Boom Logistics (BOL)

Bombed Out Big Time

This post is written by Nigel Littlewood. We have looked at BOL extensively and we both own BOL. 

Boom was a classic industry consolidation play. The stock market gets taken for rides pretty regularly by wily entrepreneurs who promise riches of gold simply by buying a number of small industry participants and rolling them together (seemingly effortlessly) to create a much larger corporation with the corresponding cost savings and pricing power. Boom was to become the market leader in the crane industry by consolidating a number of acquisitions.

It’s my experience that this strategy rarely delivers on the initial promises provided while the strategy may make sense, it often fails in execution and it is one of my rules to avoid investing in such plays.  As Warren Buffett says,  “I don’t like to swing at a pitch until it’s left the pitchers hand”

Boom was one such venture that was put together and listed in Oct 2003 and continued to keep buying crane providers right into the stock market boom of 2006-2007 where its shares reached circa $5 a share before beginning a very long fall to lows of 7c last year a mighty fall of around 99%. AND that folks is why we are looking at it.

While there have been mistakes made within the business since listing, I’m not going to spend time on the history as it’s the future that will matter to us as shareholders. In 2008 the company got a new CFO, a woman called Iona Macpherson …who is probably 20% better than the average male CFO and had to be, to get the job. She is energetic, intelligent and full of enthusiasm for the progress made and the challenges ahead. We have been impressed during our limited contact with her so far. One year after Iona was appointed, a new CEO also joined her. Brenden Mitchell has had a tough job in bringing the business back from the brink. We have been impressed with both Iona and Brenden although we look forward to meeting with them regularly going forward.

Brenden has invested significant amounts of his own money in the shares at higher prices.

The shares are trading at 16c having fallen a long way from their highs. The stock is well out of favour although investors are starting to look at the stock again, management confirmed they are getting calls from professional investors both here and in the US.

Despite a dramatic slow down in the economy and a collapse in mining CAPEX spend, BOL continues to report a profit at the EBITDA line despite lower than targeted capacity utilisation rates. Since 2009 the company has maintained its margins while revenue has contracted, excess cash has been used to reduce debt from $245m to circa $105m while rev has fallen from $400m to under $280m.  EBITDA margin has actually been maintained during this time at around 17%-18%.  

So far management has given us confidence that they are honest and competent…let’s hope nothing happens to change this view.

Secondly, we are seeing a pick up in construction and housing, and expect increased spending on infrastructure in Australia in the years ahead, it was even discussed at the recent G20 summit held in Sydney. The very soft conditions in mining maintenance should pick up albeit we expect margins will be under pressure but BOL management seems intent on maintaining a disciplined approach to pricing with a long-term goal of tripling return on invested capital.

So to summarise, things are very tough in this industry but hey that’s why we are looking at it, if things were going well the shares wouldn’t be at 16c.

So how do the financials look right now?

Share price             16c

Shares                     $469m

Mkt Cap                 $75m

Current Net Debt    $105m

EV                            $180m

                                    2014(f)

EBITDA                       $50m

NPAT:                           $9m

Free Cash flow           $30m (this will probably fall to $20m in 2015 due a lack of asset sales)

Net tangible assets    $250m

So this year we have:

free cashflow multiple:         under 3x.

EBITDA multiple:                  under 4x

EBIT multiple:                       8.4x

p/e                                          8.2x

Int cover                                 6x       

div yield                                 0

On the face of it, current earnings look pretty attractive but not super exciting. However, it is trading at around a third of NTA so while I concede we don’t want to be a seller of a large fleet of cranes in a fire sale, its an indication of just how bombed out the stock is. The potential upside in this stock isn’t created by the current earning’s environment. Indeed it’s created by an (even slight) improvement in revenue and a corresponding holding or improvement of margin.

In the event that revenues go half way back to where they were in 2009, we would see the company generating EBITDA of around $60m (assuming margin stability) providing an ebitda multiple of 3x. With any sign of improvement in the macro environment, this stock has significant upside potential. The market has a bearish bias on BOL right now (with fair reason) but with a shift in that attitude towards a more neutral view, an EBITDA multiple of 6x would not be unreasonable, combined with an improved bottom line and the stock could go much higher.

When we bought PMP at 15c, the stock was being priced for going broke…imminently and that investment has delivered returns of 200% so far so you don’t need much of a market shift to see strong upside…but you do need patience.

Management has suggested it would like to buy back stock when debt is under $100m which should be post the end of the current fiscal year, assuming revenues are stable, its hard to see why the company wouldn’t buy stock back at a third of NTA.

So we have a pretty well-run business in a tough industry at a challenging point in the cycle trading at reasonable multiples if things are stable to better going forward. For patient investors this stock has the capacity to deliver significant upside while downside is somewhat underpinned by a big discount to NTA, and management’s intention to cut fixed costs further. This isn’t a stock for those with a negative view on Australia but with a modest improvement in mining maintenance spend, a pick up in infrastructure activity and continued pick up in building, this stock will make more money and its low multiples will increase. At some point in the next decade (or so) this stock will probably be the darling of the cycle again and the market will like it and that will be the time to sell.

As the old saying goes: Buy in gloom, sell in boom.