"It seems like the deleveraging is playing out as predicted.."
Corporate, yes it is playing out, but at somewhat of a glacial place, I'm afraid.
While NIBD is indeed falling, what one really wants to see in order for the share price to rise in these sorts of de-leveraging cases, when earnings are under pressure, is for NIBD to reduce at a faster rate, than EBITDA falls (in % terms).
And depending on the particular capital structure of the company in question, the rate of NIBD needs to be, not just marginally higher, but appreciably higher, than the rate of deterioration in EBITDA.
That way, through the arithmetic mechanics of the EV/EBITDA multiple, the numerator will fall faster than the denominator and assuming the EV/EBITDA multiple remains unchanged, means that the market value will rise. (In theory, as the financial risk reduces with falling NIBD, the multiple should actually go up, which provides the really turbo-charged share price appreciation, but let's exclude that prospect for this argument. Mainly because it still feels like a merely distant prospect, at this stage.)
For BOL's specific current capital structure, every 1% fall in EBITDA needs to be accompanied by more than 1.8% reduction in NIBD for the deleveraging effect to kick in.
The trouble for BOL, and the reason why the share price has not responded to de-leveraging even though, is that the rate of deterioration in EBITDA has - with the exception of the most recent half year - exceeded the rate of reduction in NIBD.
Period-on-Prior Period % Change in EBITDA vs NIBD:
JH13: EBITDA down 12%%, NIBD down 9% [NIBD vs EBITDA % Change; Ratio = 0.75]
DH13: EBITDA down 16%, NIBD down 12% [Ratio = 0.75]
JH14: EBITDA down 47%, NIBD down 13% [Ratio = 0.28]
DH14: EBITDA down 5%, NIBD down 15% [Ratio = 3.0]
Pleasingly, as pointed out, for DH14 the "magic ratio" of 1.8x was exceeded; however, experience has shown that a succession of a few of these results is required before the market truly latches onto the story.
Which begs the next logical question:
Are there any leading indicators we can look for to possibly predict future deleveraging ratios for BOL?
Well, the most obvious observation that one draws when looking at the composition and structure of the P&L is just how fixed cost centric it is, with about 60% of operating costs comprised of people costs (55% - Salaries and Employee Benefits) and rent (6% - Operating Leases).
Presumably for going-concern purposes there is little than can be done in terms of ameliorating rent and lease expenses, but the big number capable of flexing is the cost of people.
And I think management has what strikes me as tardy and sluggish in proactively addressing this people cost issue.
Since the severe downturn in BOL's business started in mid 2013, the race to the bottom between Revenues and Salaries has been won overwhelmingly by the Revenue team:
Period-on-Prior Period $m Change in Revenue vs Salaries:
JH13: Revenue down $34.0m, Salary Expenses down $12.6m
DH13: Revenue down $12.2m, Salary Expenses down $8.2m
JH14: Revenue down $11.0m, Salary Expenses down $3.8m
DH14: Revenue down $14.7m, Salary Expenses down $6.2m
At some stage, this relationship has to swing the other way, either by Revenue rising (unlikely over the next 12 months, it appears), or Revenues stabilising while Salaries keep falling (Salary expenses are, after all, a lagging indicator... or at least, they are at the peak of the business cycle, so we HOPE they are also at the bottom of the cycle, too.)
So, the BOL story is consistent with experience that shows that turnaround situations invariably take longer than one expects.
I'm coming up for my one-year anniversary of ownership of BOL, and the share price is exactly where I bought it.
But what I was looking to happen is moving in the right direction, at least, albeit not with the velocity I had hoped possible.
At the end of this financial year, NIBD will be equivalent to the company's current market cap, which I think is an important psychological milestone for the market.
And NIBD will have basically halved over the past 30 months, which I think provides some useful context for a company whose revenues have fallen by over a third over that time frame.
Not too shabby for a cigar-butt investment, I suppose.
(20min delay)
