I emailed BYL today, and requested that the latest Bell Potter...

I emailed BYL today, and requested that the latest Bell Potter report be linked to the company webpage, and this was promptly done, so its there for all to read. Bell Potter's share valuation has increased to 72 cents – a valuation with which I have no problem. I bought another 100,000 this week at an average price of 52.9 cents, selling my long-standing BHP holding to pay for it. I'll not buy more, because I have too many (796,500 to be exact at an average cost of 39.8c), but I am loath to sell too, because I think BYL has some years to run during which EPS and DPS should grow at a good clip, and I'll get a good yield while I wait. DPS may rise to 4 cents, which would help to make the waiting pleasant.

Bell Potter's NPAT estimate for FY2014 is $10 million, which is at the upper end of the $9M-to-$10 range that BYL suggested.

My valuation of BYL was based on what I thought FY2015 would deliver, and the lower end of the estimated revenue range is $320M – the number suggested by BYL for FY2015. The Bell Potter report suggests an NPAT of $11.2M, and that gives an NPAT/Revenue percentage of $11.2M/$320M = 3.5% for FY2015. I have suggested a range of percentages starting at 3.5%, and ending at 5%, and so 3.5% seems too low. Bell Potters valuation of 72 cents renders a P/E Ratio of 7, a metric with which I have no problem. Bell Potter gives the estimate revenue for FY2015 as $320.5 – I wonder why they bothered to add the .5 to BYL's suggested $320M.

Bell Potter and I differ on the future Revenue and NPAT margin, and hence my forward-looking perspective is rosier. Below are Bell Potter metrics, from which I calculated the NPAT margin.

- - - - - - - - - - - - 2009 - - - 2010 - - 2011 - - 2012 - - - 2013 - - 2014e - - 2015e - - - 2016e
Sales revenue - - 181.3 - - 137.4 - - 188.4 - - 252.3 - - 292.3 - - 254.5 - - 320.5 - - - 339.5
Net Profit - - - - - - 6.8 - - - - 5.0 - - - - 0.1 - - - 9.4 - - - 10.2 - - - 10.0 - - - 11.2 - - - - 11.9
NPAT/revenue % - - - - - - - - - - - - - - - - - - 3.73% - - 3.49% - - 3.93% -- 3.49% - - 3.51%

Effectively, Bell Potter has taken the worst NPAT/Revenue percentage of 3.5%, and applied it to FY2015 and FY2016. I think 3.5% is too low, particularly as the low-margin contracts of Bellamack and Kalara are not going to be in the picture, and because the healthy order book allows BYL to toss out its pencil sharpener. Even if NPAT for FY2014 transpires to be $9.5 million, rather than Bell Potter's $10 million, the NPAT/Revenue would be 3.73%. Also, for 2HY2014 the NPAT margin is about 5%.

In summary, I think that FY2015 and FY2016 will have more revenue than $320.5M and $339.5M respectively, and because the NPAT margin should be at least 4% (and maybe 5%), NPAT should be higher, and hence EPS higher too, and then an exuberant Mr Market would lift the P/E ratio to say 8.

For now I'll accept 72 cents as a target SP, but as the year rolls out and the quality of Mr McBain's stewardship becomes patent, the risk is to the upside.

BYL is a small cap with a concentrated ownership and low liquidity, so it is not a stock for many investors, in spite of its sterling quality.