A case study in value destruction...

The road is littered with the carcasses of casualties of the mining services sector but, boy, they don't come much worse than this company.

A decade ago, ANG generated EBITDA of almost $4.0m and had over $9.0m of net cash in the bank.

On a conservative EV/EBITDA multiple of 5 times, that would result on an Enterprise Value for the company at the time of $20m, and therefore a market value of some $29m.

Today, after the current monster capital raising (which is basically akin a gun being held to the collective head of shareholders with the message, "give us more money, or you'll lose everything" [*]), the company will have a market capitalisation of $42m.

In the intervening period, this company has raised no less than .....wait for it.... a staggering $139.9m.  A total of $52m in dividends were paid over this period.

Viewed another way, assume that you, ten years ago, inherited this business in its entirety from an old aunt who passed away.  i.e., you were the sole owner of this business, and you decided to hold it for the long-term.

As a long-term shareholder of this business, you would have started the journey with a notional value of $29m for your company.  Then, net of money you received from the company you would have been called on to throw an additional $88m at the business. And yet today, your company would be worth just $44m.

So, even forgetting the value you were gifted with when your old aunt died (that value has disappeared), but you have also lost 50 cents in each dollar that you, yourself, pumped into the business.

But, how, you ask yourself, did it come to this?

Well, the first thing to note is the extent of M&A activity that your company's managers were involved with over the time that you have owned the company:  an eye-popping $160m (!!) worth of acquisitions were made on your behalf.

Like I say, eye-popping, in the context of a company with an Enterprise Value today for the company being roughly just one-third of that total value of the businesses that have been acquired.

The next question that warrants asking is, what has the financial impact of those acquisitions been?  Well, for most companies who are acquisition-prone, it  becomes difficult over time to distinguish how much changes in revenue levels have come from pure organic growth compared to how much has resulted from acquisitions; but for companies such as ANG, that have deep cyclicality in their business, it is nigh on impossible.

All that we can do is to make the observation that ANG's Revenue in FY2006 was $49m, and this year it will be close to $220m.

And then, if we say that the position in the commodity cycle in 2006 was roughly the same as it is today, then it is fair to conclude that most of the revenue uplift over the decade had been due to acquisitions. (Actually, I suspect that 2006 was not as bad as the business conditions being experienced today by ANG, but this just serves to reinforce the argument that all of the Revenue increase has come from acquisitions.)  

So, this means that the company spent around $160m and in doing so, it acquired some $170m of revenue. In isolation, that doesn't seem that bad, for if those businesses operated at ANG's average EBITDA margin in the high teens, then it would mean ANG management were effectively paying between 5.0x and 5.5x EV/EBITDA for the businesses it was acquiring. That would have been quite satisfactory.

But this is were the reality starts to depart from finance theory:  while Revenue today is materially higher than it was in 2006,  EBITDA is barely changed (just a few millions of dollars higher) and EBIT has actually gone backwards(!).

Profitless Prosperity, is what it's called.

And the problem here is, self-evidently, Operating Costs.

ANG seems to be yet another mining services company whose management has been caught like a deer stuck in the car's headlights, by the downturn in the resources sector, and has failed to bring cost structures in line with the new normal (I dunno, maybe they bought into the "China-Stronger-For-Longer" mantra).

As case in point, ANG's single biggest expense item is its Employee expense, which is currently running at over $100m pa (equivalent to 48% of current Revenue).  Until three years ago, this figure averaged in the low-30%, and even when work temporarily slowed down for the 12 to 18 months during the GFC period, the ratio only reached 40%.

So, by my calculations, something of the order of $30m of EBITDA is being left on the table because the business has not been right-sized for the new resources world order.

As a potential investor in the company, I ask myself, "Why not? And will it happen now that management have got some breathing space around the balance sheet issues?"

Because one thing I do see is that the company has - at great expense and pain to its shareholders - basically started from scratch with the "recapitalisation" currently underway ("recapitalisation" being, in my opinion, just a fancy shmancy euphemism for "staving off administration").

For, importantly, the financial risk, once this raising is completed, will now have been - to borrow a phrase from a poster on another, but equally tragic, stock thread - "baked out"of the stock.  

At the current EBITDA run-rate, NIBD-EBITDA is close to 1.0x and EBITDA-to-Net Interest will be running next year at close to 10x.

Valuation-wise, at the current EBITDA run-rate (i.e., before any cost reductions are achieved), the stock is trading on an EV/EBITDA of 4.4x.  Which, given the chequered history of this company ("chequered"being a highly flattering descriptor), is probably still not cheap enough for me.

But what is management actually get round to doing just half what they are paid to do, i.e., manage the company for the benefit of all its stakeholders, including its long-suffering shareholders?  What if management are able to bring Employee Costs - not completely into line with the boom time levels of 30% of Revenue (that's clearly not possible) - but to just the sort of levels that, say, prevailed during the GFC (i.e., 40% of Revenue)?

That would mean an 800 basis point reduction in Employee Costs as a % of Revenue, or in hard money terms, a doubling of EBITDA to over $25m.

And if I had some conviction about that not-unreasonable scenario coming to pass, I would be happy to purchase the stock.

For in that case, the stock would be valued at an EV/EBITDA multiple of just over 1.5x and on a P/E of 4.5x.

A terrible business, no doubt, but I think one that is - debt free - worth more than just 1.5 times its EBITDA.


So my questions then, to those who might now the company's operations better than I do, is how feasible is the likelihood of a management team - who I discern have been overwhelmingly ineffective based on the historical financial metrics of the business - suddenly finding religion and tackling the cost base?

Or is it a case of the cost base simply being structurally permanent and nothing can be done about it?


Because the deep value vulture in me does see value in this carcass ($220m of Revenue relative to a Market Cap of just $42m .... some other parties or some other entity might be able to turn those Revenues to account more profitably and, also, Current Assets almost equal to Total Liabilities after this equity raising completes).

But what I can't see is the path/mechanism/catalyst for that value to be crystallised, absent some or other external event, such as a takeover of the company, or a magical rebound in demand for ANG's services, neither of which I am able to predict.


[*] Make no mistake, without this latest, highly-dilutive emergency capital raising, the company was a goner.