ACL, page-5

A couple of quotes from Claude Walker in @ Rich Life newsletter on ACL. Bit dated. The note was sent to subscribers back in mid July when the sp was $3.60. He says he sold shares in FRI and SOM to increase his exposure.

"At a share price of $4, ACL has an enterprise value of about $900m, and is forecasting about $83m in profit, so it is trading a about 11x its FY 2021 profit, and on a forecast yield of at least 3.4%. And as I write, the share price is sitting at about $3.60, suggesting the stock is even cheaper still.

Global pathology company Sonic Healthcare (ASX:SHL) is forecast to have $1.25b in debt at the end of FY 2021, and has a market cap of over $9b, so it will have an enterprise value of at least $10b if it remains at its current share price of around $39.50. It is forecast to make a profit of about $1.25b, putting it on a P/E ratio of around 8.

Now, both of these companies are trading on low multiples of FY2021 because the market does not expect that they will be able to maintain current levels of profitability, as the pandemic subsides. In my opinion, it’s quite likely that covid testing will continue to contribute to their profits for many years to come. On top of that, it’s quite possible that there will be more pandemics in the future and also some pent up demand for tests that have been delayed during covid outbreaks.

Personally I sold my Sonic shares a bit early, at around $35, which was a mistake. However, I would argue that ACL has a better potential for growth because it is smaller. In its recent prospectus, ACL says it will consider, “Strategic acquisitions in both Australia and internationally,” just as Sonic Healthcare did when it was a smaller entity. However, if Sonic found an acquisition that added $10m in profit, it would only increase annual earnings by less than 1% of current levels. In comparison, if ACL added $10m then it would grow profit by around 12%. Therefore it should be much easier for ACL to grow via acquisition.

Finally, one of the big risks is that we switch to rapid antigen testing. This kind of testing detects people who are symptomatic and contagious but will miss many people who are infectious. In covid ridden countries they use antigen tests because they a cheaper. However, according to the CDC “Antigen tests are relatively inexpensive, and most can be used at the point of care. Most of the currently authorized tests return results in approximately 15–30 minutes. Antigen tests for SARS-CoV-2 are generally less sensitive than real-time reverse transcription polymerase chain reaction (RT-PCR) and other nucleic acid amplification tests (NAATs) for detecting the presence of viral nucleic acid. However, NAATs can remain positive for weeks to months after initial infection and can detect levels of viral nucleic acid even when virus cannot be cultured, suggesting that the presence of viral nucleic acid may not always indicate contagiousness.”