@Warrigals and anyone else that's not BOL-ed out yet
Well, call me crazy, but I've finally done it. I've pulled trigger on BOL.
After looking at the last lot of results, clearing my head over the weekend, and running through some numbers, I've now decided @Madamwer 's thesis has probably been right all along. I think we now have good reason to believe that costs are likely to, from here on, reduce at a rate that at least keeps up (and probably exceeds) further losses of revenue.
I still think there is a chance (who knows, really?) that revenues may again slide at an unexpectedly large rate, perhaps putting the debt servicing covenant at risk, and, as a worst case scenario, leading to liquidation. I think this is unlikely, but in an attempt to be conservative, I have assumed this has about a 1 chance in 3 of happening (which now seems unrealistically gloomy to me), and that if it does happen, shareholders will get zilch.
So if I then assume that there is a two-thirds chance that from here on, that EBITDA levels can be maintained (at about $14m), and assuming that maintenance capex is around 8% of revenues (seems reasonable to me), then we can expect that 3 years from NTA assets will amount to about 30c per share, with debt almost eliminated (largely via continued asset sales at about $15m per year, even if at a 60% realisation rates).
If by year 3 resources derived revenues have stablised at about $70m (representing a 70% fall from the levels of FY2013), and other revenues (infrastructure etc) stablilize at about $50m, thus giving us total revenues of about $120m, then an EBITDA of $14m will imply an EBITDA margin of under %12. The last time revenues were that low was prior to FY2015. At that time, EBITDA margins were substantially higher.
Further, if we assume depreciation rates will have come down to match my 8%-of-sales estimate, then the implied EBIT will be about $4.5m, representing an EBIT margin below 4%. This is also historically pessimistic. This level of EBIT, with respect to the remaining capital, will represent a very pessimistic ROC (EBIT to capital) of under 3%. The last time revenues were at these levels, the business had capital of about $114m (not too dissimilar to my scenario).
My point here is to illustrate that a stabilisation at current levels of EBITDA, does not appear unreasonable.
If at year 3 the business can start generating a very undemanding return on its capital in the range 6% to 13%, then I estimate that the value of the business, in 3 years, will be somewhere in the range 15c to 34c per share. If the market price, by year 3, gets re-rated to somewhere in this range, then we can expect an annualised gain by year 3, of somewhere between 17% to 55%. Or to think about it differently, the intrinsic value today (at a 10% required rate of return) will be somewhere between 11c to 25c per share, representing a multiple to current market price (assuming 9c per share), somewhere in the range x1.2 to x2.8.
Of course, all manner of negatives can befall this (poor) business, and so my year 3 prognosis, no matter how cautious, may never materialize. I hope I am covering this sufficiently with my 33% assumed risk that I will get zero (-100% return on my investment) . This certainly feels overly pessimistic to me. Nevertheless, if I throw this in the mix, I get the following probability weighted (expected) outcome:
- intrinsic value by year 3 of 16c per share
- if the market re-rates the stock by year 3, to my estimate of intrinsic value, an annualised gain by year 3 of about 21%
- or, said differently, an intrinsic-value-to-price mutiple of x1.8 (ie a 45% discount of value to price).
But of course, my conclusions also assume that there is a 33% chance that I will lose everything.
The way I like to think about this, is to imagine that I have a portfolio of businesses that are identical to BOL in every way, except that they are completely uncorrelated (yes, perhaps only in Wonderland). Running through some numbers, performing some stats etc (oh what fun!), I get that a portfolio with about 20 equally weighted such opportunities (BOL1 + BOL2 + BOL3 + ... + BOL20), results in a probability of about 10% that my portfolio will generate an unpalatable return (an annual return of less than , say, 9%).
So whilst this suggests that I can invest up to 5% of my portfolio in BOL, and I believe my valuation is sufficiently cautious, there is the fact to consider that I am starting to build a (small) collection of businesses that are tied to the fortunes of the resources cycle, within my greater portfolio. As such, I cannot assume that an allocation on the basis that BOL is uncorrelated to other businesses in my portfolio. As such, I feel it is prudent to allocate somewhat less than 5% to this opportunity, and have thus allocated 2.5% to it. Of course, if the price drops further, I may decide that a higher weighting is in order (scary as that sounds!).
But of course, it's entirely possible that I am speaking out of my behind here.
(20min delay)
