Yes, all very good points you make. For, as investors, whenever we buy shares in a business - because we believe the market value of those shares are significantly below the intrinsic value of that business - one thing we need to make sure of is that we calculate intrinsic value correctly.
Because, if one gets that wrong (and the derivation of intrinsic value is often an ethereal and nebulous exercise), then the chances are high that one could permanently destroy the value of one's capital.
And that is especially true when the business you are buying is facing terrible business conditions and is under earnings pressure... which is without doubt the BOL situation.
So it is essential to keep re-visiting one's assessment of intrinsic value to make sure it hasn't somehow changed adversely, for whatever reason.
To that end, your questions are very relevant ones.
Starting with:
"Yes, the assets will still be $200 M after debt is paid, but they will be plant and equipment in a recessionary sector and I presume, the most saleable stuff would be sold by then."
One of the most critical factors in determining intrinsic value for this company was to address this exact question. for it is not good buying something because a few executives with vested interests managed to convince the auditors that the assets were worth X, and therefore that's what should be told to the public when really they were only worth a fraction of X.
And the first thing that prompted me do start doing me own research on BOL was when it was announced about 18 months ago that a group of critical capital providers to the business - the company's banking syndicate (who clearly has their own particular and highly specific interests at heart, namely the getting back of their money) - had done their own homework in the form of a due diligence exercise on the company assets as part of a debt refinancing exercise.
My assumption was - and still is - that maybe the company's managers and auditors might make some liberal assumptions when signing off on their deemed value of the company's assets, but the bankers who have some skin in the game are likely to have a far more focused and measured approach to such an exercise.
It is, after all, their money that is on the line and I suspect that they would have quite readily have delivered a message to Boom management something along the lines of, "Sorry, gentlemen, but having had a close look at your Plant and Equipment and we don't think we are going to be paid what's due to us, so you'd better call on your shareholders to bale you out, or else we are going to pull the plug on you guys and let the administrators take over proceedings."
And the judgment of the bankers has been borne out by reality given that the company has registered a profit on the sale of assets since that judgment was made in the form of an agreement made in early 2014 to roll the company's debt.
For context, since then the company has recorded a total of $5.7m of profit on the sale of some $28m of assets. By any measure, that's a satisfactorily wide buffer. And it warrants noting that the sale of those assets at a price above book value took place over the past 18 months, a period which is truly reflective of the sort of "recessionary sector to" which you refer.
For fuller context, it might be instructive to look at how conservative (or otherwise) the company's book value of PP&E is stated by looking a longer-term profit (or loss) on asset sales. The listing below shows 1) the value of assets sold, 2) the profit (loss) realised on the sale of those assets and 3) the profit (loss) as a % of the value of the sold assets:
THE "ACCOUNTING QUALITY" OF BOL's ASSETS
(Profit on Asset Sale; Value of Assets Sold [% of Profit on Assets Sold]
DH05: Profit on Sale (P) = $0.109 m; Value of Assets Sold (V) = $0.435m [Margin, M = 25%]
JH06: P = $0.429 m; V= $1.603 m [(M = 27%]
DH06: P = $0.099 m; V= $0.587m [(M = 17%]
JH07: P = $0.108 m; V= $0.266 m [(M = 41%]
DH07: P = ($0.630 m); V= $0.694 m [(M = -91%]
JH08: P = $0.684 m; V= $1.100 m [(M = 62%]
DH08: P = $0.753 m; V= $4.353 m [(M = 17%]
JH09: P = $0.084 m; V= $6.451 m [(M = 1%]
DH09: P = $0.169 m; V= $4.959 m [(M = 3%]
JH10: P = $0.272 m; V= $2.039 m [(M = 13%]
DH10: P = $0.395 m; V= $2.712 m [(M = 15%]
JH11: P = ($0.005 m); V= $3.051 m [(M = -0.2%]
DH11: P = $3.339 m; V= $11.173 m [(M = 30%]
JH12: P = $0.528 m; V= $4.109 m [(M = 13%]
DH12: P = $0.459 m; V= $3.960 m [(M = 12%]
JH13: P = $1.084 m; V= $7.273 m [(M = 15%]
DH13: P = $2.456 m; V= $9.919 m [(M = 25%]
JH14: P = $2.516 m; V= $7.364 m [(M = 34%]
DH14: P = $1.192 m; V= $9.257 m [(M = 13%]
JH15: P = $1.999 m; V= $11.080 m [(M = 18%]
As can be seen from this exercise, over the entire period under review (which is reasonably reflective of a full business cycle), a cumulative total of $16.0m of profit was realised on a total of $93m of asset sales.
Moreover, BOL has not reported a loss on the sale of PP&E in any financial year and has only done so only once in any meaningful way during any half-year period (DH07).
Why, even right through the GFC, asset sales were conducted at at premium to their carrying value.
So, while there are a few things that I do worry about a bit when it comes to my investment in BOL, realising the value (or close to it) of the carrying value of the asset base is not one of them.
The pace of the monetisation process might warrant ongoing close monitoring, but what the resulting proceeds might be I don't think is a question.
And then, this point you raised:
"Their EBITDA and EBIT have fallen to $17.9 M and $5.2M from $42.1M and $25.8M resoectively. What are the grounds for assuming EBITDA and EBIT of $25M and $10M then? A 12 yr average of 6% EBIT return is impressive, but that was still on an infrastructure investment fuelled China growth, which will not resume now"
Yes, fair call. The forecast risks for earnings are indeed high given the state of the world that BOL faces. Who knows what EBITDA might end up being over the next 24 to 36 months? Could it fall by a further 20%? 30%? 40% Could it fall by another half again?
Tell you what... let's assume EBITDA not only falls by 50%, but be a lot more.
Let's be really conservative and assume the highly improbable scenario that EBITDA falls by a full 100%, i.e., EBITDA goes to ZERO from next financial year and doesn't recover thereafter.
By that stage the company's debt will have all but been extinguished. This means that Operating Cash Flow will be zero (because in this case - assuming for the sake of simplicity that no further working capital is liberated - Net Receipts will be zero, interest payments will be zero and tax payments will, needless to say, also be zero.)
So, in terms of the capital balance of the business at this stage, the value of any any ongoing asset sales in excess of the maintenance capex requirement of the business (which is currently running at some $5m pa...[JH2015 was just $1.3m, but that is probably unsustainably low]) will report to the company's bank account in the form of a growing cash balance.
Therefore, assuming the asset sale run rate reduces to $20mpa (down from the current rate of $25m pa) into the future, the cash pile balance will grow by the amount of surplus capital that is generated each year (viz. $20m less $5m) as follows:
Year 1: $15m
Year 2: $30m
Year 3: $45m
And $45m is basically the market cap of the company today.
Meaning that - assuming the share price is still where it is today - the company will be trading at cash backing... and buyers of the stock in that case will be getting some $120m to $140m of cranes (worth between 25c and 30c per share) for free.
And remember that any dollar of positive EBITDA that is generated over and above ZERO, will shorten the timeline to the point of full market value cash backing.
I trust this simple exercise demonstrates that the BOL story is not really an earnings story; in fact, far from it, as has been demonstrated under the near-implausible zero EBITDA scenario above.
My sense, however, is that - a bit like you do - the market still views this as an "earnings story".
Which is what has, I believe, created the mispricing.
At some stage the gap will close.
I can't tell exactly when it happen.
But based on the current asset monetisation process remaining intact, it definitely will.
(20min delay)
