my 2 cents worth

The words below grew from me articulating in writing my BYL investment reappraisal. It's easier to post it as is, rather than to trim it to suit an HC post.

The 1H2014 results announcement did not change my view, which was that BYL would do better than Mr Market thought six to eight months ago, and that I valued BYL at circa 50¢. The reappraisal left me feeling more comfortable about my view, so I bought another 50,000 last week.

1. Facts, Extrapolations and Musings

BYL's FY2013 revenue was $292,416,142, and NPAT was $10,211,149 The 1H214 revenue was $148.7M, and the NPAT was $4.4M. I have assumed that revenue for FY2014 would be similar to FY2013, but NPAT will be less – say twice the 1H2014 NPAT of $4.4M to get M8.8M in FY2014, or an EPS of nearly 8¢. The SP has factored that in, so a decline in NPAT should not panic investors. To be conservative, I retain my view that BYL is worth 50¢ to me, but I would not be surprised to see it dribble past that valuation.

From the metrics below, we can see how Mining Services (the boost in work from Karara) saved the day in terms of both revenue and profit, when comparing the two half years, and how Civil Division dropped revenue back in a disconcerting way. Land Development Division was in effect Bellamack, the end of which we knew was, thankfully, drawing to a close (it was only marginally profitable). We can expect a better second half for Civil Division, thanks to fourteen new contracts out of seventeen signed in the first half that will contribute to the second half of FY2014, plus new work yet to be contracted, and partly completed, in the second half. The boost in Civil Division's revenue should compensate for the cessation of the Bellamack project. Mining Division should generate similar revenue metrics to the first half – perhaps a little less. Total profit could even be a bit higher in the second half, because the Bellamack project contributed so little, whereas Civil Division contributes about 10%.

Half ended Dec 2013 - - - Civil - -- Land Development - - Mining - - - - - - - Total
Sales - - - - - - - - - - - - 72,164,803 - - - - 9,841,446 - - - 66,474,068 - - 148,480,317
Unallocated revenue - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 246,855
Total contract revenue - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 148,727,172
Profit before tax - - - - - 7,587,156 - - - - - - 229,807 - - - 5,222,269 - -- - 13,039,232

Half ended Dec 2012
Sales - - - - - - - - - - - - 91,576,911 - - - 25,873,720 - -- 31,404,901 - - 148,855,532
Unallocated revenue - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - 36,566
Total contract revenue - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 148,892,098
Profit before tax - - - - 10,242,629 - - - - 1,636,182 - - - - 1,841,196 - -- 13,720,007

As an aside, BYL has always had a large so-called Administration expense, but it seems to be a catch-all for many things, including equipment depreciation. It would be interesting to know what occasioned Administration to decline from $9,283,922 to $6,536,915 (perhaps a swag of equipment became fully depreciated – I don't know).

The Thomson Consensus estimates has the forecast EPS at 7.9¢ for FY2014, which is fair enough, considering that I rounded my calculation to the nearest cent, and I would not be surprised if the 2H2014 profit turns out to be slightly higher than the first half. The current Thomson Consensus Estimates (Bell Potter, in effect) are:

. . . . . . 2013 . . 2014 . . 2015 . . 2016
EPS . . . 9.3¢ . . 7.9¢ . . 8.4¢ . . 8.6¢
DPS . . . 3.0¢ . . 3.0¢ . . 3.8¢ . . 3.9¢

The uplift in the dividend pay-out ratio in 2015 and 2016 is because by then BYL would probably taper off its debt-reduction regimen now in place. Immediately prior to the 1H214 results announcement, the estimates were:

. . . . . . 2013 . . 2014 . . 2015 . . 2016
EPS . . . 9.3¢ . . 7.8¢ . . 8.5¢ . . 7.3¢
DPS . . . 3.0¢ . . 3.1¢ . . 3.8¢ . . 3.3¢

I cannot recall what earlier estimates were.

If BYL achieves the most recent Thomson Consensus Estimates, and after 2016 its dividend stays at 4¢ for eternity, an NPV valuation using a RRR of 10% would give a value of 52¢. BYL may not pay as much DPS in 2015 and 2016 as the Thomson Concensus Estimates suggest, but then it is unlikely to never advance on 4¢ thereafter, so I am satisfied that 50¢ is a conservative valuation for me. There are so many unknowns, so many subjectivities, that it is a waste of time indulging in a seemingly more elegant guesstimate. By coincidence, 50¢ is BYL's NTA, so that suggests my valuation is conservative. I suspect that when Euroz or Bell Potter revise their valuations in the light of the 1H2014 results announcement, they will value BYL at about 70¢, which is Bell Potter's valuation of a year ago. What will change in my view is that the level of certainty will be higher than Bell Potter's February 2013 valuation (http://www.brierty.com.au/files/Bell_Potter_Research_Note_Feb_13.pdf).

Another way of looking at BYL's value is to say that it is now (since Peter McBain became CEO) a well run company in a low-brow business, earthmoving, and hence it should have a PER of about 6.5 – 7. If its EPS is assumed to be 7.9¢, then 7.9¢ x 6.5 = 51.35¢.

My intuitive value of about 50¢ is unique to my circumstances – what Mr Market decides is another matter. The high dividend return and my view on its sustainability means that for me the SP does not have to get to 50¢ quickly, which takes care of JM Keynes's wise words, “Markets can remain irrational longer than you can remain solvent.” Keynes's advice does not apply if one is happy with a double digit annual dividend-cum-franking-credits return, and one has invested one's own funds. If one bought BYL at 40¢, the annual return would be (3¢ ÷ .7) ÷ 40¢ = 10.7%, which is not to be sneezed at. I bought in at about 35¢.

What could lift BYL from the no-growth-after-2016 setting that I have used? More housing developments in WA and NT for one. Government infrastructure investments for anther. A lucrative and long-term mining services contract would help - perhaps even put a rocket under the SP.

In the case of the WA Government, infrastructure development could be funded from the tonnage-based iron ore royalties it gets from miners who are now compensating for lower prices by increasing tonnage. Such funds if spent within the framework of the Royalties for Regions policy, would see infrastructure building activity in the geographies where BYL has often secured contracts, and where it has joint ventures with Aboriginal enterprises. In the current fearful investment climate, new entrants are less likely to enter this business for a few years, whereas some cash-constrained earthmoving firms will withdraw from the field, so competition may abate in time (FGE was not a significant earthmover, but part of its contract at Roy Hill was “structural earthworks”). Of course, existing earthmovers like MLD and NWH to mention two, will increase civil works business if mining services decline, which could be a negative for BYL, but probably less so in the small contracts domain where BYL has operated for decades. However, this source of competition for civil works may be muted in the near future, because existing iron ore miners and new players like Roy Hill will want to ship as much iron ore as possible while prices remain high, remembering that it only costs them about $US50 a tonne landed in China, and this is likely to be effected using a mix of in-house earthmoving facilities and contractors. For a while, there should be sufficient work around to keep equipment and teams busy. If I owned Roy Hill, I would for a few years not even think of investing in equipment and hiring operators – the time to tinker with marginal cost reductions is when the money is flowing in and the future is more visible.

2. Mining Division

In an earlier post I suggested that the Karara Mining Limited (KML) contract expired circa march 2015, but as it started in June, and being a 4-year contract, it should expire in June 2015, so that improves BYL's revenue visibility for YE 2015. The KML mining services contract was reported as a $185M deal, but the parties will agree to work orders that result in a total that exceeds $185K. KML needs to ship additional DSO (direct ship ore) from its haematite operation to make up for delays in getting the magnetite-concentrate operation running at target capacity, and the haematite mining has been contracted to BYL. Most haematite miners are rushing to export as much as they can at current prices, which portends well for BYL and others like NWH.

The KML contract is BYL's only current mining services contract. Management want to have one or more such contracts, but thus far they have not succeeded. In past years BYL had mining services contracts with Tanami Gold (Coyote and Bald Hill), Fortescue Metals Group (Cloudbreak), Mt Gibson Mining (Extension Hill), Newcrest Mining (Telfer) and Consolidated Minerals (Woodie Woodie). In the NWH thread I opined that NWH's job advertisements for Pilbara-based mining engineers and a Perth-based lawyer/contracts manager suggested that NWH was gearing itself up for more earthmoving as a mining service, and that the Roy Hill mine now being developed was likely to use contract mining services in its early years. The likes of MLD and BYL are exposed to similar opportunities, but BYL's smaller size makes even the crumbs most welcome.

3. Land Development Division

I am unsure if Zuccoli Stage 2 is similar to Bellamack or not, so I have ignored Land Development as a Division in future, and simply included the Zuccoli contract under Civil Division, along with similar work performed for the likes of Landcorp, Cedar Woods, LWP, Peet and others. If that contract is similar to Bellamack, then I expect that the profitability would be better – closer to the profitability of Civil Division's other work.

4. Civil Division

According to the 1H2014 results announcement, BYL secured 17 civil works' contracts in that half year worth $180 million. If from that $180 million we remove about $80 million (being that part of the Zucolli Stage 2 contract that I guesstimated to relate to 2015, 2016 and 2017), that leaves $100 million. As a large percentage of such work is completed within months of commencement, rather than years, this is a significant half-year sales achievement. Remember, BYL's total revenue is something like $300M a year, or $150 per half-year, and a big chunk of that flows from mining services. The half-year report stated that 14 of the 17 contracts will contribute to 2H2014's revenue. I am inclined to think that Civil Division will generate about $90 Million in 2H2014.

In recent HC posts I have listed the BYL contracts secured since July 2013, whereas the list below goes back to January 2013, and it includes three contracts secured in February 2014. This list is to allow readers to get the flavour of BYL's civil works business, which has a different profile to civil works performed by the likes of MND and NWH – a distinction that investors should understand. A few of the contracts listed below were publicised via ASX announcements, but most were not. BYL regards $15 million as the dividing line that dictates whether contracts are announced via the ASX, or not. In the list below, contracts that were secured between 1 July 2013 and mid-November 2013 have their values attached, which sums to $40.3M – these were detailed in the 25/11/2013 AGM report – see http://www.brierty.com.au/images/Documents/ASX%20Announcements/2013/AGM_Presentation_2013.pdf

February 2014
. . . Roystonea Road Project – Client: NT Government
. . . Flynn Drive – Client: City of Wanneroo
. . . Trinity at Alkimos Stage 11 – Client: LWP
January 2014
. . . North Lake Primary School – Client: Lend Lease & LandCorp
. . . Kalgoorlie Greenview at Karlkurla Stages 2B & 2D Subdivision – Client: Landcorp
. . . Newman Town Centre Redevelopment Stage 3A – Client: Landcorp
. . . Wickham South North Link Road – Client: Rio Tinto
December 2013
. . . Coalfields Hwy – Client: Main Roads WA
. . . Zuccoli Stage 2 – Client: NT Government
November 2013
. . . Karara Tailings Dam – Client: Karara Mining
. . . Heritage Walking Trail – Client: BHP Billiton
. . . Alkimos, Stage 19 – Client: LWP – $1.9M
. . . Nettleton Rd, Byford – Client: Cedar Woods – $8.3M
.September 2013
. . . Lakelands Stage 60 Earthworks – Client: Peet – $1M
. . . T1 & T2 Long Term Park & Ride Capacity Expansion – Client: Perth Airport Pty Ltd – $15.6M
. . . T1 Forecourt Landscape and Canopy – Client: Perth Airport Pty Ltd – $1M
. . . Lakelands Latitude Stage 3 – Client: Peet – $3M
August 2013
. . . Alkimos, stage 14 - 18 earthworks – Client: LWP – $2.8M
. . . Lakelands stage 37 – Client: Peet – $0.7M
. . . Stuart Highway Coolalinga – Client: Gwelo Investments Pty Ltd – $4.5M
July 2013
. . . Two Rocks – Client: Capricorn Village JV – $1.5M
June 2013
. . . Alkimos, stage 17 – Client: LWP
May 2013
. . . Avon Health Precinct - Stage 1, Northam – Client: Shire of Northam
. . . April 2013
. . . West Angelas Brockman Fuel Infrastructure Project – Client: Rio Tinto
. . . Alkimos, stage 16 – Client: LWP
March 2013
. . . Abydos Link Road – Client: Atlas Iron
February 2013
. . . Alkimos, stage 15 – Client: LWP
. . . Alkimos, Central Village earthworks – Client: LWP
January 2013
. . . Alkimos, Stage 14 – Client: LWP
. . . Rous Head – Client: Fremantle Port Authority

Let us see what Euroz and/or Bell Potter have to say in their next published opinions. My above rambling is bound to be wrong in places, but I hope that compensating errors will keep the gist of it sound.