Ann: H1 2019 Investor Update, page-4

Yes, at face value it does look like a "good" result, and I am sure the stock will be higher because of it.

But with LGD, and all its disparate businesses and their moving parts (not to mention the company being a serial acquirer of something in just about every financial period) it is nigh on impossible to obtain a real grasp of the quality of the earnings.

For that reason, I tend to think its a bit of a tough gig trying to unpack the P&L each time (because you will probably never get to a conclusion of its quality); rather, I think the way to approach an investment in LGD is from a free cash flow point of view (because, FCF, at least, is not subject to interpretation).

On that basis, for easy maths, LGD is today a business that generates Operating Cash Flow of some $10m pa to $11m pa, out of which around $1m pa is required to be re-invested for stay-in-business capex and then a further $1m pa or $1.5m pa needs to be set aside for the making of acquisitions to keep the company's earnings base from going backwards. (The company has, over time, averaged $5m pa in acquisitions, but not all of that ends up being exclusively for growth... some of it ends up plugging holes in core earnings, based on history.)

So, simplistically, that leaves FCF of around $8m pa.

Based on the Market Cap of $70m and EV of $90m, respectively, that equates to a FCF yield of 11% and 9%, respectively [*].

Which suggests to me that the stock still has upside potential.

Admittedly, this approach is a crude one, and is unlikely to prove to be perfectly accurate, but its appeal to me is its simplicity, in contrast to the challenges presented by the way the P&L is struck.


[*] At yesterday's closing price