It is interesting that Roger Montgomery, after years of promoting what is in essence an EPS-times-PER valuation methodology (modified to give non-dividend-paying stocks a fillip), his organisation has recently justified investing in EML based on concepts summed up as EBITDA-times-PEBITDAR (Price per EBITDA per share ratio). See
https://rogermontgomery.com/why-eml-is-a-core-holding-in-our-small-companies-fund/. I did not read any analysis that was used to justify investing in EML, so don't take what I have written above to be factual, because there may well have been a well considered investment case based on reasonable projections.
RM used to present his valuation formula based on ROE (NPAT/Equity) relative to a desired return. On a per-share basis, NPAT is simply what is called “earnings” in the words “earnings per share” (EPS), and “price earnings ratio” (PER). The advantage of using ROE is that it inclined one to screen for high-ROE candidate stocks for valuation, which tend to have good growth potential, particularly if they invest profit in further growth, rather than paying dividends. A firm has to have a good earnings history for that valuation methodology to be relevant, so it does not apply to start-ups. But sticking with EBITDA generally, in his book, 'Valuable', RM criticised EBITDA-based valuation, and he mentions Buffet sarcastically suggesting that the tooth fairy must pay for the ITDA (interest, tax, depreciation and amortisation).
I accept that historical EPS is a poor basis to extrapolate future in EML's case, but I would prefer using an error-fraught guesstimate of the ITDA components rather than ignoring them. This at least allows one to solicit comments on the reasonableness of those guesstimates, which is what I'll now do. What are reasonable projections of Revenue, EBITDA, and ITDA for FY20, FY21 and Fy22? I suggest the following as a set of kick-off numbers that can be refined later.
| Column 1 | Column 2 | Column 3 | Column 4 | Column 5 | Column 6 | Column 7 | Column 8 | Column 9 |
|---|
| 1 | ($ Thousands) | FY2015 | FY2016 | FY2017 | FY2018 | FY2019 | FY20 est | FY21 est | FY22 est |
|---|
| 2 | REVENUE | 14437 | 23311 | 57960 | 71020 | 97195 | 208000 | 260000 | 325000 |
|---|
| 3 |
|
| 61.47% | 148.64% | 22.53% | 36.86% |
| 25.00% | 25.00% |
|---|
| 4 | EBITDA | 2630 | 5040 | 14521 | 20760 | 29134 | 65000 | 84500 | 109850 |
|---|
| 5 |
| 18.22% | 21.62% | 25.05% | 29.23% | 29.97% | 31.25% | 32.50% | 33.80% |
|---|
| 6 | Dprc & amortisation | -2690 | -3694 | -10076 | -8798 | -10267 | -20800 | -26000 | -32500 |
|---|
| 7 |
| -18.63% | -15.85% | -17.38% | -12.39% | -10.56% | 10.00% | 10.00% | 10.00% |
|---|
| 8 | Share-based payments | -5104 | -2073 | -5317 | -4986 | -4214 | -6000 | -6000 | -6000 |
|---|
| 9 |
|
|
|
|
|
|
|
|
|
|---|
| 10 | NPBT | -5811 | -1750 | -2121 | 4986 | 9026 | 38200 | 52500 | 71350 |
|---|
| 11 |
|
|
|
|
|
|
|
|
|
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| 12 | NPAT |
|
|
|
|
| 26740.0 | 36750.0 | 49945.0 |
|---|
| 13 | Shares count |
|
|
|
|
| 325418554 | 326394810 | 327373994 |
|---|
| 14 | EPS in $ |
|
|
|
|
| $0.082 | $0.113 | $0.153 |
|---|
I lifted the FY20 estimates for Revenue and EBITDA from the TAMIM report – see link in the first post of this thread. For FY21 estimates I simply increased Revenue by 25%, year on year. I accepted TAMIM's $65m for FY20's estimates, and $110m for FY22, but as 30% year-on-year growth approximates that, I used the resultant calculated $109.85m. TAMIM said it had used 25%, and then added $6m for synergies.
I simply took 10% of Revenue to derive Depreciation and Amortisation, which simply gives numbers that could be changed if alternative guesstimates feel better.
For share-based payments, I simply looked at the past and plucked $6m a year out of thin air. I'll change this in the light of any useful comments made.
Because the accounting treatment of tax usually uses a 30% tax rate, that is what I used to derive guesstimated underlying profitability. Thirty times my crude EPS guesstimate for FY22 would roughly equate to the current SP. Thirty is a low multiplier for the Software & Services sector, but FY22 is further down the track than FY20's EOY.
(20min delay)