Adam
Good to get your input.
Why am I contemplating insolvency? Damn good question. One I haven't got a good answer for. So first I will attempt to address some of the other issues that you raise.
"I would have thought that the biggest risk was - once the balance sheet is fully repaired (by fully repaired I mean that NIBD falls below EBITDA... which I calculate will occur in 2017, even absent any upturn in demand for COL's services) - that the market remains too brutalised and scarred by the trauma of the past few years to re-rate the stock upwards, and it simply continues to trade at 3.0x EV/EBITDA."
When I attempt to put a value on a business, as a prospective purchaser, I prefer to ignore the market and buy into something where the underlying business will provide adequate compensation. If the marker comes to the party, then well and good, but it's not something I want to depend on. I say this whilst being acutely aware that in the case of a business like BOL, I will be particularly happy to dispose of the business at anything remotely resembling fair value, should a buyer offer me that opportunity.
On this score, by my estimates, BOL stacks up well. For example, if BOL achieves zero earnings (zero EBIT) in the next 3 years, and then achieves an undemanding (in my opinion) return on it's capital in the range 6% to 13% (equating to a ROE in the range 4% to 9%, as by then debt will be minimal) , for ever (not counting on a new resources boom), then I expect that the dividends alone will provide adequate return. I estimate that these assumptions equate to a present intrinsic value of the future dividends (based on a 10% required rate of return) in the range 12c to 26c (value per share).
Or to think about it differently, if the shares are purchased at 9c (price at which I made my first purchase), I expect that the dividends alone will provide an internal-rate-return in the range 12% to 21%.
However, as undemanding as the above assumptions appear, I am not very certain that it reasonably covers me for all risks. After all, not only is this a commodity business offering minimal differentiation, operating in a cyclical sector etc, but the management gives me little confidence. After all, management's track-record as stewards of shareholder capital, has not been good. This was well demonstrated during the boom years, where wild expectations meant that capital was deployed imprudently and resulted poor returns on NTA (even worse on
capital) resulted.
As such, I see a number of risks (especially the unknown-unknown's, which I guess I
don't see). One of the risks I see, in terms of achieving my envisaged dividend stream, is that management, true to past form, starts squandering shareholder wealth again. I think this is unlikely, as I believe the experience of the last few years means management will be shell-shocked for a long time. So I hope.
I also see, in the nearer term, the risk that just as we all think we've seen the worst in the sector, things actually deteriorate further, and that revenues once again start slipping at a greater rate than management can cut costs. The risk here then, is that the debt servicing covenant will be breached. I'm not sure what the consequences of this will be, and to be fair they probably won't be hugely severe, for as you say, and is quite apparent, management is making good progress deflating its balance sheet (PPE and working-capital). Though I do see the correlated risk, that such an eventuality may correspond with a global market that becomes increasingly saturated with equipment that nobody wants, thus potentially resulting in higher than anticipated depletion to NTA, and perhaps even a pause in the ability to meet the debt reduction schedule.
The other risk I see is a highly dilutive capital raising. Much as I am happy to hold-hands with this management, when I am entering at less than NTA value, I am not keen to be in bed with them, when I am paying 1$ of my cash for 1$ of equity. To do so would imply that I believe that this business and management, has a high probability of achieve a return-on-capital that aligns with my required rate-of-return (or as you would more likely say, that exceeds its cost of capital). Clearly, based on my prior assumptions, I do not give this a very high probability.
So the bottom line is, I see lots of potential hurdles. If I'm going to buy into something like this, I want it to be a virtual no-brainer. I am hoping my "plug" of a 1/3 chance of blowing my money, is sufficiently gloomy (on top of my undemanding upside assumptions) to cover me for all these nasty future events. I
feel that it is.
So assigning a 1/3 chance to each of the following 3 futures:
- I blow-my-dough.
- ROC=6% after 3 years (plus various assumptions about debt pay-down, dividend payout etc).
- ROC=13% after 3 years (plus various assumptions about debt pay-down, dividend payout etc).
I get a probability weighted (ie expected) intrinsic value (based on my 10% required return) of about 12c per share, That is, buying at 9c represents about a 25% margin to my estimated, conservative (I hope), intrinsic value.
(20min delay)
