If I had to choose a single graph that best encapsulates today’s result, it would be this one:
As previously discussed (see https://hotcopper.com.au/posts/45883444/single), Pental’s main issue in the post-Symex era has been its difficulty in growing Gross Profit. Now, thanks to a structural change in demand, that growth appears to have kicked off in earnest.
Because of the operating leverage involved, the effect of this step-up in Gross Profit on Underlying EBIT has been nothing less than spectacular, with a +80% increase between 2H19 (2.9m$) and 2H20 (5.2m$).
The “million-dollar question” now is whether this is indeed the beginning of a new Supercycle in Gross Profit or it is merely a temporary phenomenon, either because structural demand for cleaning products will decrease or because Pental will not be able to take full advantage of it.
From a valuation perspective, and despite today’s price jump, PTL still doesn’t appear to be priced for continued success: annualising 2H20 Underlying EBIT, the current EV/EBIT multiple is [135m*0.47$-3.7m$]/(5.2m$*2) = 5.7x, which is tantamount to saying that the market hasn’t yet really warmed up to the idea of a sustainable increase in earnings from the previous historical base.
In terms of re-rating potential, even an undemanding 8.0x EV/EBITmultiple (corresponding to a ~6.5x EV/EBITDA) would already imply a SP of [8*(5.2m$*2)+3.7m$]/135m = 0.64$, whereas a more optimistic, “bull-case” (relative to the nature of the business) 10.0x EV/EBIT would correspond to a SP of [10*(5.2m$*2)+3.7m$]/135m = 0.80$.
So, especially in a market that is starting to display a fair amount of froth at the speculative end, this looks to me like a fairly solid, FCF-generative business with structural tailwinds and a valuation that still affords a decent margin of safety to the buyer, even after a +35% SP rally.
As always, my two cents only and all the usual disclaimers apply.
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