Thanks SB.
Here are my views on your calcs, although as we all know valuation is as much art as science and only time will tell who is right:
- I see you have used an average last 3 years FCF for your calcs, which includes the 2016 year which in my view gives you an overly conservative view of underlying FCF. This is because this year included 1) a significant level of investment in new systems and processes to improve regulatory compliance, 2) the training business was running at material losses and 3) Concept Engineering was in the early stages of its strong profit growth. If you undertake your analysis just using the past 2 years FCF average (c$2.5m), you should come to a valuation of about 35c;
- In my view, the bigger issue for the valuation of this company is the trajectory of FCF given continued growth in the labour hire business, and the growing profitability of the training business. In my view, we should be looking at FCF of $4m-$5m this year (depending on the level of WC investment and capex). Further, given the exposure to the infra sector and growing training earnings, a sustainable FCF of $4m seems reasonable to me and would, based on your valuation approach, equate to a valuation of 55c.
- If mgt keep doing what they are doing, I don't see a sp of more than 50c as unreasonable over the next year or two, although macro conditions remain a key risk.
- Just one other comment, I wouldn't typically add the NTA to the DCF valuation to get a total valuation. I would only add asset valuation to DCF if the assets being valued were non core to the business/cashflows used in the DCF.
All the above is just my opinion, but this looks like a great investment to me at the current price.
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