BOOM LOGISTICS The crane specialist is in the turnaround phase and is trading at a 40% discount to its net asset backing. This company has strong management and should benefit from the big spending that’s occurring on the East Coast infrastructure and on the renewable energy fronts. PLAYING THE INFRASTRUCTURE AND REWABLES BOOM When you look at the history of Boom Logistics from a financial standpoint, all you see is red, certainly in the past five years. The company has made just over $170m in losses in that period, mainly as a result of the deteriorating West Australian economy as demand for its cranes, travel towers or cherry pickers and associated technology and labour has dropped. But Boom is now poised to benefit from some big forces in the Australian economy. From investing in RCR Tomlinson (RCR) and Seymour Whyte (SWL) Under the Radar has made good money playing the East Coast infrastructure boom and the increasing investment in renewable energy. There are not many ways to profit from these themes, but we think that this will be the case for Boom. PAYING DOWN DEBT AND VERY CHEAP The big positive in its favour now is that even though it has made these losses, much of which have been from asset write-downs and impairments, it has reduced its debt load; from well over $100m five years ago to close to $45m. Debt does remain high and we envisage that this will continue to fall as free cash flow remains strong through revenue growth. Because of the negative sentiment, Boom is cheap, trading at a 40% discount to its net tangible assets per share, and this is after the big write-downs. The company has reduced its cost base partly through an asset sales program, but also through reducing its employee numbers. Boom is now able to aggressively grow its profits by taking advantage of the work available in the burgeoning wind farm infrastructure sector; and in the coal sector, which is going through a production boom. MANAGEMENT IS INCENTIVISED FOR GROWTH The company has signalled it expects to record double-digit growth on its $150m of revenues in FY17 but it will have to do more than this over the next two years to achieve its targets. Moreover, the board and senior management’s confidence in being able to grow earnings quickly is underlined by its 2c target for EPS by September 2019. In FY17 Boom generated trading EBITDA of $10.6m and because of its big depreciation expense recorded a loss of $10.9m before impairments, which mainly consisted of asset write-downs. If it is to meet its 2c EPS expectations it will need to make at least $30m at EBITDA. As we’ve said, one key to meeting this expectation is operating costs, which have come off in the past five years from close to $300m and are now just shy of $140m. The company’s crane numbers have gone from 400 five years ago to just over 300. DEMAND IS CLIMBING The other key is demand on the East Coast, which is where it is poised continue to grow revenues. Boom has moved much of its asset base or “depot infrastructure” to the East Coast, where it is capitalising on opportunities in the infrastructure and utilities sector. The company has won at least $29m in revenue that will contribute to FY18, much of which comes for the burgeoning demand for its services in wind energy. SHARE PRICE $0.195 MARKET CAP $93M RADAR RATING BUY NET DEBT $44.4M ASX CODE BOL BULL POINTS Ý LEAN BUSINESS POISED FOR PROFIT GROWTH Ý SOLAR/COAL CONTRACT POTENTIAL Ý MANAGEMENT INCENTIVISED BEAR POINTS Ý CONTRACTING BUSINESS MODEL Ý HIGH DEBT Ý NO IMMEDIATE DIVIDEND PROSPECT WHY WE LIKE IT The crane operator was a market darling for some five years after it listed in 2003. It has has been a horrible performer since then, suffering from a competitive market and too much debt. The group’s latest result shows that management is successfully improving profitability after cutting costs to the bone and reducing debt. More to the point, senior managers are well incentivised to grow earnings per share over the next few years (at least). If the turnaround is a success, this stock should make investors a great deal of money. After all, it’s trading on a 40% discount to its net asset backing; and the group is lining up contracts in the fast growing infrastructure and wind energy markets. WHAT’S NEW The company has impressed reducing its net debt from almost $90m only four years ago to its current level of just over $46m through an asset sale program, which has concluded. Boom now has some $210m worth of fixed assets (mainly cranes) on its balance sheet. The company made a loss of $22.6m for the period, but it had an $18m depreciation charge. At EBITDA if you exclude one-offs, it made $10.6m on $150m in revenues. Management is highly incentivised to generate a yearly profit of 2c at earnings per share by September 2019. We estimate that this translates to about $30m in EBITDA. The pressure is on! 2 under the radar report RESEARCH TIP 12 OCT 2017 In its latest result it was noteworthy that the second half showed revenue was stronger than the first, and up 36% on the same period last year. Historically this has not been the case. Overall revenue for FY17 was just over $150m, split $73.1m to $77m in the first and second halves. This was almost the exact reverse of the prior year and shows that momentum is moving in Boom’s favour (finally). BOOM COULD LIVE UP TO ITS NAME AGAIN The crane operator has been through one of the toughest periods and as it was going through this period it had well over $100m in debt, hanging over management’s head. Boom has been effected by fleet write-downs prompted by revenue declines and profit margin cuts; all a result of weaker commodity prices and project delays in Western Australia. Boom Logistics lived up to its name when times were good, but it has been a big achievement to prove that the company was not renamed “Bust” when the market turned. The West has been hit by an oversupply of cranes together with reduced infrastructure spending. This has created intense competition for ad hoc work, which has depressed prices. The group’s survival means that it has slimmed down its cost base, and has recalibrated its business to take advantage of increasing infrastructure spend on the East Coast of Australia as well as the rapidly growing demand for renewables technology. n
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