Back on track

I have followed Engenco (formerly Coote) since IPO in 2006 and sold my initial stake due to a lack of understanding of the Greentrains rationale.
I have kept a lazy eye on the company since, and took some more interest when Dale Elphingstones’s Elph Pty Ltd started buying in. Elph now hold some 65 % of the company subsequent to a couple of takeover attempts. The previous board was replaced and key Elph personnel took management positions, including Dale Elphingstone as Chairman. Elphingstone is widely regarded, and highly successful in building similar businesses. Unfortunately the legacy issues of top of the market acquisitions, heavy capital expenditure and the resources slowdown contributed to large debt and cash flow issues. When Elph took control it became a turnaround situation which has been evolving for 7 years or so, testing for all concerned.
Life-saving capital injections led to heavy equity dilution over the years culminating in a 10 for 1 share consolidation in 2011. This resulted in a large number of shareholders with very small shareholdings, which has no doubt resulted in these investors being either disaffected or ambivalent to the prospects for the company. Who could blame them if they didn’t wish to participate in the recent SPP and instead sell into the share-sale. However, the tiny SPP aside, there has been NO equity raisings in the 4 years following the capital consolidation, this I like.
It must be said that the current management has done a commendable job rescuing the company from the precipice to where it sits today, despite the timeframe. Clearly there is talent amongst management and a commitment of the majority shareholder to achieve this turnaround. I only hope that the experience of the last 7 years doesn’t deter them from taking some risks moving forward.
In making an investment case I am interested in safety first. Debt is no longer a limiting factor for the company. The company is generating positive free cash flow and the free cash flow yield now sits at +15%. It is worth noting that Drive Train Power and Propulsion, CERT and Gemco businesses segments are still the core assets of the company. Other businesses have come and gone but the early assets are still largely intact. The valuation is low relative to current metrics and possibly very low relative to the asset potential. As majority shareholder Elph is incentivised, I estimate the cost base for Elph to be around 50c/share
Assuming that the commitment that management has shown in turning the company around is replicated in driving the growth prospects, I think that the company will be re-rated as profitability improves, and the company becomes noticed again. I suspect that significant value can be unlocked without external tail winds. However, the recent Commonwealth Budget $10B commitment to the rail industry must surely flow through in some way, at some stage. The growing CERT business at the very least should be a beneficiary of such an initiative. There are always risks but in terms of industry cycles there’s no “top of the market” about this one. I have no short term expectations but am happy to buy at these levels, hold and watch with interest.