Is $1.00+ unreasonable for BigAir?

Is $1.00+ unreasonable for BigAir?

When BigAir Group Limited (ASX:BGL) was trading in the low $0.70 range back in September last year, we asked a relatively simple question: was $0.80+ unreasonable for BGL? Our thoughts at the time can be found here.

To save you some time, as a quick recap, management were then guiding for an annualised EBITDA run rate of $14m, versus $12.1m reported for the full year 2013. At a minimum, the business was therefore reasonably expected, albeit conservatively in hindsight, to grow 16 per cent in 2014.

Following a meeting with management and undertaking our own modelling post our conversation, we took management’s guidance a little further. Given the business had just made their largest acquisition to date (in IP Intelligent Communications), which, when coupled with the leverage the business would extract from cross-selling products, we saw reason to be a tad more optimistic.

Our EBITDA ballpark run-rate forecast of $17m was produced, and assuming approximately 50 per cent margins, a net profit after tax of between $7.5 and $8.5m was likely in future periods. This equated to an earnings per share range of 4.5 to 5.2 cents at the time, which, when compared to the average industrial company trading on approximately 16 times forward earnings, a share price range of $0.72 to $0.83 was derived.

And while it hasn’t been a smooth ride, this has remarkably been the range of the share price over the past 5 to 6 months since.

This however, is all history, and we can’t make money from the past (unless you’re a historian). So the question now becomes, where to from here?

Management is now guiding an underlying EBITDA run-rate of $18m. This is coupled with continued impressive underlying momentum within the business, the expectation of further acquisitions, wholesale cross-selling opportunities and organic growth, meaning a reasonable earnings per share range is now 5.4 to 6.6 cents, as demonstrated below.

Applying the same ~16x forward earnings multiple as before, and a potential share price range of $0.86 to $1.06 is not an unrealistic expectation. Notwithstanding the fact that we continue to have no ability whatsoever to predict share prices or the events that may influence them.

All this leads to BGL remaining one of our longer-term holdings here at Montgomery Investment Management. And all things being equal, it will likely remain that way due to current indicators pointing to BGL becoming a much larger business than it is today.