sky falling in on the company, the company will be well below the bank's final amortisation limit by the time the facility expires in a little over 6 months' time, probably by as much as $10m.
Psychologically, getting gross debt to below the bank's lower limit of $37.5m will be a big psychological milestone [*].
And I expect the company's management to make quite a big song and dance about it when they present the upcoming results, and I suspect they will draw particular attention to the fact that this has occurred quite far ahead of the schedule set by the banks (the banks effectively gave the board 18 months, and it looks like they'll get there in something like 12 or 13 months).
The important point to note however, is that this improvement in the debt profile, ahead of the banks' time line, has been attributed more to the sale of assets than to surplus cash flow generation from operations (The $31m-odd reduction in Net Debt over the current 12 month period will, I expect, have come about due to asset sales realising some $20m of capital [DH15 = $11.3m (actual asset sales) and JH16 = 8.0m (forecast)], and Operating Cash Flow LESS Capex providing around $12m [DH15 OCF = $8.5m less Capex of $0.4m (actual) and JH16 = $5.0m OCF less Capex of $1.0m (forecast)].
But one thing is for sure, in the improving Net Debt-to-EBITDA metrics, this has all come about by the dynamics above (i.e., the reduction in the numerator, NIBD), while the company has received absolutely zero help from any meaningful recovery in the denominator, EBITDA.
Which brings me to the second point raised above, namely that of the Cost Base of the company being out of kilter with the reduced activity levels currently being experienced.
When investments don't go to my way of thinking, I always try to learn from my mistakes by asking myself where I went wrong.
And in BOL's case, what I failed to predict was the extent to which management would be unable to bring fixed costs - which today represent almost two-thirds of total cash operating costs (64% in the last reported result), compared to an average around 54% historically - into line with the changed conditions of the business.
But, while Fixed Costs (Employee Benefits + Operating Leases) have been falling in nominal terms for the past 6 half-years, this reduction has lagged the loss of Revenue in each period.
But for the first time since the commodity slump began almost 3 years ago, the DH2015 result showed a favourable move in the fixed cost base relative to Revenue [**], the outworking of this being that underlying EBITDA went from $2.6m in the prior period (JH2015), to $6.7m in DH2015.
(When operating margins are as skinny as BOL's, the leverage is huge... in both directions, of course, and for the past several reporting periods, the leverage has been heavily skewed to the wrong side of the ledger, but there are some green shoot signs that this adverse trend may have run its course.)
For, despite the reductions already achieved, the company is still way out step with its history in terms of its Fixed Cost structure relative to its Revenues:
(Employee Expenses + Operating Leases)/Revenue
DH03: 39.5%
JH04: 40.5%
DH04: 41.5%
JH05: 41.5%
DH05: 41.3%
JH06: 36.7%
DH06: 37.0%
JH07: 37.2%
DH07: 36.4%
JH08: 38.9%
DH08: 38.1%
JH09: 45.5%
DH09: 47.2%
JH10: 53.3%
DH10: 47.0%
JH11: 49.6%
DH11: 47.2%
JH12: 498%
DH12: 50.1%
JH13: 53.9%
DH13: 51.7%
JH14: 53.2%
DH14: 54.3%
JH15: 60.3%
DH15: 58.6%
As can be seen, the company's Fixed Cost-to-Revenue ratio has averaged below 45% over time (admittedly this is flattered by the high levels of unit labour productivity during the boom periods of the late 2000's), so getting back to that sort of levels is surely just a pipe dream.
But getting back to a level somewhere in the low 50%'s area is a within the realms of possibilities, I believe.
Assuming Revenues don't decay much further in the next 12 months, every 100bp improvement in Fixed Costs-to-Revenue margin translates into an 12%-odd increase in EBITDA.
So, "normalisation" of the Fixed Cost-to-Revenue margin - and not even to historical levels that are 14% or 15% lower than they today's level, but by just 600bp or 700bp - would lead to 70%-plus increase in EBITDA, all other things being equal.
That would result in EBITDA of some $24m.
And what, in that case, would it mean for the company's debt position going forward for the over the next 12 months, i.e., FY2017?
Well, the capital balance of the business for FY2017 would look something like this (assuming working capital remains unchanged):
Net Receipts = $24m
Interest Payments = $2.5m
Tax Payments = Nil
=> OPERATING CASH FLOW = +$21m
Capex = $2.0m
Asset Sales = $10.0m
=> INVESTING CASH FLOWS = + $8.0M
Therefore, debt reduction = ~$29m
NIBD @ 30 June 2015 = $40m (forecast)
Less: $29m reduction over the course of FY2017
=> NIBD @ JH2017 = $11m
Relative to EBITDA of $24m, that would result in a NIBD-to-EBITDA ratio of just 0.4x.
And valuation-wise, at the current share price, the stock would be trading on 2.0x EV/EBITDA and on a FCF yield of some 35% to 40% (on EV) and 50% on Market Cap (!)
I daresay that, in such a circumstance, the share price would not be 8c... almost certainly double that, and probably closer to 25c.
Of course, it might be that these early signs of the Revenue-Costs jaws starting to open up, lose momentum and all that happens is the company continues running harder to stand still, EBITDA-wise.
Then, assuming that EBITDA is maintained at the current $14m pa run rate, as implied by guidance of for JH2016 EBITDA of $7m (i.e., the company fails to make any more headway in costs relative to revenue levels), and that working capital remains relatively unchanged, in this case the capital balance of the business for FY2017 looks something like this:
Net Receipts = $14m
Interest Payments = $2.5m
Tax Payments = Nil
=> OPERATING CASH FLOW = +$11.5m
Capex = $2.0m
Asset Sales = $10.0m
=> INVESTING CASH FLOWS = + $8.0M
Therefore, debt reduction = ~$19m
NIBD @ 30 June 2015 = $40m
Less: $19m reduction over FY2017
=> NIBD @ JH2017 = $21m
Relative to this base case EBITDA of $14m, that would result in a NIBD-to-EBITDA ratio of 1.5x, and the trend in this important ratio would look as follows:
NIBD-to-EBITDA (times)
DH13: 3.0
JH14: 3.5
DH14: 3.4
JH15: 13.7 (EBITDA was just $2.7m in this half)
DH:15: 3.9
JH16 (forecast): 2.9x
DH16: 2.1x
JH17: 1.5x
In this scenario, the valuation multiples, on the current price, would be 4.2x EV/EBITDA and FCF yield of 16% (on EV) and 24% (on Market Cap)
In this case, with the balance sheet de-risking exercise being largely done, the likely share price level - I believe - would end up somewhere in the low- to mid-teen cents.
It's been a long, hard slog, and it hasn't been one of my more glorious investments.
In fact, before the DH2015 result I had toyed with the idea of selling my shares because the milestones I was looking or were not being met, but some of the critical aspects of that result restored a degree of conviction in me; and between the time of the result and now, I have ended up doubling my position, to a level of around 3.5% of my invested capital, today.
I'm a shareholder because I think - providing that they Revenue base of the business can remain remotely intact - the stock will double, and could triple, over the coming 12 to 18 months.
And I believe we are now quite close to the point when the market will start to recognise the catalysts for the recovery in the public's pricing of the business.
[*] As will be the psychological milestone of the company's Net Debt falling below its Market Cap (assuming the share price remains at its current level), the first time this would have been the case since December, 2012.
[**] To be honest, I had expected this to start to occur some 12 months ago, but all that happened was for Revenues to have deteriorated even further, leaving the company running harder, not just to stand still, but to go backwards.
Which proves that these kinds of tricky balance sheet repair and operational turnaround situations invariably take longer than expected.
(20min delay)
