Ann: Revised 2019 earnings guidance, page-19

@danielpotter1972,

Yes, ABC has been a very resilient company but that is more than likely due to the tyranny of distance which has limited the amount of competition that ABC has had to face over its life.

Still, that is a competitive advantage and should be acknowledged as such.

The company is also a strong Free Cash Flow generator, with it never not generating FCF in any given year.

So, all up, it has attributes that makes it definitely qualify as investment grade, in my opinion.

Problem is, being a non-scale-able business, it can't be considered to be a growth stock by any stretch of the imagination; all the growth over the past decade has come via the construction cycle upswing, as well as some $400m worth of acquisitions that were made since 2008.

When it comes to investing, I think that one of the most important things that needs to occur is to determine the correct way to value a given security (eg. as a growth stock, a cyclical stock, a fixed income proxy, an asset play, on sum-of-the-parts EV multiples, on Price-to-
revenue for tech stocks, etc.)

Despite it operating in a cyclical industry, the best way to value ABC, I believe, is not as a cyclical stock (because it's financial performance over time really doesn't display any real cyclical characteristics; see Chart A below), but on a FCF Yield on EV basis, given its Cash
Flows stream is relatively resilient and stable (see Chart B below):





Given the nature of the business (including the high degree of forecast risk), I would not buy the stock on a FCF Yield less than, say, 7%, to provide me with an adequate margin of safety and in order for me to feel I was being adequately compensated for the inherent investment risks.

Over the past 6 or 7 years the FCF has varied between a minimum of $140m and a peak of $170m, with an average over that period of around $160m .

At today's closing share price, the Market Cap of the company is $2.3bn and Net Debt is likely to be around $430m to $450m when the company reports its interim results.

So EV is around $2.75bn on which $160m of average FCF represents a 5.8% FCF Yield.

Which is still too skinny for me, so I would not buy the stock on valuation grounds, even after today's - and indeed the past 12-months' - spectacular fall in the share price.

I note that the company has traded in my desired >7% FCF Yield level in the past, namely during the GFC in 2008/9 when it became particularly cheap (as did everything else), in 2013 and 2015.



Accordingly, $2.80 is the level where I would start buying the stock.

(I acknowledge that this is not a definitive exercise, but then again, investing never is.)