I'm frustrated.
BOL announced full year results, which didn't look particularly divergent to expectations. Goodwill has been written down by $70m which is pretty massive considering intangibles at 31 December were $74.018m. But not really surprising considering the consistent underperformance of the business. The more notable parts of the announcement from an asset perspective are the write-downs in assets-held-for-sale of $4.5m and a $5m hit to 'fixed assets in WA'. Considering assets-held-for-sale at 30 June will be ~$15m, the $5m write-down is a big hit. The other write-down is against assets of ~$100m, so the ~5% hit isn't so bad.
Full year 'Trading' EBIT is $13.8m. Considering NTA is $232m (which is net of debt), the ROA is appallingly low. Margin compression and under-utilisation are the culprits however note this can of course easily flip the other way leading to a rapid spike in ROA. Certainly the current economic value of the assets are suspect.
So, anyway...
- NTA is 49c
- The current price is 13.5c
- If you believe the figures, BOL is a truly eye-popping discount to NTA of 72%
And this is the frustrating part. Management have previously re-iterated the scope for a buy-back given the recognised massive discount to NTA, yet do precisely nothing about it. As highlighted in the update, they have spent $16m on new kit this year, which in itself seems pretty ballsy given every man and his dog know the mining sector is done for the time being. Why on they continue to buy new kit and not just buy-back stock is still beyond me.
The update made no mention of the buy-back.
Nor have insiders been buying stock.
So no buy-back, no insiders buying the stock, hardly any professional in the market wanting to touch the stock AND management buying new kit when assets are delivering sub-par returns. It doesn't add up.
I am either missing something here, the NTA just can't be believed and/or management are just poor capital allocators and therefore should be replaced.
I really hope I am missing something. I'm more than happy to admit a mistake - I've plenty of those in my lifetime.
I am writing to management asking for an update on the buy-back. I intend to be more vocal on this issue.
Kristian
Disclosure: own BOL
Hi Kristian,
ReplyDeleteMaybe management themselves do not believe that they will be able to sell the hard assets on the balance sheet for a price that is close to their recorded value.
I agree with you in that there may be a lot of value created in buying back stock right now.
But there may be more value in paying down the company's debt because if conditions get tougher and the cash flow dries up (esp. without the help from asset sales), then getting caught with $89 million of debt and an asset base that may need a material write down may be a knockout blow for the company - esp. if the banks pull their support.
Gotcha. Potentially one of the tricks REITs s being used here: only sell the assets that can achieve book price or greater. Completely agree on debt. $89m net debt with $13.8m EBIT is a concern. If they were using ALL spare funds to pay down debt then fair enough. The big issue to me is the purchasing of new equipment.
ReplyDeleteKristian,
ReplyDeleteRestructuring provisions will be cash so you may as well make that net debt $96M. Also the buyback seems pretty unlikely to me, can't imagine BOL's banker would be too keen on it using cash to buy back shares when net debt is 7x 'Trading' EBIT.
The amount of fixed cost leverage (operating and financial) in this business makes me uncomfortable given the trajectory of the markets it operates in. But will follow it with interest, good luck.
Yes, the bankers might understandably be reluctant to allow the buy-back. But equally, why would the bankers allow further asset purchases? The ROA is less than commercial interest.
ReplyDeleteThank you!
The lenders ARE earning commercial interest on the funds, it is the company that is earning the ROA. I think you raise a very real issue, but one that is (at least today) more relevant for shareholders than the lenders.
ReplyDeleteFrom a lender's perspective there is a world of difference between investing in PP&E and letting cash leave the company through a buyback (investment in PPE creates more security and maybe more income whereas a buyback has zero value to the lenders). They would be looking at the same pile of PP&E that you are and feeling relatively comfortable with their position despite BOL's very poor performance in the last half.
Companies don't exist to benefit lenders. They exist to benefit their owners, = their shareholders. So the sole consideration in any decision made by the board should be: what is best for shareholders. Of course, the answer they come to might be different to what some shareholders think it should be. But that is the question that should always be answered. So, the lender's views on cash utilisation are only of relevance while considering that primary question. And doubtless, buying back stock at say 30% of NTA (ie at 30c in the dollar) is on its face a much better use of cash than paying down debt at 100c in the dollar.
DeleteThat said, the comments made by several here are spot on- there may well be lending covenants precluding a buyback for now. And if there are then all this hypothesising is moot, because a buyback just is not an option.
I have been a regular visitor of this site and I love reading blogs posted here.
ReplyDeleteIndependent Financial Adviser Weston-Super-Mare & Independent Financial Adviser Bristol
Rickymartin,
DeleteMost of my family comes from Somerset, and I visited Weston-Super-Mare. Love Somerset, but I prefer our beaches here in Sydney!
There may also be restrictive covenants against stock buy-backs and allowance for a limited basket of CAPEX, which would explain the behavior. A clever commercial lender would have ensured that this is the case.
ReplyDeleteThank you all for the comments. To date it has MOST DEFINITELY been the case that is better to be the lender to BOL, not shareholder. Annoying. On the bright side, DA (Depreciation + Amortisation) has been significantly higher PPE, so free cash flow has been much better than reported profit I believe this will continue to be the case when we see the full year results. The answer then is surely simple: pay down debt really aggressively by disposing of more assets and not buying more kit until the balance of power is away from lenders and then buy-back with ears-pinned-back.
ReplyDeleteAs further disclosure, I have been buying some more stock recently and my average entry price is ~15c. I started buying earlier this year. If the NTA is anywhere accurate, BOL is wildly cheap. What we need now is the right strategy put in place to realise that value.