Ann: FY19 Performance Summary, page-2

My random thoughts after reading the pack and checking a couple of things with the CFO.

Firstly, I have to say I was impressed with the response I got from the CFO. He got back to me within about an hour with clear and succinct answers.

The Good

- EBITDA: up $3.9M or 32%!
- Scale leverage working being achieved as sales grow and costs kept under control (particularly in Europe). Sales up 10.8% and EBITDA up 32%!
- Large recent tender wins (yet to be contracted). We may not see any/all of this as contracted revenue in Sep qrt (but should see it all in 1H). That'll look impressive on the New Business graphs and grab get some attention ($27.5M one qrt and $43M the other vs peaks of $16M/qrt over past couple of years)!
- WIns also indicate that the sales strategy is working, the R&D has made RDF competitive again ... and therefore indicates likely good sales growth going forward.
- Retention rates: remain impressive at ~100%, continue to target this going forward and recently renewed the Vic contract

The Bad

- Loss of Texas and confirmation of size of the damage ($2.55M writedowns and restructuring costs in FY19 result). Previous RDF advised Texas was 13% of 1HFY19 revenue - so that looks like A$15Mpa revenue and A$2.5M EBITDA (vs $3.9M EBITDA growth in FY19). The market of course already adjusted for this when it was announced. My view at the time was that this would put RDF back around a year in its recovery, however, if they keep winning tenders at anything like the rate of the past few months the recovery could be much shorter.

The Neither ...

- @1_Day_Man - as per your thinking, CFO confirmed that with FY19 $2.1M writeoff, all Saudi and Mexico receivables are now written off (still on balance sheet as a receivable offset by accrual). They're continuing to pursue these. CFO confirmed that current customers are weighted towards Govts (good payers) ... so IMO bad debts are history (that won't be repeated) ... yet there's a significant upside if they could retrieve part/all of these sums ($10M!!)
- My query regarding finance charges vs interest costs incurred was answered too. The difference is an accounting transfer relating to the appreciation of asset retirement (so expected to continue at similar levels to FY19).
- Interesting that with the US$ based Chicago settlement sitting on the balance sheet, there's a natural hedge to US$ earnings (if A$ goes up, the decline in earnings is offset by a reduction of the settlement sitting on the balance sheet, and vice versa)
- Agree with @1_Day_Man re good/conservative accounting. I see this in the accelerated depreciation of R&D as well as the accruals. These measures may today look worse but more upside in future.

Value today?

- IMO, RDF seems ridiculously cheap at it current MC of $53M based on many measures ....
- It has $15M in net cash (that's after all Chicago payments) - so EV today is actually sitting at $38M!
- Net Assets are $73M and NTA $60M
- EV to EBITDA ratio is only 2.3x! and MC to EBITDA only 3.2x!
- The one analyst who follows RDF has a valuation of 60c (71% higher than the SP)
- Personally, my valuation is a range - 60 to 80c. This hasn't changed in the year as essentially the Texas loss offset the gains this past year.
- IMO rerating could occur with the next large tender win ... or realisation by the market of sales growth achieved when TCV of Toronto/Pennsylvanian contracts are announced ... or a surprise recovery of Mexican or Saudi debt ... or another analyst initiates coverage and spreads the word on what a bargain RDF is.... or when they finally report positive NOPAT (possibly for 2HFY20? - but more likely 1HFY21)

Comments? Any errors in above? Am I blindsided by anything in my thinking that RDF is a bargain?