@madamswer i assume the ebitda was a bit below your expectations, how would you model next years ebitda, if you don’t mind me asking?"
@Just_a_guy ,
Apologies for responding only now; I have been out of circulation for a bit.
To answer your question, for the simple reason that it is a bit of a fool's errand, I don't try to get overly specific in making highly explicit forecasts for any given financial period.
Instead, when investing in a deep value, cyclical situation such as Korvest, what I try to do is obtain a good feel for the
earnings potential of such a business, i.e. what sort of Revenues, Profits and Cash Flows a given business has the capacity to generate at some point in the future; and then to invest around those by applying what I believe are appropriate capitalisation multiples.
So, in KOV's case, I'm not too concerned whether they in the most recent financial period generated EBITDA of $1m, $2.0m, $3.0m (or zero, for that matter), because it isn't relevant to the investment thesis.
Rather, my assessment is that this company has the assets and operating footprint to - when business conditions permit - generate EBITDA of $8.0mpa under reasonable demand environment (and in excess of $10m when things are booming).
And my belief is that the cycle is never dead (even though it may darn well feel like it during the long, tough periods when business is slow!), and that - at some stage during my remaining life time - people will start to once again build big things and the phones at Korvest's sales office will start to ring again.
So, sure my financial model for Korvest does indeed have
a number for next years' EBITDA ($4.6m, for what it's worth) but it's not really a meaningful number given the many unpredictable vagaries that determine this company's profits from one year to the next (something which, incidentally, informs the limits in terms what one should pay for such a business).
Therefore, I certainly don't own Korvest shares based on what I think next years' financials will be (because, like everyone, I have very little idea!).
Instead, my investment in Korvest is predicated on a company that, as I said, I believe will generate $8m in EBITDA sometime during the next 2, 3 or 4 years.
Applying an Enterprise Value multiple of, say, 5 times to that $8m in EBITDA ('cos that's probably the very minimum the intoxicated and delirious market will be happy to pay when things are humming
[*]), yields an EV of some $40m.
Adding the $5m of cash held by the business, results in a market value of some
$45m.
That equates to around
$4.20/share, some 65% higher than the current share price.
(And while I wait for that outcome, I get paid 5% pa in fully franked dividends).
[Of course, this is not all risk-free upside; there is always the chance that some or other manager(s) - emboldened by a recovery in financial performance - deem it a smart and clever thing to take some of our $8m pa in EBITDA and to start to splashing it around in the making of acquisitions. But, in theory, by the time that human failing starts to exhibit itself, the re-rating of the stock on the higher earnings base will have been completed, and it will mean that we are long gone and escape the inevitable wailing and gnashing of teeth when those top-of-the-cycle acquisitions come back to bite.]
[*] When it comes to deeply cyclical stocks, such as KOV, in my experience the "market", in its wisdom, actually tends to apply
higher valuation multiples at cycle peaks than it does during earnings troughs. Bizarre, I know, but that is seemingly how the animal spirits function.
PS. Not too sure how you derived your JH2018 EBITDA figure of $1.6m; at the risk of splitting hairs, I came to a figure of $1.87m.
