I'm not too sure what to make of this result. Spectra has obviously been a big problem for AKG, but why is the balance of the AKG business not making any money? In FY 13 (pre acquisition of Spectra, STA and Vostro, and prior to the divestment of the Fasteners business) AKG was reporting EBITDA of $5.5m on Revenue of $37.8m (14.5% EBITDA margin). The Education segment in FY 13 generated Contribution of $5.7m on Revenue of $30.3m (18.8%).
What's happened to the base Education business since then? If its financial performance had been maintained then the AKG results would probably look something like this:
1. Base Education business EBITDA: $5.0 - $5.5m
2. Plus / minus impact of acquisitions: say ($0.5m)
[Spectra (negative $3m), STA (positive $1.5m) and Vostro (EBITDA unknown, but at time of acquisition was expected to generate positive $1.0m p/a)]
3. Plus / minus movement in value of Redhill shares: ($0.76m)
Equals: FY 16 EBITDA if Base Business remained constant: $3.74m - $4.24m
Yet the reported EBITDA was negative $3m.
It would have been helpful if management had commented in more detail about what's happening in the base business. The base business should be very profitable, given the positive student visa reforms a few years ago, the competitively favourable devaluation of the A$ compared with several years ago, and the growth in international student numbers in recent years. Navitas has reported good results, and Redhill's results are also positive and improving. AKG should also be riding the wave.
My sense is that Management has been very distracted in the past several years due to poor acquisitions and a loss of focus, however I believe they are now focussed back on the basics. Spectra seems to have been fixed and should produce a break-even result this year if the current trends continue. I believe the Vostro business has also been scaled down due to Victorian government funding changes, so let's assume that's also a break even result this year.
If that is the case in Spectra and Vostro, then any profit produced in the base business + STA should fall to the bottom line. Even if they only achieve 10% - 12.5% margins on $35m in the base business that should generate $3.5m - $4.37m of EBITDA. Then add in a further $1.5m from STA, which takes us to $5m - $5.87m, plus the expected further improvement in Redhill's performance should also be a positive.
The market cap today is $16m, suggesting a 3x forward EBITDA multiple (even before making any modest assumptions about RDH's prospects). This seems reasonable to me, given AKG's recent track record and the failure of management to communicate a strategy to the market or to provide any meaningful insights into the performance of the underlying businesses.
Lastly, I am relatively unconcerned about the situation with the bank and the Emphasis of Matter issue. Bank debt has been reduced significantly in FY 16, and the company does have some very supportive and wealthy major shareholders. If the company was ever squeezed by the banks then they could easily sell their RDH shares for c. $2m+, and several of its subsidiaries operate as standalone entities and could easily be sold at good prices, eg, STA would be worth $6m+ (based on a 4x FY 16 EBITDA multiple).
If Management was more transparent about the performance of the underlying businesses and communicated a credible vision and a strategy, I would be inclined to buy more shares and wait for a takeover of the company to occur.
I expect the share price to tread water for the next 6 months until the half year. If Management can deliver a decent result at the half year and communicate it properly there is potential for some meaningful share price appreciation next year. That's what I am hoping for!
I would be interested in any other perspectives out there.
AKG Price at posting:
22.0¢ Sentiment: Hold Disclosure: Held
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