SDV Chart, page-10

A$16m run rate for core business based on latest quarterly + US$8m-US$20m (A$12-A$30m) from Highlands (this range is from last years number to this years performance targets) + A$8m revenue per annum from the latest Phoenix order. That Phoenix order is the largest one to date, 2x Iluka, and shows the scale of opportunity in the US.

So for CY20 based on current performance we are looking at A$36m-A$54m of revenue. The upper end of this range requires success from Highlands, but given the scale of the deals they are tendering for they would only need to win one to beat their US$20m revenue target. Regardless, better to use the lower end of this range for now, so c.A$40m revenue.

A$40m revenue at c.25% gross margin = $10m gross profit. Overheads are max. A$5m currently based on latest 4C and Highlands cost base. So we are looking at A$5m EBITDA for CY2020 assuming Highlands underperforms expectations. Gross margins usually climb over time.

Minimal interest, no tax so $5m EBITDA is essentially cash earnings. 22x earnings. Looks cheap for a company growing as quickly as SDV is.

Assume that Highlands has some success and core business keeps growing and A$50m revenue run rate at some point in CY2020 looks very reasonable.

$50m x 25% GM - $5m OH = $7.5m EBITDA or ~$7m free cash flow.

That would be 14x cash earnings which is very cheap for a growth business like this.

And then look at all the optionality here:
- ProSol were providing advisory to a number of very large mining customers in the Hunter Valley and using external suppliers for chemicals. What if SDV can secure some of those contracts as they roll off? Some of them (like Glencore) are Iluka sized or bigger.
- The massive deals in the US must be close to a decision. The acquisition of Highlands gave them greater control over both distribution and the supply chain. There are some monster $20m+ deals here based on the volumes that would be required for some of the majors. Sign one of these and the stock will jump due to the incremental revenue/earnings but then will likely keep trending higher as the market prices in the likelihood of further success in the massive NA market.
- They have a number of trials with big miners and construction companies that have been incubating for 6-12 months, which is the typical period for SDV. Some of these must be close to converting.
- More acquisitions are possible, particularly in North America.

This business is at real scale now. They will be running at around A$40m revenue currently and look cheap on this number, but there's a clear path for them to grow to $60m-$100m revenue over the next couple of years given ongoing execution, and at those numbers the leverage really becomes clear.

$10m+ free cash flow is very attainable in the medium term so if the market begins to price this in, as it tends to do with growth stocks like this, then I think the stock has a lot further to go. It will be a bumpy ride but if you think Lewis and Co. can grow the business to this scale in 2-3 years then it looks like a buy here.

My guess is that this is broadly how Perennial view things too, which is why they've been acquiring stock so aggressively.