Ann: AGM Chairman's and Managing Director&#39, page-17

re: Ann: AGM Chairman's and Managing Dire... Hi fellow LCM followers,

I think it wouldn't be fair to only use PE valuation to value LCM as it doesn't reflect it's large pile of cash, constant positive cashflows, specialist status and strong management team. Analysts who cover this sector usually apply similar methodologies which do not represent the individual risk/reward profiles. Plus if they knew their asses from their toes, they would all be rich and running their funds, not writing sell-side reports.

Although what's been happening to the METS sector looks like a bloodbath, I think there's plenty of opportunities for smaller, niche players like LCM to take away smaller chunks of the large pie.

Before I go into the details, I just wanted to say that the prospects of the company depend on a number of things, which most of us forget when we see our favourite stock drop by -30%. Fear and panic are emotions that force us into believing that someone somewhere knows something we do not. The reality is that once LCM had that massive run (as it does every year for the last 3 years) it retreats. The dip starts on low volume (2.24 to 2.00) and then it's a snowball effect down as our greed takes over and we won't to cash out before it falls even further. And from there on it's just panic and depression (1.70 to 1.50). The brave add to their position, the others watch as the knife falls even further down to a point where you'd like to take your whole lot and dump it, to cut your losses and start fresh (1.50 to 1.27).

But what happened with the company? Steve Banning is JUST as competent as he was before (if not more with all the extra experience). The company is very well managed and kept, read here:

http://www.theceomagazine.com.au/profiles/LogiCamms/Steve_Banning.pdf

Furthermore, they've got a top management board and team, that represents MOST of their competitors and clients. They're very well connected and they are considered to be the LEADERS in their niche areas.

I do not know why Logicamms do not put enough effort into communicating with their shareholders. Frankly speaking, my assumption is that they're too busy cracking away at what they do best, with constant increases in job opportunities (indicator of increase in projects). Either way, the communication is poor. But that doesn't make a great company equal to the other average same sector (METS) companies with poor balance sheets (excluding SND).

As far poor communication goes, LCM has recently won some business in Vietnam that they've scored through ICN. Read here: http://www.icn.org.au/case-studies/victoria/icn-assisting-industry-export-australian-experise

If the management would put more effort into investor communication we wouldn't go through the whole stage of happy>not so happy>sad>frightened>paranoid>depression.

Once a stock falls by 20 to 30%, each one of us thinks that someone found out something we don't. Which leads to a herd reaction and LCM pummelled to $1.30. Truth is, the management doesn't share results with anyone. Not me, not you, not any other key stakeholders. So the only things that guide us are expectations and emotions. And emotions should be the last thing guiding a long term investor.

So what has changed over the last 6 months? Well yes, sector pressure, bla bla bla. Profit downgrades in mostly all key competitors (FGE, TSE, WOR, MND, DCG, LEI). That's all fine, but let's dig deeper. FGE was a cost blow out that's not industry related but company specific. TSE and WOR are enormous and charge outrageous rates, everyone in the industry has been wondering for ages when Rio/BHP's procurement department will start consolidating suppliers and benchmarking rates. DCG and LEI, run down by management, slow movers in a very fast speed environment. The only notable company is MND. Good management, quality delivery, fair pricing. They've indicated that despite market conditions they will be flat. Ok, so that's as far as the sector is concerned, now let's go back to LCM. The company is sitting on ~15% of their market cap in cash. Ok, if that's not a heavy hitter, they're also adding around 5% of their market cap in cash through constant positive cashflow (equivalent to cash held YoY increase by ~20% pa over next 5 years). Ok, these are rough estimations based on my financial model, but still. Not bad, eh?

I apply a discretionary premium/discount to stocks based on a number of factors, - management quality, positive cashflow, % of cash to cap, etc. LCM scores the highest in my METS universe, with a whopping 18% premium to peers.

I'm expecting FY14 EPS of 15c. Weighted towards second half but more of a 6.5c/7.5c split. That put LCM on a forward PE of 7.7x and forward EV/EBITDA of 5.6x. Using a PE peer average of 10.6x and EV/EBITDA of 6.2x that would mean that together with my discretionary premium, LCM should be traded at 1.74 if you compare it to the market on a like-for-like basis. Where's it trading now? Ah, yes, 1.30... Panic mode? I think so.

Now, although I say that I forecast 15c for FY14, I too have decreased my growth expectations given the market conditions (which I think is solely an effect of bad market news). I like to be on the safe side, so I'd rather be super conservative, than to believe in miracles. My original FY14 EPS was between 18-19c.

Ok, so P/E and EV/EBITDA relative valuation of 1.74, but that's just market relatives. When I look at DCF, at current expectation DCF sits at $2.25 (using a discount rate of 15% and a LT growth rate of 3%). The reason why I use a 15% discount rate is simply because most analysts covering the METS sector apply a simple 15% DR to all stocks. Idiocy? Yes. But it helps me see where the market's expecting the stock to sit, and helps me see value among the dross. A more realistic discount rate for a strong growing company like LCM should be around 12%, now that brings us to a DCF of $2.79. So a soft sell target just shy of $3 is my 2 year view for LCM.

OK, we've covered the DCF and market valuations. But hey, there's also that beautiful dividend. I do not believe that LCM will decrease dividend payouts this year as that'll undermine their long term appeal to many. at $1.30 they're on a dividend yield of 6.90%.. Apart from that being a great offer, if I use a multi stage dividend discount valuation model and assume a discount rate of 7%, LCM is then valued at $2.65.

So, if I recap and take and average of the three valuation methods I will get an average value of $2.39. That's an 84% premium to where LCM's at now, so I won't let fear and emotions get in the way of logic and quantitative valuation methods.

I've been holding LCM since my first buy in with an average price of $0.75. I've sold a fourth of my portfolio above $2.00 and bought back in with all remaining cash at 1.50, 1.40 and now 1.30.

I've been reading the posts on LCM on hotcopper for a while now, and I must say I'm very happy to see so many like minded individuals under one "roof". I wish everyone patience (due to the current jumps) and rationale (don't let your emotions get the best of you).

I'll re-post this message on all three threads related to LCM. Not spamming, just want to deliver this information to anyone who might be in need of a little reality check. :)