OilNut, any scenario analysis is, to a degree, subjective and we...

OilNut,

any scenario analysis is, to a degree, subjective and we seem to differ on some of our assumptions.

- Margins on catering and logistics are, as you pointed out, highly variable through the economic cycle. If we look for example at Nektar's EBIT margin, it went from 15% ca in FY14 to just over 1% in DH14. At what level it can stabilise is hard to guess; if it is a five-year forecast under a survival scenario that we're making, I'd be inclined to use a slightly more optimistic assumption than your 2%-6% (not sure if that was EBIT or NPAT), but in actual facts we're both guessing here.

- As a general approach, I prefer looking at costs that are under management's control, such as employee benefits; as I mentioned in my previous post, realigning those costs (as a % of revenue) to FY13 levels would alone bring the company back to being EBIT (and cashflow) positive. Obviously this is not a given, and it would not be possible at all levels of revenue, but again it is a survival scenario I'm looking at.

- Once it is assumed that the company is EBIT positive, because the running cost of leases is already incorporated in the expenses, you do not need to subtract the leasing debt amount in order to calculate the NLAV (you would be double-counting it, if you did). It is certainly possible, though, that the company will not generate enough revenue to cover the leasing costs; that is exactly the situation I described under my worst-case scenario, therefore the presence and impact of the leases was indeed factored in. Also, once it is assumed that the company is cashflow positive, you do not need to factor negative cashflows in the NLAV calculation. I do appreciate that TTN was not cashflow positive in DH14 (albeit not by much, once you have removed the interest expense), but the chances of that situation persisting are already factored in the probability of non-survival. You can argue that a two-scenario analysis is too simplistic, and we should be weighing in additional scenarios where TTN is initially cashflow negative and then moves back into profitability; that would be a fair observation, but it was a first sketch of valuation that I was aiming at.

Finally, with regard to Atlas, I do agree with you that it is the most valuable business left and I broadly agree with your metrics in that respect.

To conclude, I am not saying that what is left of TTN after the Hofco disposal is a good business, or a safe investment proposition. It is a high-risk situation, with a distinct possibility of non-survival and an upside that I would quantify as 3-4 times (slightly more optimistic than your own assessment). At today's price, I do think it is worth a punt. I do not doubt that there can be better risk/reward situations out there and, if you want to make the case for one of them as I did for TTN, I will be very happy to listen.

Cheers