Ann: Half Year Accounts, page-41

I'm in today at an average of 10.2c with the expectation of a retrace towards 20c as H2 FY21 plays out.

I set some rationale out below, and very happy for it to be picked over for everyone's benefit:

1. H1 FY21 NPBT $3.4m. Lock that away.
2. Typical H2s for CLT see a 15% to 25% revenue drop vs H1 based on the seasonal nature of the business - FY19 dropped 13%, FY20 dropped 30% but with full COVID impact. I estimate H2 revenue to land about $44m (vs $56.5m for H1) being a 22% reduction for full year revenue of just over $100m.
3. H1 Gross Profit %age saw a significant improvement vs previous HYs in the last 4 years to over 24% (typically sits around 20%). An impressive result - I'm not sure what drove this but possibly the TLD business generating a higher portion of revenue at higher margin. I have forecast Gross Profit %age to remain steady as Cellnet revenues dip with seasonality and TLD revenue has a stronger weighting. For conservative analysis, I am expecting H2 Gross Profit %age to reduce to 23% (although there's no historical basis as such for it to reduce other than COVID-hit H2 last year). Thus, H2 Gross Profit expected to be $10.1m.
4. Costs are crucial. Operating costs for H1 as a %age of revenue dropped to lows not seen for many years, at under 19%. Typically they range around 20% in previous H1s. Costs as a %age of revenue do increase in H2, driven mainly by revenue decreasing more so than costs increasing, typically increasing by a factor of 1.2. I believe management is scrutinising its cost base so for purposes of analysis, I will estimate H2 costs as %age of revenue to increase by factor of 1.15 vs H1, giving me operating costs for H2 of $9.4m (and 21% vs revenue).
5. H2 NBPT thus (3) - (4) = $0.7m
6. FY21 NPBT = $4.1m
7. Cash at bank = $5m.

Risks
1. Revenue is lower than expected, being lower than 78% of H1 FY21 revenue. This could well play out, however, with an ever-expanding product range, TLD growth and less of a COVID hit, I feel this is already quite conservative.
2. Gross Profit %age is significantly less than H1, and less than the 23% I have predicted. I believe this to be a fair risk as I don't understand the factors driving a high H1 Gross Profit %age. My feeling is high margin TLD revenue (per 3 above), and if this is correct, then Gross Profit could actually increase further). Also, new product lines are higher-margin lines than existing product.
3. Costs as a %age of profit increase substantially, and above my estimate (per 4 above). I have mapped out operating costs over the last few years by half-year. Approximately 50% of operating costs is staff, and I believe staffing levels are now well balanced and costs unlikely to increase in H2 when sales and associated tasks are almost certain to decrease. Warehousing and freight costs should also decline in line with lower sales and inventory holdings in proportion to lower H2 sales, and as already stated financing costs will reduce as term debt is now fully paid. Management has displayed sound cost discipline to date, so I believe this is a low risk.
4. Market doesn't recognise the value with CLT... who knows? But stable profit-making, dividend-paying businesses often demand PEs around 15-18.

While the business isn't growing, it is stable and will potentially be back to paying dividends in this FY. For this reason, I see a Price-NPBT ratio of 10-12 being fair and indeed very conservative, giving me an EV of c. $45m and a MC of $50m. This equates to a SP of around 20c.