There has been some considerable talk about the veracity of Boom’s NTA, because that obviously plays a not-insignificant part in the investment thesis, so I thought I’d take the liberty of sharing my research in this regard important.
Specifically, I have given thought to the prospect of management - acting to a degree under the duress of the company’s bankers – effectively selling off the best (most readily saleable) assets, and thereby nullifying the apparent NTA discount.
While I have no wizardly techniques to discern this, when I first started looking at BOL as a prospective investment, I did consider/contemplate the quality of the asset base, and the way it was being accounted for by doing the following:
1. I reconciled the depreciation charge with balance sheet PP&E and saw that it was remarkable consistent over time, between 11.5 and 12.0 times, and also over the past few financial periods. (I’m not too sure this tells us much, other than that there is consistency in depreciation policy, and there are no major anomalies occurring in regard to accounting for PP&E.)
2. I then divided the depreciation charge by the number of cranes in service in order to discern any trends. In theory, if the quality of the fleet is being improved, then depreciation per crane should be increasing, because older cranes would have a lower book value. (Note: the company adopts straight line depreciation policy for its cranes over time frames which, while not as conservative as a reducing balance method, it is consistent with most other publicly-listed companies operating mobile capital equipment). As it happens, depreciation per crane is rising, as expected (as shown below), but I am still not sure this says anything about the appropriate carrying value of the fleet today, which is really the information we are after.
Depreciation Per Crane ($’000):
2004: 17
2005: 22
2006: 44
2007: 58
2008: 65
2009: 58
2010: 53
2011: 62
2012: 56
2013: 63
2014: 69 (DH figure)
3. The company’s CEO is at pains to point out in various statements and presentations that following the asset sales of the past two years, the age of the fleet is currently less than 10 years, compared to some 13 years before the asset rationalisation programme commenced. He has specified the exact nature and models of the cranes that had been sold so, without my being a crane aficionado, I tend to take his substantiation at face value. Sounds plausible enough to me.
4. But the most compelling assurance about the veracity of the book value of PP&E being real I found in the “Other Income” line. Since 2005 BOL has reported, as part of the “Other Income” line, Profit or Loss on Property, Plant and Equipment. This item has only been a negative in an single half-year period on two occasions, and then by only modest amounts, as can be seen it the schedule below. In any given full financial year, it has always been a positive value. Overwhelmingly, and over a reasonable period of time, a surplus above book value has been achieved on sale of PP&E. So that gives me a significant degree of comfort that the book values are reliable and that there is no pillaging of the asset base. [Note that, cumulatively, over that review period, BOL has recorded over $10m Profit on PP&E sales of around $65m in total. So one might even argue that book values look conservative… although that is not a view that is required to know that the company is significantly undervalued relative to its asset base]
Profit on Sale of PP$E ($m):
DH05: 0.109
JH06: 0.429
DH06: 0.099
JH07: 0.108
DH07: -0.063
JH08: 0.684
DH08: 0.753
JH09: 0.084
DH09: 0.169
JH10: 0.272
DH10: 0.395
JH11: -0.005
DH11: 3.339
JH12: 0.528
DH12: 0.459
JH13: 1.084
DH13: 2.456
A point in relation to all this that is worth making: I don’t believe that the precise NTA figure is of critical importance, given just how deeply the market value is from whatever NTA really is (I'm sure that NTA isn't 15c or even 20c or 30c, that's for sure).
In other words, an investment in Boom is not one that requires one to be around for the “end game” (i.e., the complete liquidation of all assets, and the consequent realisation of NTA).
All that is required for the share price to approach “NTA” is for the balance sheet to be repaired to the point at which capital returns to shareholders can commence, and by my modelling, even if there is no improvement in demand, NIBD will be around 1.5x EBITDA by this time next year, which will be a level at which management I believe will feel comfortable enough to commit to a capital return course of action.
And the market, as you know, is quite smart at anticipating such turning points reasonably well ahead of the event itself.
A final point I feel the need to stress about BOL: like all turnarounds and restructurings, they are risky and tend to take longer than initially expected. For this reason, even though I see scope for a “multiple bagger”(gee, I hate that term; it always connotes the taking on of excessive risk) in BOL, I will never have more than say 2% of my investible capital exposed to such a situation, which was the case with similar turnaround analogues, COF, PMP and TPI over the past 12 to 18 months.
Best,
Cam (Sorry, I mean, Adam)
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