baby and bathwater, page-57

well looks like I started a lively thread!

BTW Disco I own lots of shares!

Reading the many comments I see the following as the key points;

1. FMG contract
2. Cons Min contract
3. 2012 eps and normalised eps
4. capex versus cashflow

for what it is worth my views on the above are as follows;

1. I understand that this contract was worth $5m out of $13m of DSA revenue. Not sure what the margins are but DSA margins are a lot lower than the RQL main business. At the AGM we were advised that DSA will operate at break even for first half as having lost FMG in August they have had the expense of removing gear from site and undertaking maintenance prior to redeployment. We also heard that DSA is experiencing a high level of demand for their product / service and thus we could see them replacing the lost business in second half. Whilst FMG loss a negative surprise, they only paid 3.5 times earnings for DSA, reflecting that contract risk. I feel confident that DSA will prove to be a good acquisition.

2. Cons. Min contract. I think that the FMG contract loss has spooked investors, and they are naturally nervous re the Cons. Min contract. replacing DSA on a mine site is a lot simpler than replacing RQL. RQL or its predecessors have looked after Cons Min's Woodie Woodie for some 15-20 years. This is a very challenging mine re water management. My enquiries suggest that this site has $12m of equipment, may account for $9m of revenue and perhaps $3.5m of EBITDA. Thus in an earnings sense this may account for 15 % of this years EBITDA guidance. There have been previous times in this relatioship that the contract matured and went on month to month, only to later be renewed for term. I sincerely hope that this time is no different. However if for whatever reason it is not renewed, it will take a long time to transition off this site, and the organic growth of the RQL business will no doubt absorb any business lost, albeit reduce YOY growth. Personally I'm happy for this to run on a month by month basis, probably more profitable than a term commitment.

3. 2012 eps. The company has given guidance for $16m NPBT. They have some $8m of tax losses left and may also have some $2m of R&D cover. So they will probably have a tax bill of some $2m this year, for a NPAT of approx $14m. Thus current PE is 6 times 2012 estimates, or 7.5 times on a normalised tax basis. I note that this stock is trading at about 4 times EV:EBITDA. You only have to look at the broader market to see that these multiples are also seen in other companies. However I believe that this stock would have one of the lowest price for growth multiples, and also that their growth is perhaps more certain than most. The CEO stated that the company had doubled its earnings every 2 years and he saw that trend continuing. On this basis it will require a NPBT of $24m for FY13 (that represents a PE of 5 for 2013 on full tax rate). It is this combination of factors which makes this stock a standout for me.

4. Capex versus cashflow. Yes there has been a lot more capex than cashflow in the past 3 years as the company has made a major investment in its fleet in order to meet market demand. This is the price for growth in a capital intensive business. This too has increased the depreciation charge to the P&L. The company has benefited from the tax savings over the same period which together with equity raisings and debt has funded the fleet expansion. Their current fleet utilisation is circa 65% indicating that they can write 50% more business without more capex (in practice not really as it will depend on equipment needed versus that in fleet availability). Nonetheless we can expect much less capex this year. Importantly this gear is long life kit, and it will see service well beyond its accounting depreciation period. as the fleet matures you will see capex getting closer to the annual depreciation charge, and this is when we will start to see greater return on shareholder funds. The capital intensve nature of the business is a good barrier to entry, together with the specialised nature, and in time the fully paid and written down equipment will effectively provide an inertia rental earnings and a further barrier to those that need to by new expensive gear to compete ( mine managers and competitors alike)

This is a quality business, with barriers, in a sweet spot, with first rate management. Ticks all my boxes. That said it may get lower before investors gain confidence in the market and RQL outlook. This is a 2-3 year proposition.

Hope the above is helpful for those holding or considering.

Merry christmas and wishing you a healthy and wealthy New Year