In my view, BOL offers a compelling risk/reward based very simplistically on a highly attractive valuation combined with Crane demand significantly outpacing supply (more “ complex” reasons I’ll get to later)
On the demand side, the Mining capex cycle is kicking into gear again (post years of underinvestment) with 2 very large new mine constructions announced in the last 2 weeks (BHP - South Flank, FMG -Eliwana). UBS has recently estimated that the big 3 Iron Ore majors ALONE will spend at least $9.5 Bn over the next four years in capex and the miners themselves are already talking about cost pressures. This is a major positive for companies such as BOL as “cost pressures” are basically price increases for mining service firms (c.100% margin).
This bullish mining outlook follows the wind farm pipeline continuing to grow significantly in the last quarter in addition to the overall infrastructure pipeline (which was already huge). Even in the last few weeks the QLD state Government has increased budgeted infrastructure spending even further (~$2bn). This is occurring while Coal miners in QLD are already ratcheting up capex spend and demand for mobile cranes is becoming very tight. Price rises are on the way!
The next stage of the up-cycle is playing out already, even earlier than I anticipated as all of these factors are very positive for Crane rental companies and operators (i.e BOL). Importantly this appears a higher quality cycle given the fact it is not just Resource spend kicking off in a major way, but also Infrastructure and wind farms.
From the Crane supply side, industry capacity has declined over the past highly challenging 7 years as ageing assets have not been replaced and significant bankruptcies have led to asset sales offshore (mainly Asia). Despite the sharply improved conditions, banks remain unwilling to extend credit for large new purchases with McAleese Cranes and NQ cranes bankruptcies fresh in their mind. Furthermore, operators remain hesitant as they are still licking their wounds from their previous exuberance in 2010/11 which led to significant pain in 5e ensuing 7 years.
This is effectively the sweet point of the cycle.
In my view, the stock is going to rally hard over the next 6 months because:
-it is dirt cheap (4x EBITDA should probably be on 8-10x given point in the cycle.....(i.e 100-150% upside on multiple expansion alone).
-it is growing very quickly (+85% in FY18, Petra just initiated and guiding to another 50% in FY19 which appears conservative given huge operating leverage and the very favourable demand/supply dynamic).
-incremental ROIC is very high given latent utilisation upside (so growth is highly value accretive)
-it’s a cyclical stock in the early stage of an upswing with returns a long way below long run averages (as are Earnings per Crane to remove accounting distortions) and pricing has fallen 30% from 2011 levels providing a solid platform for price increases given the numerous bankruptcies experienced during the downturn combined with strong demand across all key Revenue streams.
-the balance sheet is fixed with ND/EBITDA now “too low” providing BOL with significant balance sheet flexibility (I.e buying back stock at 22c when replacement value of the business/assets are north of 40 cents at least).
Furthermore, the company has material deferred tax assets and even more off balance sheet DTA which will move on balance sheet. This will further support its NTA (and CF) in addition to the debt reduction, improved profitability and below replacement value PP&E over the next few years.
Mean reversion at its best. From a share price perspective, mean reversion is most potent when you have a cyclical stock in the early stages of positive momentum. This is where BOL currently stands.
Interested in any thoughts on BOL guys.
BOL Price at posting:
22.0¢ Sentiment: Buy Disclosure: Held
(20min delay)
