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.
