Ann: FY18 Market Update, page-10

While this result is somewhat messy (given the restatement of the FY2017 figures and the timing of the CLX acquisition which meant that its Revenues were accrued from the acquisition date, it did not make any profit contribution), the momentum in the business is currently very strong.

If there is anything negative in the result it was that the Operating Cash Flow for the second-half was weak (less than $1m), however this is not atypical for deeply cyclical businesses emerging out of trough market conditions.

Deriving some valuation metrics:

First, P/E:

FY2018 EBIT was $10m; Looking forward to FY2019 I expect that the combination of:

1.  Ongoing cyclical increase in earnings, and
2. The debut full-year contributions of CLX

...will see FY2019 EBIT of at least $12.0m.

Interest Expense in FY2019 will be higher than FY2018's $1.1m, because the company's net debt for FY2019 will probably average 50% higher currently than FY2019 so, say $1.7m Interest Expense in FY2019.

That leaves Pre-Tax Profit of ~$10.3m, and NPAT of $7.2m (or EPS of 3.3cps)

At the current share price of 27cps, that works out to a prospective P/E multiple of just 8.2x

Which does not look at all demanding to me, given we are probably not even one-quarter of the way into the cyclical upswing in LGD's business cycle.


Now EV/EBITDA:

Add back to FY2019 projected EBIT of $12m, the D&A charge, which is currently running at some $3.0mpa, and you get EBITDA of around $15m.

With some working capital unwind (Year-end Working Cap-to-Sales was a near-record 33.7%) and some surplus capital generation during the year with which to reduce borrowings, one can expect Net Debt to end FY2019 at, maybe, $17m (cf. 30 June 2018's $21m)

So, based the current share price of 27cps, that equates to a market cap of $59m, i.e, an EV of 76m

i.e., EV/EBITDA multiple = 76/15 = 5.1x.
Again, nothing at all too demanding, I don't think, given the relatively modest position in the earnings cycle for LGD.


Conclusion:
This stock trading in the mid- to high 30c region during the cycle peak between 2011 and 2013.

And I think it is a better business today (not a great business by any stretch of the imagination, mind, but a somewhat better one than it was five years ago).

It is not the kind of business one should hold for the long-term, because of the deeply cyclical nature of the company, but - as a deep cyclical value investment - I believe it remains undervalued.
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