FY18 result - North of 40 cents seems reasonable, page-12

"Amazing how you’re willing to so easily ignore nearly one third of its entire operating life! Literally One Third (i.e. nearly 5 years) ...and brush it away with caveats like well times were good here and times were poor here..... I guess you could make the exact same argument about any time it was at 3-4x EBITDA as well. Heck, why even use earnings multiples at all!!!"

On the contrary, I'm not ignoring the one-third of its life; I am explicitly accounting for it, because that one-third of the time when it traded at peak multiples was during cyclical extremes; the rest of the time its multiple was far more muted (~5x EV/EBITDA).

So, unless you are anticipating the cycle to go to similar sorts of crazy levels as it did during the peak of the commodity boom, based on precedent, it is highly unlikely the stock is going to trade at 8x EV/EBITDA multiples.


"The optionality created by BOL’s de-gearing, positive earnings momentum and distressed and fragmented industry generates significant potential for BOL to add value via acquisitions and/or a buyback. Disregarding alternative views on the appropriate multiple (other than that 4x is clearly wrong), static multiple analysis really doesn’t capture this optionality at all. In effect, BOL should trade on a much higher multiple because its balance sheet has so much flexibility....and at the same time as many competitors in the industry remain on their knees."

Balance sheet flexibility?
That's a laugh.

Let's look at a rough capital balance for this company:

Starting with EBITDA of, say, $30m this year (FY2018 = $21m), i.e., a 45% EBITDA increase predicated on a 15% Revenue increase, so assuming 3:1 operating leverage.

To support the 15% Revenue increase for this year is likely to require a $8m to $9m working capital investment. And then there are also the off-balance sheet liabilities that need to be serviced.

So, if they are lucky, they will generate around $22m of Net Cash Receipts this year (FY2018 = $15m).

Out of this will have to come some $3m (FY2018: $3.5m) to pay the interest bill on their $37m of borrowings.

Assuming they don't have to pay any tax, that leaves Operating Cash Flow of around $20m (FY2018: $11.5m)

And then there is the trebling of capex for which it has been budgeted, to $15m.

The upshot of all this is that the company will generate some $5m in Free Cash Flow.

It started the FY2019 year with $37m of Net Debt, which reflects Net Debt-to-EBITDA of 1.9x, which is probably appropriate for a capital-light business which has consistent, durable and reliable cash flows, but it is far too high for a capital-intensive business whose case flows vary greatly.

This means that every spare nickel and dime needs to be applied to ongoing debt reduction.

So no flexibility on that score, I'm afraid.



"Remember the industry downturn was exceptionally deep and long duration (c. 7 years). Acquisitions during current times create reinforcing feedback loops which compress BOL’s WACC while expanding its ROIC, increasing the ROIC WACC spread and justifying a large NTA premium.

LOL.

When it comes to earning an excess return above the cost of capital, a company like BOL is best left out of such a discussion.

Because, besides the very first two years of its listing, BOL has never generated double-digit ROCE (and the only reason it did so at the very start of its listed life is because the IPO vendors had run down the asset based, which needed to be recapitalised by the new owners after IPO).




"This is why many of these capital intensive companies trade at multiples of NTA while they operate with strong earnings momentum and have de-risked their financial position.

Totally wrong, according to valuation axiom.

The only time companies trade sustainable at a premium to NTA (i.e, the book value of their tangible equity) is when the financial returns generated by those companies are in excess of what the cost is of the capital they employ.

Because it is those excess returns - i.e., when you generate a greater return on capital than what that capital costs you - that translates into the creation of shareholder value, i.e., an increase in the value of Owner's Equity

Conversely, when companies fail to earn their Cost of Capital (which applied to BOL), they are destroying the value of the capital they invest, and therefore their market values are less than their book values. (Because those book value are being reduced, since the capital being employed is costing more than it is making.)

Which is why BOL will always trade at a discount to NTA; until, of course; one day it somehow manages to generate ROCE above its Cost of Capital. But I'm not sure what will cause that to magically happen.


"The same is likely to occur given BOL has the potential to acquire a number of companies who are highly distressed at the moment and struggling with the working capital requirements of increased demand."

As the numbers above showed, BOL has no financial wiggle room to be making any acquisitions any time soon.

Which, ironically, is probably a very good thing based on what happened the last time they went on an acquisition foray: between 2003 and 2007, they spent $217m on acquisitions. Have a look at the chart above to see what the company's ROCE of the did following those acquisitions.


"Sell BOL when everyone is a fan, not when everyone still hates it."

Here I agree with you.

But the time when it was truly hated was 12 months ago, when the company was generating very little EBITDA and the share price was 8c.

And my sense is that people are fast becoming fans... why, I heard some talking head on television even mention it; and when the common media start punting the stock, my finger moves intuitively to the sell button.

I suspect when people love it sufficiently will be at around 28cps (an EV/EBITDA of 5.5x), which is when I will sell [*]. And I will leave the game of trying to invest to the point where people REALLY REALLY love it to others to play.


[*] I just hope they don't do a capital raising before that, because - based on what I saw in this past financial result - the assets are relatively maxed out in terms of utilisation, and there are increasing calls on capital for things which I strongly suspect management wants to do.