So why is it that on the day of the announcement the SP falls to new lows, and the business lost almost one quarter of its value? I will make an attempt to understand.
The non-believers win over the believers! Platitude 101.If one believes the projected figures and estimates on reasonable multiples etc. one must arrive at a value upwards of 22c. That is the believer's corner.
Now for the non-believers:
- THM EBITDA is given, i.e. estimated, at 5.1m. How certain is that? It would be normal to have a range, some companies simply refuse to release a guidance. Not so THM.
- HLF produces a small normalised EBITDA of 0.3m, after adding back in a (huge) 4m of normalisations; thus aggregating a normalised EBITDA of 5.7m. TEP wrote: "I suspect there will be circa 110 million new shares issued" yesterday; bringing it to a total of 384m SOI.
Here are some alternative SP projections for the group:- non-normalised EBITDA of 1.4m / 384m * 15 = 5.5c per share
- non-normalised EBITDA of 1.4m /384m * 12 = 4.4c per share
- normalised EBITDA of 5.7m / 384m * 15 = 22c per share
- normalised EBITDA of 5.7m / 384 * 12 = 17.8c per share
So now we have a range of 4.4c to more than 22c per share. In effect,
the normalisations swing the SP around quite a bit (and I was surprised it did also contain an inventory write off). And would assume, as an investor, that these normalisations are kept to a minimum, but write offs have also occurred at A2M for than matter.
Mucking around with the normalisations creates huge SP divergence. Going further, one could assume that the revenue figures, growth figures etc are all a little optimistic. They surely are, since this deal needs to be sold. It is the multiplier of 10,12 or 15 that
will add further uncertainty to the SP if you do forward estimates. ... and one will arrive at a much lower SP when applying less rosy assumptions.
It is also a little odd, that the economically weaker unit (HLF) acquires the economically stronger entitiy (THM). - Not that I mind that too much. - But it looks like the tail bought the dog. I am disappointed that Rhian Allen is not on the board, practically now a CEO at subsidiary / group level; yet it is her unit that brings the bacon in. How does that sit motivation-wise once the earn-out is done? The value of her shares, now HLF shares, are now determined by the people above her, also her contract going forward after 3 years. This 'marriage' with her is not going to last longer than the earn-out period. Who will keep up the 'vibe' once RA is out?
For what it's worth: Normally HLF has a stronger buy side than sell side. Today, HLF got totally sold off. How will the placement go, if one can buy the share cheaper on the ASX? What if there is not enough take-up? Who is buying the Bergen block?
HLF bought itself a lifeline, a cash (EBITDA, juicy margins) machine (at least in the short term), but the market wonders why was it available? at that price? despite all the strategic fit, synergies etc. (which I found plausible - on the face of it) ... and can that last? longterm?
And that is the uncertainty.
Uncertainty when felt strongly brings the SP down. The proposal wasn't put forward convincingly enough.
All my own speculations. GLTAH
