For a first approximation of what TTN is currently worth, I have made the following simple two-scenario analysis.
Let’s first look at a survival scenario, where TTN manage to go back to profitability.
Revenues ex-Hofco (includes Atlas, RCH, Nektar and Base) added up to $30.9m during DH14, so we can conservatively assume that, in a survival scenario, total annual revenues would stabilise at the current annualised level of $61.8m.
What sort of EBITDA margin can the company reasonably achieve by doing cost cutting at this level of revenue?
From looking at past financial statements, the biggest expense is employee costs, which in DH14 amounted to 47% of revenue; if that could be brought down to 36%, as it was back in FY13, employee expense would then be $22.1m.
Excluding non-recurring items and Hofco-related expenses, the remaining costs added up to $16.8m in DH14, i.e. $33.6m per year.
That gives an EBITDA of $61.8m-$22.1m-$36.3m=$3.4m by simply re-aligning employee costs (as a % of revenue) to 2013 levels; if, in addition to that, non-employee expenses could be cut down by a reasonable 10% each, we would then have a $61.8m-$22.1m-$32.7m=$7.0m EBITDA, i.e. 7.0/61.8=11.3% EBITDA margin, which does not look out of synch with market for this sector.
Assuming zero depreciation and amortisation (as I will also assume fully depreciated long-term assets in the sequel), and assuming also that all debt is repaid after the Hofco disposal, using a 30% tax rate we get a $4.9m NPAT result.
Thus, a conservative PE multiplier of 5x gives a fair EV of $24.5m, to which we then want to add the current Net Liquid Asset Value.
As of Dec 31st 2014, we had [Current Assets] = $15.9m and [Total Liabilities] = $26.5m, i.e. NLAV = -$10.6m. Adding the proceeds from the January capital raising ($4.3m) and those from the Hofco sale ($13.5m), we get a current NLAV of -$10.6m + $4.3m + $13.5m = $7.2m. Therefore, in a survival scenario and assuming zero value for long-term assets, it seems reasonable to assume that TTN’s fair value is in the region of NLAV+EV = $24.5m + $7.2m = $31.7m, or 37c per share.
Note that I have not added to [Total Liabilities] the $10.9m in non-cancellable operating leases (recorded as of Dec 31st 2014), for they are assumed to be part of ordinary expenses over the next five years; because it is a survival scenario that we are considering, it does not matter what the company’s current liquidation value is.
Let’s now look at a worst-case scenario where, either because of further declining revenues, or because costs cannot be slashed enough, the company does not make it back to profitability.
I argue that, in this case, TTN’s recovery value could well be zero. In fact, although the current NLAV is positive ($7.2m) there is still that $10.9m in non-cancellable leases, which, very much like debt, could make the company insolvent. Therefore, I will assume that, in a worst-case scenario, TTN is worth zero.
Now, what is a reasonable probability for these two outcomes? Because the adjustments needed for the best-case scenario (re-alignment of employee costs as a % of revenue to 2013 levels and additional 10% cut to non-employee expenses) do look achievable, and the company is currently debt free (i.e. not under huge time pressure), I am happy to assign a 50% probability to the event of survival. Therefore, under this set of assumptions and on a probability-weighted basis, TTN should be worth at least 50% * 37c + 50% * 0c = 18.5c per share.
Based on the above analysis, I thought TTN was worth a punt on Friday, after the resumption of trading, and therefore bought in at 11c. All IMHO, DYOR and of course GLTAH.
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