Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
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Reporting season is now over, presenting many new Value.able opportunities. Roger Montgomery reveals to Ross Greenwood which A1 companies have caught his eye this season. Listen to podcast.
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Who would have thought a little comment at the end of my 17 August Value.able column for Alan Kohler’s Eureka Report on Qantas’ strategic direction announcement would cause such a stir!
It appears I wasn’t the only Value.able Graduate wondering aloud about the coincidental timing of the strategic change of direction, coming as it did whilst the share price was trading at near record lows.
My Value.able column started like this: “Sick of losing money, Qantas CEO Alan Joyce revealed a long-overdue change of strategy for the airline earlier this week, which included cutting jobs, delaying the delivery of six A380s until 2019, buying smaller aircraft, launching two new Asia-based airlines and an attempt to turn around the fortunes of Qantas International.”
And ended like this: “This may not disturb parties that have taken notice of the share price trading below NTA and considered mounting a takeover. You may recall that back in 2007 a consortium that included former CEO Geoff Dixon and former chairman Margaret Jackson had a bid of $5.45 share on the table. At yesterday’s closing price of $1.525 I think it’s safe to say they dodged a bullet.
“If there’s a way to get around the Qantas Sale Act and increase aircraft utilisation rates with an offshore hub, I reckon someone out there in the world of institutional finance has thought of it and run the ruler over Qantas
“…if there was ever a second tilt at Qantas, now would be as good a time as any…”
Have a quick look at the Balance Sheet.
Ignoring the $470 million ‘investments accounted for using the equity method’, QAN has twenty billion of assets (only $593 million are intangibles – landing slots, brand and software). There is $3 billion of cash and $13.8 billion of property, plant and equipment. Now add to that $14 billion of liabilities, some of which is represented by Redemption Revenue*, a portion of which may never be claimed.
For the moment, put aside the Qantas Sale Act (a small thing to do here because it suits this discussion!), now imagine…
You mount a bid for $3.5 billion (funded largely by the cash in the company’s bank account). You sell all the planes, the property and all the equipment to pay off the liabilities, but keep the frequent flyer business, which then cost you nothing.
While it is true my scenario is embarrassingly simplistic (and not nearly as obvious as bidding for ING during the depths of the GFC) it may also be true that the most profitable frequent flyer program in the world (and Qantas’ most profitable Operating Segment) could be in the sights of an audacious bidder.
Let’s compare the Revenue, Earnings Before Interest and Tax (EBIT) and resulting EBIT Margin of Qantas’ four core operating segments:
I know which segment I want to own!
In 2007 Qantas was the target of a takeover attempt by APA (Airline Partners Australia) – a consortium put together specifically for that purpose. They were willing to pay $11 billion.
At the time, fears around the impact of a highly leveraged owner on Australian superannuation funds were added to the national interest concerns. The bid was not supported by employees or the community. Interestingly, the government of the day didn’t intervene in the bid because of undertakings that the company would remain Australian owned and headquartered in Australia. We are a proud nation.
A bid today at, say $4.5 billion, and with the same undertakings, would either make the current bidders look very wily, or those involved in the previous attempt very silly.
Many analysts now have buy recommendations on Qantas. Whilst I agree that the shares are at a discount to tangible equity, I don’t believe the discount is as great as being stated. This is because retained earnings in equity were never really earned. The economic profit of the airline is, as I have stated on many occasions over the years, much lower than the accounting construct that produced the retained earnings entry. But a discount to NTA does appear to exist.
If you were a bidder, and can overcome all the obstacles, with the share price well below NTA and the imminent prospect of the company committing to acquire another 100 planes, you’d want to get a move on.
Of course this is a purely economic discussion and does not take into account the impact on the jobs and livelihoods of QAN’s 34,000 staff and their families. Nor have I taken into account Australia’s national interest.
There haven’t been many occasions when QAN shares have traded below my estimate of the company’s Value.able intrinsic either.
Ten days ago Qantas was trading at intrinsic value. Based on recent results and current expectations, our estimate of intrinsic value is forecast to rise by as much as 30 per cent over the next three years.
Sneak Peek #2: Ten years of historical intrinsic value and three years of forecast valuations for Qantas, compared to the current market price. Why is the price chart orange, I hear you ask? Because Qantas scores a B for quality. In our next-generation A1 service B = Adequate Quality and Adequate Quality = orange. Amazing, incredible, simple.
There are just two requirements to ensure you receive an invitation to become a founding member of our next-generation A1 service.
1. Read Value.able
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Posted by Roger Montgomery and his A1 team, fund managers and creators of the next-generation A1 stock market service, 1 September 2011.
*The company’s notes states; “Unused tickets are recognised as revenue using estimates regarding the timing of recognition based on the terms and conditions of the ticket. Changes in these estimation methods could have a material impact on the financial statements of Qantas.” Some have suggested that more can be made from unused tickets than those actually claimed/uplifted.
Redemption revenue received for the issuance of FF points is deferred as a liability (revenue received in advance) until the points are redeemed or the passenger is uplifted in the case of flight redemptions. Redemption revenue is measured based on management’s estimate of the fair value of the expected awards for which the points will be redeemed. The fair value of the awards are reduced to take into account the proportion of points that are expected to expire (breakage). The accounting steps are [a current liability if they will be earned within one year] debit to the asset Cash for the amount received and a credit to the liability account such as revenue received in advance.
As the amount received in advance is earned, the current liability account will be debited for the amount earned and the Revenues account reported on the income statement will be credited. This is done through an adjusting entry.
Reports of the death of Australian manufacturing are greatly overstated. Roger Montgomery visits Australia’s unloved manufacturing sector and finds a group of thriving companies worth adding to your watchlist. Read Roger’s article at www.eurekareport.com.au.
Floating a business in volatile times takes a big leap of faith. Bega Cheese (ASX:BGA) floated last month; issuing 127 million shares at $2 each, this raised $35 million which brought the companies value to $250million. In this interview with Ross Greenwood, Roger Montgomery shares his Value.able expert opinion on the future of Bega Cheese. Listen to Podcast.
Did you know some of Qantas’ planes are more than twenty years old? And our estimate is that they fly, on average, 14 hours per day. The rest of the time they mimic that expensive bit of fashion in your garage, earning no income. That garage/hangar time has expensive ramifications for the economics of airlines, just as your decision to buy an expensive but garaged ‘fashion’ item has expensive ramifications for you.
Capital-intensive businesses, such as airlines, erode shareholder wealth. Inflation ensures their maintenance and replacement is a significant proportion of cash flow, which could otherwise be paid out to shareholders. Parts plus labour, which protect the business assets from wear and tear, actually causes wear and tear on shareholders’ funds.
Raising capital and increasing debt, has hitherto been easy for Qantas, but the market is slowly coming to the realisation that it cannot continue. The market capitalisation of Qantas – the ‘value’ the market ascribes – is less than all the equity that the company has raised – much less.
As a result of the market’s slow migration to understanding the economics of airlines, fresh management have had to respond quickly.
The best measure of economic performance is Return on Equity (ROE). This year QAN achieved a ROE of just over four per cent. Meanwhile, Oroton shareholders have been enjoying eighty per cent returns. Did you know there are 267 companies that earn more than 15 per cent returns on equity?
The business of selling seats is an expensive one for Qantas, and while the business of selling the hope-of-getting-a-seat (the Frequent Flyer program) is extremely profitable, owning planes means the cash is always inhibited – it can’t be distributed to shareholder owners.
Qantas however isn’t the only seller of seats on planes. Indeed there are businesses that sell seats on planes and they don’t have any planes. Let’s compare two seat-sellers: Qantas and Webjet.
I believe the very best businesses online are lists – lists of jobs, lists of apps, lists of songs, lists of cars, lists of houses, list of flights and lists of seats. What is particularly attractive is that a business with a list of seats doesn’t have any planes. Sure its revenue is going to be lower, but what about its profit?
Let’s compare…
Now, lets take a look the economics of these businesses over the past ten years.
As the following sneek peek charts from our soon-to-be-released next-generation A1 stock market service display, Webjet has scored, on average, an A2 since 2005.
In this example, the Quality Score information tells us that something dramatic happened in the 2004/2005 financial year.
Webjet was once called Roper River Resources Company and in July 1999 the shares, under the ASX code; RRR, were trading at 25 cents. By March 2000 – near the peak of the internet bubble – RRR shares were trading at $1.38.
The reason is now obvious, although at the time it may have been a bit of a mystery.
In January 2000, Roper received a ‘speeding ticket’ from the ASX to which it responded on 14 January with the following statement:
“1. There are no, matters of importance, about to be released to the market.
“2. The Company is not aware of any information to explain the recent trading in the shares.
“3. The Company can offer no other explanation for the price change and increase in volume in the securities of the Company.”
“4. I confirm that the Company is in compliance with the listing rules, in particular, listing rule 3.1.”
On 27 January 2000 however – less than two weeks later – Roper River Resources (ASX:RRR) announced it was issuing 50 million shares to acquire Webjet Pty Ltd.
By June 2004 the shares were still trading at 15 cents, however the company announced the previous October that it was trading in the black for the first time. By November 2004, it was reporting 400 per cent monthly increases in sales. Almost every month to its full year results in June 2005, it continued to report 400 plus percentage increases in monthly sales.
And in that year Webjet’s Quality Score jumped from C4 to A1. As you can see, Webjet has maintained an A1 or A2 quality rating since.
By comparison, Qantas’s Quality Score profile has been more marginal. This should be unsurprising to many, if not most Value.able Graduates, who understand the downside of capital intensity. Lots of property plant and equipment results in more equity for a given profit, and that means lower returns.
So, what do you think?
With reporting season about to end, your mission, if you choose to accept it, is:
Source the latest Annual Report for each business in your portfolio. Go to the Balance Sheet and under ‘Non-Current Assets’ find ‘Property, Plant and Equipment’.
If you have any, how many capital-intensive businesses are hiding in your portfolio?
Making this process simple and easy is something we have been working on for you. We created our next-generation A1 service because we wanted to make finding extraordinary companies offering large safety margins easy. And, of course we love investing. The above graphics are just one
It’s an A1 service that is like nothing you have ever seen before.value
Value.able Graduates – your invitation to pre-register is coming soon.
If you haven’t graduated to guarantee your invitation, click here to order your copy of Value.able immediately. Once you have 1. Read Value.able and 2. changed some part of the way you think about the stock market, my team and I will be delighted to officially welcome you as a Graduate of the Class of 2011 (and invite you to become a founding member of our soon-to-be-released next-generation A1 service).
Posted by Roger Montgomery and his A1 team, fund managers and creators of the ext-generation A1 stock market service, 30 August 2011.
Qantas posted an underlying before-tax profit of more than $550 million, which is up almost 50 per cent on last year. However, while half a billion dollars may sound like a lot of money, Qantas Chief executive Alan Joyce says the airline’s profit is well short of where it needs to be to justify the investment from its shareholders. Listen to the Podcast or Read the article.
Following Woolworths latest results announcement, Roger Montgomery shares his insights on why Australia’s leading retailer failed to meet the markets expectations. Roger said ‘WOW is lowering their prices to drive profit growth, which is not sustainable or good for our country’. In this appearance on Switzer TV, Roger also highlights the key data points that investors should look for when analysing annual reports. Watch the interview.
With reporting season in full swing, I would like to share my insights into whose Quality Score has improved, and whose has deteriorated. Remember, none of this represents recommendations. It is intended to be educational only. You must seek and take personal professional advice before acting or transacting in any security.
To date, 232 companies have reported their annual results. I am sure you can understand why we feel snowed under. With almost 2,000 companies listed on the ASX, the avalanche still has a way to roll.
We have updated all of our models for each of the 164 companies that we are interested in. As you know, we rank all listed companies from A1 down to C5. The inputs for those rankings always come from the company themselves. I would hate to think how bipolar they would be if we allowed our emotions and personal preferences to infect those ratings (or be swayed by analyst forecasts)!
Rather than arbitrary and subjective assessments, we download some 50-70 Profit and Loss, Balance Sheet and Cash Flow data fields from each annual report to populate five templates. All of these templates employ industry specific metrics to calculate the Quality Scores. This allows us to rank every ASX-listed business from A1 – C5. Its our objective way to sort the wheat from the chaff.
For Value.able Graduates not familiar with our scoring system, company’s that achieve an A1 Score are those we believe to be the best businesses, and the safest. C5s are the poorest performers and carry the highest risk of a possible catastrophic event.
A1 does not mean nothing bad will ever befall a company. A1 simply means to us that it has the lowest probability of something permanently catastrophic. Further, ‘lowest probability’ doesn’t mean ‘never’. A hundred-to-one horse can still win races, even though the probability is low. Similarly, an A1 business can experience a permanently fatal event. In aggregate however, we expect a portfolio of A1 businesses to outperform, over a long period of time, a portfolio of companies with lesser scores.
With that in mind, we are of course most interested in the A1s and – on a declining scale – A2, B1 and B2 businesses.
So, who has managed to retain their A1 status this reporting season? And which businesses have achieved the coveted A1 status? If you hold shares in any of the companies whose scores have declined (based of course on their reported results), please read on.
Of the companies that have reported so far, last year 20 of them were A1s, 28 were A2s, one was a B1 and 13 scored B2. That’s an encouraging proportion, although we tend to discover each reporting season that the better quality businesses and the better performing businesses are generally keen to get their results out into the public domain early.
Its towards the end of every reporting season where the quality of the businesses really drops off. This is always something to watch out for – companies trying to hide amongst the many hundreds reporting at the end of the season. It’s always a good idea to turn up to a big fancy dress party late, if you aren’t in fancy dress.
This year we have seen the number of existing A1s fall to nine from 20, A2s from 28 to 24, B1s rise from one to two and B2s fall from 13 to six.
The first table shows all twenty 2009/2010 A1 companies that have reported to date. You’ll see a number of very familiar names in here, including ARB Corp (ARP), Blackmores (BKL), Cochlear (COH), Carsales.com (CRZ), Fleetwood (FWD), Mineral Resources (MIN), Platinum Asset Management (PTM), REA Group (REA), DWS (DWS), Forge (FGE), K2 Asset Management (KAM), Macquarie Radio Network (MRN), Nick Scali (NCK), 1300 Smiles Limited (ONT), SMS Management & Technology (SMX), Webjet (WEB), JB Hi-Fi (JBH), Navitas Limited (NVT), Saunders International (SND) and GUD Limited (GUD). Nine have maintained their A1 rating this year.
Now, before you go jumping up and down, a drop from A1 to A2 is like downgrading from Rolls Royce to Bently. When we talk about A2s, its not a drop from RR Phantom to a Ford Cortina, not that there’s anything wrong with the old Cortina (if you are too young to know what I am talking about Google it!).
The only big rating decline is GUD Holdings, which made a large acquisition (Dexion) during the year. Indeed, a common theme amongst the higher quality and cashed up businesses this reporting season has been the deployment of that cash towards, for example, acquisition or buybacks (think JB Hi-Fi).
Moving onto the 2009/2010 A2 honour roll: Codan Limited (CDN), Advanced Share Registry Limited (ASW), Commonwealth Bank (CBA), Credit Corp (CCP), CSL Limited (CSL), Decmil (DCG), Domino’s Pizza (DMP), NIB Holdings (NHF), OZ Minerals (OZL), Plan B Group (PLB), RCG Corporation (RCG), Sedgman Limited (SDM), Slater & Gordon (SGH), Super Retail Group (SUL), Wellcom Group (WLL), Argo Investments (ARG), AV Jennings (AVJ), Carindale Property Trust (CDP), Computershare (CPU), Euroz Limited (EZL), Oakton (OKN), Tamawood (TWD), Austal Limited (ASB), LBT Innovations (LBT), Academis Australasia Group (AKG), Chandler Mcleod Group (CMG), The Reject Shop (TRS) and Primary Health Care (PRY).
The businesses that make up this list showed slightly more stability. The biggest fall in quality this year was Primary Healthcare (PRY),which is still struggling to digest the large purchases it made a few years ago. The Reject Shop (TRS) also declined, to B3. TRS is still investment grade and we would lean towards believing this is a short-term decline, given the floods in QLD that caused the complete shutdown of their new distribution center and the massive disruptions subsequently caused. As the company said, you can’t sell what you haven’t got!
Finally, B1 and B2 companies: Leighton Holdings (LEI), Alesco Corp (ALS), Mount Gibson Iron (MGX), Amcom Telecommunications (AMM), Data#3 (DTL), Ansell Limited (ANN), Fortescue (FMG), Little World Beverages (LWB), Stockland (SGP), iiNet (IIN), MaxiTRANS Industries (MXI), Newcrest Mining (NCM), SAI Global (SAI), Gazal Corporation (GZL) and Salmat (SLM).
About half the companies in the B1/B2 list retained or improved their ratings from last year. Mind you, half also saw their rating decline!
The clear fall from grace is Leighton Holdings, whose problems have been well documented in the media and via company presentations.But once again, like The Reject Shop, this could be a temporary situation. If the forecast $650m profit comes through, I expect LEI’s quality score will improve. What the dip will do, however, is remain a permanent reminder that Leighton is a cyclical business. Getting the quote right on a job is important, even more a massive enterprise like Leightons.
Are you surprised by any of the changes? We certainly were!
Sticking to quality is vitally important. That’s what my team and I do here at Montgomery Inc, and its what our amazing next-generation A1 service is all about. Value.able Graduates – your invitation is pending.
If you are yet to join the Graduate Class, click here to order your copy of Value.able immediately. Once you have 1. read Value.able and 2. changed some part of the way you think about the stock market, my team and I will be delighted to officially welcome you as a Graduate of the Class of 2011 (and invite you to become a founding member of our soon-to-be-released next-generation A1 service).
Remember, you must do your own research and remember to seek and take personal professional advice.
We look forward to reading your insights and will provide another reporting season update soon.
Posted by Roger Montgomery and his A1 team, fund managers and creators of the next-generation A1 service for stock market investors, 24 August 2011.
What is the value of a company that wakes up to find it has sold very little or even nothing in the last six months? My very long-term outlook for the price of oil hasn’t changed, but I can make the argument that the shares of Matrix C&E cannot currently be valued as a going concern any more confidently than I can a speculative exploration company.
While its a very harsh interpretation and its not the only interpretation, there are things to be concerned about.
Before I go into what disappointed me about the result, let me make an observation about the short term share price action. It appears that many short term investors could be overreacting to the report. Management are very confident that they will win new business and if they do, the share price represents and opportunity.
First, cash flow. Its something I have mentioned here at the blog previously – as have others.
Submitted on 2011/07/05 at 1:08am: “The short and mid term outlook for Matrix will be dependent on them securing some contracts and their cash flow will be dependent on them getting a few deposits paid. We have put a call into the company to see if we can get an answer but they may soon be in blackout so we’ll have to wait and see.”
Submitted on 2011/06/24 at 1:46pm: “Great stuff Ash. Good to challenge and shake things up. Any opposing views, go right ahead and put them up. I know that lots of you are concerned about Matrix. Watch their cash flows…”
There were many useful insights provided here at the blog about Matrix and their cash flow.
Prior to those comments, in April in fact, I noted we had participated in the capital raising at $8.50. But our holdings were small and hadn’t exceeded 1% of our portfolio because of our concerns about cash flow. You may also remember I demonstrated declining intrinsic values for Matrix in the future, which triggered some concerned responses. You really do need to understand the business, and the benefits of diversification.
Many might throw their hands up and give up on the intrinsic value approach, and while I would be delighted to see fewer value investors, this is as much an overreaction as the plunging share price may be today. There are critics who suggest there’s a problem with the intrinsic value approach. Gloating is predictable, but they do fail to understand that any shortcoming is not the approach but its application; You need to understand cash flow (heck, there’s a whole chapter in Value.able!) and you need to understand the business (it’s what Value.able is all about).
So here are some of the facts, thoughts and reasons I think the market is reacting the way it is. Don’t forget, in the short run, the market is a voting machine.
First:
MCE missed analysts’ expectations. Thats the first reason for a negative reaction by the market. I should point out that the share price has been declining significantly for two trading sessions prior to this blog post and has fallen 50% from its highs in April.
Second:
Profit grew 85 per cent (but not by as much on a per share basis). While the question should be if an analyst’s forecast is missed, is it the company’s fault or the analyst’s, in this case those forecasts are a function of company guidance. Guidance was $40 million at the start of the year, then $36 million. This week profit came in at $33.6 million. Earnings per share grew 56 per cent (less than the 85% growth in total NPAT) thanks to a capital raising that was used to construct a facility that hasn’t yet generated returns.
Third:
Fifty six percent growth in earnings is stunning. Make no mistake about that. Again, all things being equal, if such growth were to continue it would almost certainly cause intrinsic values to rise and materially.
Fourth:
The company is forecasting revenue growth of 20 per cent. This is “company guidance”. If NPAT margins can be maintained – duplication costs could be removed next year, which would be positive for margins – profit will equate to 52 cps. But in the face of few or no new contract wins in the last 12 months, are management being optimistic? Thats probably the key to working out if the current price is an overreaction and therefore an opportunity.
To grow revenue by 20 per cent to $224m, they need $114m of new work, on top of the current order book of $110m, which declined 70m in the last six months. Note the zero balance under Deposits in the Balance Sheet too. There’s $500 million of work in the tender pipeline. If they win 30% of that (a figure the company suggests is reasonable) that is $150 million and if won this year, will help the company achieve its target.
Fifth:
Analysts were forecasting 2012 EPS of 66 cents in July. Using these numbers, MCE’s valuation is over $10.00. But your valuation is only as good as your inputs. Those analysts are now forecasting earnings of 61 cents per share for 2012 and my own number is now closer to 51 cents (see above). In the absence of any announcements of contract wins, expect further downgrades from analysts.
Sixth:
Significant contract wins would have the opposite impact on intrinsic value and it could rise again.
Seventh:
If they achieve 52 cents of earnings per share, my intrinsic value becomes $6.80 – still significantly higher than the current share price but well down on the previous estimates of intrinsic value. The fact that $6.80 is above the current share price is one of the reasons I am keen to talk to the company!
But don’t forget, they have to win some contracts, because at the moment the [declining] order book is just 58 per cent of last year’s revenue. More importantly, in the absence of any contract wins, that intrinsic value could fall precipitously. As I say above; “There’s $500 million of work in the tender pipeline. If they win 30% of that (a figure the company suggests is reasonable) that is $150 million and if won this year, will help the company achieve its target.” Its important the company make clear (at the AGM for example) details about the length of the tendering and commissioning cycle for all shareholders.
Eighth:
Aaron Begley is confident that they will convert about 30% of the work they tender for. With $500 million in tender work thats will satisfy their revenue growth targets.
Ninth:
In the first half of last year cash declined, despite the fact the company borrowed more money and raised more capital. In the second half, the business generated just $900,000 of cash. There is no way to dress this up though and its not impressive for a company with a market cap earlier in the year of over $700 million and $350 million now. As mentioned in some of the posts, it could merely be a function of the long lead cycles of commissioning oil rigs, in which case there may be an opportunity worth investigating.
Tenth:
In conclusion, the results revealed this: Order book fell from $180m in the first half to $110m now. The $70 m decline is matched by the cash receipts in the second half. Given the fact that deposits in liabilities on the balance sheet fell to zero, we can assume the company made little or no new sales in the second half. Its with this in mind that you need to consider whether the companies forecasts are bullish or not. They need to win some business to justify the estimate of intrinsic value
As at June 30, 2011, MCE’s quality rating is A2. There is virtually zero chance of a liquidity event. But non manufacturing overheads are running at $750k a month, so the cash will be diminishing if there are no contract wins. That is what is driving the share price lower.
THEY NEED TO WIN SOME CONTRACTS OR SHAREHOLDERS NEED TO BETTER UNDERSTAND THE TENDERING CYCLE LENGTH.
Finally:
It is quite fair for critics to point out the one-eyed focus many investors have on the Value.able intrinsic value formula. The formula is a good one, but it is only as good as the inputs you feed it and they must come from an understanding of the business. I took a call from an share market investor who didn’t understand why the share price for Matrix was falling after reporting such strong profit growth. If that sounds like you, take a break and get back to the books to understand the business and its prospects. At the very least, it will help to either, 1) temper your enthusiasm for a company that is at a discount to your intrinsic value estimate, 2) change your estimate of intrinsic value or, 3) give you a better understanding of whether that intrinsic value is rising or declining.
On a separate note, there is a very real chance of a downside overreaction too, something we are always on the lookout for!
General and Educational Information only. Not a solicitation to act or trade in any security in any way. Always seek and take personal professional advice.
BigAir Group?
Digging in a little deeper to BigAir’s financials and you may notice a few things to be cautious about too – always important to read past what management tell you about revenue numbers climbing to the moon and do your own thinking.
These are all symptoms of a fast growing business, and a business which has grown by acquisition.
Firstly, a little cash strapped? Current Liabilities > Current Assets by 400k. This is mainly due to the $3.6m they owe on their acquisitions in the next 12 months. They have announced the acquisitions but hadn’t paid for them at June 30. Don’t forget that they also owe $1.375m, which is in non-current liabilities – a total of $5m in payments are still to be made for past acquisitions already announced. See note 18 to the accounts for more.
The next 12 months are important, and with Current Liabilities > Current Assets, its not an not an ideal position to be in, although they may be able to cover this by working their working capital. What you now need to work out is if future cash flow and of course CAPEX, which seems to run @ $2.5-$3.2m, will provide enough free cash for them to self fund their operations and liabilities. It is of course is hard to work out because maintenance CAPEX and growth CAPEX is harder to separate when a company grows quickly through acquisitions.
The university business may prove distracting, but some serious players in the industry really like fixed wireless broadband.
General and Educational Information only. Not a solicitation to act or trade in any security in any way. Always seek and take personal professional advice.
Posted by Roger Montgomery and his A1 team, fund managers and creators of the next-generation A1 service for stock market investors, 24 August 2011.
