Goodwill is OK if it is growing earnings - which it is.What...

Goodwill is OK if it is growing earnings - which it is.

What stands out about Legend is its strong cashflow. In last 4 years, they have acquired three extra businesses, and has done so organically without asking shareholders for extra capital. They took on debt which they have been paying down from their cashflow - debt/equity this year is around 20% and interest cover at 9x.

The acquisitions have also significantly diversified their earnings streams. Yes, they are exposed to the NBN via their data business, but also power infrastructure (remember that the main reason our power bills are going through the roof is expansion of power infrastructure), commercial electrical products, data room equipment and a small but growing defence business.

ROCE has doubled from 6% four years ago to 12% today - so the acquisitions are working. ROE (incl franking credits) has increased from 12% to 20% this year. Operating cash flow over the four years has exceed earnings by 35%. EV/EBITDA is around 5, which is impressive.

And they appear to be shareholder friendly with information - they provide profit forecasts each half and mid-period updates. I don’t think they will ever be a high-growth company, however EPS growth of 10% pa looks very possible, 7-8% pa pretty safe. If they can maintain this earning rate, I value them at 45cps for FY13.