"Thanks Madamswer,
Any updated thoughts?"
@noomxx,
Apologies, I missed your post of almost 2 months ago, although I wouldn't have had anything to add to the post to which you were responding; and I really can't say anything much has changed in my view today compared to when I penned that post.
This is a slow-moving beast in a slow-moving economic landscape, but what clearly has changed with the passage of the past 4 months is that the sky hasn't fallen on our collective heads and the supply change has largely un-knotted itself, which has started to satisfy some of the pent-up demand for new cars (as you rightly point out in your post of 27 Nov: (
https://hotcopper.com.au/posts/65012511/single).
The supply chain issues have always resulted in the investment case for GUD requiring the passage of time before it could be affirmed, or disproved.
Given the unpredictable nature of things currently, I don't think it is possible to invest in GUD on the basis of predicting what the financial performance might look like over just the current half-year or even the following one; instead, one has to form an assessment about where the company will be at the end of the following year.
It was always a case of demand for some of GUD's products being deferred, but not totally lost, from FY2022 into the current financial year (and even extending into the early parts of the FY2024).
That, combined with organic de-leveraging of the balance sheet, to around 2.0x EBITDA/Net Debt by the end of FY2023, and to a more comfortable 1.7x by FY2024.
(My thinking is that the stock won't enjoy any meaningful re-rating until the balance sheet is sufficiently de-geared and I feel that will occur only when Net Debt-to-EBITDA approaches 1.6x or 1.7x, as opposed to 2.2x where it is now)
In my mind's eye the capital flow maths over this financial year and the next one is relatively straightforward:
I think the company will make somewhere around
$450m in total EBITDA over that
24-month period (probably $210m in FY2023 and $240m in FY2024), of which around
$240m to $250m will drop through to the Operating Cash Flow line (the difference being made up by payments of ~$40m in Interest, ~$80m in Tax, ~$50m for leases and maybe even allowing for as a much as a $50m investment in additional in working capital):
FY2023 and FY2024 Cumulative Amounts:
EBITDA = $450m
Less:
Change in Working Capital: -$50m
=> Net Receipts = $400m
Less:
Interest = -$40m
Leases = -$50m
Taxation = -$80m
=> Operating Cash Flow = $230m
The company will spend about $20m pa on
PP&E, so $40m over FY2023 and FY2024
=> Free Cash Flow = $190m
Assuming an objective of getting EBITDA-to-Net Debt to around 1.7x by end of FY2024, that would require getting Net Debt to $400m by then (from $487m at the end of FY2022).
So ~
$90m of debt amortisation needed.
Which that would leave around
$100m for dividends (or ~70cps, so say 100cps) over the two years, or 35cps per year.
So, the way I view GUD is that it is somewhat of a dead money situation: sure, at a P/E multiple of only 11.0 or 12.0 times, the residual downside looks limited and I'm getting a cheap option on a recovery in APG's earnings, along with getting paid a full franked dividend yield of ~5%pa while I wait.
But I think it's going to require the passage of some time before the market is willing to afford the stock the ~15x P/E multiple that the stock used to attract prior to Covid.
Covid-impacted supply chains, input cost inflation, consumer demand headwinds due to increased cost of living .... it's going to take a fair while for distribution businesses to regain their former lustre, I feel.
.
(20min delay)
