"Does this announcement suggest trading Ebit will be about $0 in 2016, if D and A are about $25m, and the midpoint trading EBITDA guesstance is $25m. Or does trading EBITDA exclude part of the EBITDA?"
Markie,
"Trading EBITDA" is meant to refer to EBITDA excluding any one-off items, such as restructuring charges, asset write-downs or profit on asset sales. So it is meant to represent a "clean" underlying operating profit performance.
And in this particular case (noting that normally I would loathe to say something like this) in you should forget about the P&L below the EBITDA line, for a number of reasons.
Firstly, there is a big mismatch between the way the financial accounts represent the financial dynamics of the company, and what is happening in the real world. Specifically, the accounts carry a depreciation charge on the operating asset base to reflect exactly that - diminution of the value of assets as they are being operated.
Except in this case, the operating assets aren't being operated at all; they are mostly standing idle. So there is a huge mismatch in the annual depreciation charge (which is, after all, an accounting construct) and the capital expenditure line required to keep the assets operating(Depreciation is running at around $25m pa, compared to Capex of around $10mpa).
Secondly, and this is the most important part of understanding the investment thesis for BOL, this is basically a zombie company now, and is being managed by the banks for cash flow. I have raised this notion before, and having looked at the nature of the new covenants, and the way they have been modified in today's announcements, I am now even more convinced that this is a case of the banker’s calling the shots. (Which is not a bad thing, mind. In fact, it is the very thing that is needed.)
Today’s announcement provides more signs that what is happening here is that this is a de facto slow motion liquidation of the company.
Again, not a bad thing. In fact, it is this very liquidation – or monetisation – of the asset base that is at the heart of why BOL is an attractive investment (albeit for the patient investor). Certainly, I suspect there are very few investors in BOL because of the bottom line profitability!
In terms of some of the specific numbers in this announcement, if they do what they say they will do over the next 12 months, then they would have exceeded my expectations.
I only had around $18m of “trading” EBITDA modelled for FY16 and asset sales of around $10m, compared to their updated expectation of $20m to $30m of EBITDA and $20m to $30m of asset sales.
(They talk about the second half of FY15 being substantially below pcp, which is what I has been expecting, too. I forecast EBITDA of around $7.5m for JH15, down from $12.7m in JH14 and $12m in DH14. But it looks like the restructuring they are now finally doing will bring them back to FY14’s run rate of $12.5m per half.)
I have always been of the view that there has been a mismatch in the cost structure of this business given the business environment facing the company, and that BOL management had been unable - for whatever reason - to get the rate of cost reduction to a pace faster than the rate of revenue attrition.
Well, it seems that they have finally taken the medicine and committed the company to making some big fixed cost cuts (again, presumably, this has been enforced by the hard hand of the company’s creditors).
FY15 represents the biggest reduction – by some way – of headcount (refer below), which is exactly what is required to re-align the fixed cost base of the business with the current market conditions, but which has never really undertaken with great vigour to date.
Changes in Employee Numbers (with year-end employee numbers in brackets):
However, the lethargy finally seems to have given way to some urgency (precipitated, obviously, by the very weak business environment during FY15), and there seems at last to be a giving up on hope that demand for their services might improve, being replaced instead by an acknowledgment that that they will just have to knuckle down an fix the business, or else it risks go under.
So based on the updated numbers it means that BOL’s NIBD will have fallen by almost $30m over the next 12 months, its biggest annual reduction ever (excluding capital raisings). That's the pace of de-leveraging momentum that investors are looking for.
And Net Debt by this time next year will be around $40m (they refer to Gross Debt expected to be less than $50m, and they normally hold a cash balance of around $7m or $8m), supported by an EBITDA run-rate of around $25m, so that means NIBD-to-EBITDA of around 1.8x, which would be the lowest level recorded since 2005(!), and on a par, even, with the period when BOL was generating its cycle peak EBITDA of around $65m pa in FY2012.
In reference to the amended covenants that require the Debt Service Coverage Ratio (DSCR) – i.e., the ratio of “clean” Operating Cash Flow to Interest Expense – to be greater than 2.5x, on their updated numbers it is clear that this will be easily achievable, going forward:
(As an asides, that Cash Flow metrics are now being used for covenanting purposes, as opposed to P&L metrics, further confirms to me that it is the banks who are dictating what needs to happen. Once again: a good thing.)
And then, on the all-important valuation metrics (recognising that P/E isn’t relevant for reasons discussed at the outset), on the mid-point of the updated EBITDA and asset sales expectations, BOL is trading on 4.0x EV/EBITDA and on a FCF yield of 10% on an EV basis, and on more than 15% FCF yield on the Market Cap basis.
So, if they achieve what they say they are on track to do, then they turnaround is truly well underway and I suspect that – especially with FY15 end-of-year tax loss selling now a matter of history – we will this time next year be seeing BOL’s stock price starting with a “2” digit, rather than the current “1”.
I’m not saying this should be a 20% portfolio holding - it is after all a high-risk high-return proposition - but having maybe 2% or 3% of any good-quality portfolio makes sense to me.
The PMP Precedent
The similarities between the BOL situation and that of another stock that I bought in early 2013 on this very same thesis, namely PMP, are remarkably close: neither is a particularly good business, both face weak business conditions, both are capital-heavy businesses with surplus assets, and both had way too much debt.
And just like the exact same position PMP was at around two years ago, BOL is having to take some tough medicine to re-align the cost base to the business environment, and to also actively monetise the asset base of the company.
It took a while for the market to latch onto it, but once it did, PMP ended up being almost a three-bagger for me.
I anticipate a similar result with BOL.
BOL Price at posting:
12.0¢ Sentiment: Buy Disclosure: Held
(20min delay)
