"But the important question now is : What is your current call?"It was one a classic "straw-hats-in-winter" investments and indeed, the circumstances at the time offered the straw hat, LYL, to investors at mere pennies in the dollar - the Mkt Cap at the time was around $55m, and the company had around $37m in the bank, so you were basically buying the operating business for the bargain basement price of just $18m ...a business which the very next year was running at almost $9m EBIT and the year thereafter at $16m - (i.e., an effective after tax payback period of ~2 years).
Incidentally, the very next year the EBIT was $39m, more than twice the EV of three years earlier. It was truly a crazy, crazy valuation level. Unfortunately, one only gets a few of these over one's investing career.
Back to now, though.
Whether or not you intended it, the implication of your question is this:
If the investment thesis was "buy the straw hat in winter", then given that winter for mining service companies has long since given way to a nice, warm and cheery summer, surely it means that the opposite thinking should now apply, i.e., to sell that same straw hat to all the people now falling over one another bidding for it.
I've given that quite a bit of thought in recent days, and I have to admit that its hard to avoid feeling like I'm not being true to straw-hat label.
But, while I'm always loathe to resort to "this time is different" line of though (road is littered with the carcasses of bad investment outcomes based on that argument), I do think that certain things are structurally different today, compared to a decade ago:
1. The Demand Side:
At the peak of LYL's previous earnings cycle, the business was essentially still largely a designer and constructor of CIP gold plants (mostly in Africa, at that).
Fast forward to today and the mix looks far less imbalanced . A decade ago, the Gold bubble would have been bigger than all the other bubbles combined. As can be seen from the latest presentation, just Lithium + Battery Minerals alone are bigger than Gold.
View attachment 5043411And that's just on the Resources part of the portfolio.
There's also LYL's increased exposure Infrastructure (Rail, Road, Asset Management, Non-Process Resource Infrastructure) and Industrial Processes (Pharmaceuticals, Biotech, Chemicals/Energy, Food & Beverage, Manufacturing, Renewables).
These were all really nascent business concepts for LYL a decade ago, and you certainly wouldn't see LYL presentations back then that included slides like these:
View attachment 5043455When LYL board and management decided a decade ago to diversify away from its concentrated "gold plants in Africa" business, it almost certainly wouldn't have known at the time that there was going to be some sort of a global supply chain crisis a decade later, which would prompt a move by western governments and business leaders to realise that they needed to "bring manufacturing back home", after it had been hollowed out in the previous two decades by globalisation.
That process has only just begun and is not going to be a mere flash-in-the-pan; re-building manufacturing capacity - not across the board, admittedly, but for critical and strategically important products - is going to be a decade-long undertaking.
LYL finds itself positioned to service that significant demand for engineering design and construction expertise; at the peak of the past commodity cycle, no such commercial opportunity existed.
2. The Supply Side:
The long winter for engineering construction businesses that followed the 2010/11/12 commodity boom resulted in many of them not surviving. There were several high profile collapses over the past 7 or 8 years.
Not just that, but far more important, is the feature of the supply side of the industry which doesn't receive much publicity, and that is the current shortage of experienced and skilled engineers, technicians and tradesmen.
This is an outworking of the limited number of job vacancies following the end of the commodity bubble, the volatile nature of the industry, and the array of alternative career opportunities (less physically demanding for a society that is rapidly gentrifying).
Speak to any seasoned manager in the industry and he/she will tell you that an army of highly qualified and experienced technical skills have exited the industry in recent years (retired or gone on to do other jobs in an economy that has full employment... either way, not coming back).
This plays into LYL's hands in two ways:
- As a pre-eminent company with an impeccable reputation for quality work LYL's ability to still attract the right people out of a limited pool will confer on it a significant competitive advantage (I know of a number of top engineers that LYL has managed to attract, from wounded competitors).
- With this limited capacity - both at the corporate level, as well as the individual level - it stands to reason that operators with a premium reputation - companies such as LYL - will be in a position to be highly selective in the projects it takes on, with the attendant and improvement in operating margins and reduction in execution risk.
So, by not selling might seem like I'm cheating on my initial thesis, but I don't think I am really.
LYL is still a straw hat but I'm keeping it because it is becoming increasingly evident to me that the current summer still has a number of years to run.
(20min delay)