Ann: Change in substantial holding, page-8

"Governments seem keen to improve the building approval rates due to the, perceived at least, shortage of housing. I don't believe that there's going to be a miraculous, immediate turnaround in the fortunes of companies like BLX yet but there's a reasonable chance that, a year out, the next five years or so may be quite supportive for anyone linked to building."

Like you, I'm not a believer in any massive acceleration in new home building; I think the recovery will be a shallow and uneven one. Even if the permitting limitation is totally removed by the stroke of political pens, there are simply too many structural constraints in the building industry (availability of tradesmen, certain building materials and of course, the cost of capital) for a massive supply-side response. On the other hand, I don't think it will get worse from here, so the company's earnings are busy bottoming.

But for there to be a meaningful earnings recovery for BLX, will require a fair degree of self-help, in the form of speeding up the roll-out of stores or cutting unnecessary fixed overheads (or both).

That said, it might be instructive to consider the targeted store roll-out objective of ~180 (compared to the 123 currently) against a few scenarios of varying per-store profitability, in order to get a feel for terminal profitability and valuation.

Scenarios A to E reflect per-store profitability ranging between $300k and $500k (current money terms), which I think will be the likely range (FY2023 was $400k, which I consider represents a reasonable through-the-cycle average, and FY2024 expectation is for $330k) at store roll-out maturity.

Of course, at a roll-out rate of around 5 stores per year, it will take a better part of 12 years to get to 180, so we need to work in money-of-the-day terms (by escalating by assumed CPI of 3%pa)

The respective total future Pre-Tax Profit, NPAT and EPS, are shown in the table below.

Also shown is the assumption of an exit P/E multiple of 15 times (you can write your own adventure here) and the resulting price target and related potential share price upside from the current price.



So, at 180 stores, on my central scenario (i.e., C) the company would be making NPAT in the low $70m, and EPS in the low-30c, which would equate to a valuation around 480cps (@15x P/E).

So, effectively a doubling of the share price, in theory, between now and store roll-out maturity.

Over that 12-year profile, it implies a compound annual capital growth of around 6%pa, plus an annual dividend yield of 3%, for a total investment return of 9%pa.

Inflation-beating, yes, but nothing spectacular in terms of excess return on offer to compensate for the variability of that assessed annual return and the execution risk.

Investment Success arises when Preparation meets Opportunity, so, like you I sense, I am doing the preparatory work on the company, so that I am in a position to act should the opportunity present itself (in the form of further earnings downgrades on the part of the stockbroking analysts in coming weeks, is my expectation).

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