Research Note, page-3

While the Hartley's report is interesting in providing industry background, I think the numbers in it are wrong.

It assumes a fall in the EBITDA margin from 5.6% last year to 5.5% this year. Yet the company said in the announcement of 22 August: "Second half revenues of $43 million generated approximately $3 million of this FY2017 EBITDA or an EBIDTA margin of 7.5%. Valmec expects this level of EBITA margin to improve even further during FY2018 as a result of increasing and consistent revenues with stronger gross margin recovery."

As I calculated on another thread I would estimate a NPAT of $3.6 million this year on revenue of $86 million as a result, compared with Hartley's NPAT of $2.1 million on revenue of $84 million.

However, their valuation on their lower profit level does not stack up for me. Their target for the PE is 17, which is the average of the ASX Small Industrials. Valmec has a market cap of only $20 million and does not pay a dividend. It is not comparable to the ASX Small Industrials average. A PE of half the Small Industrials in the next year is probably pushing it. So even with my higher profit number I am sceptical of their 12 month forward target share price of 37 cps. It would be nice of course, but is it realistic?

In passing while Valmec moving into ownership of compressors as has occurred in the US is floated by Hartley's and is an interesting idea, the amount of capital required would make it a radical move for a company of Valmec's size any time soon.