I'm quite surprised at the market's muted response to these latest developments which, I think, are potentially very positive for this company.
Accordingly, I was buying as many shares as I could this morning.
Because, if this merger (well, reverse takeover, really) proceeds, it will provide a big get-out-of-jail card for LCM. It will:
1. totally de-risk LCM's balance sheet (LCM's $3.2m in Net Debt is currently sitting at close to 2x annualised EBITDA while OSD is in a net cash position. Also, LCM's Current Assets barely cover Current Liabilities, while OSD's Current Ratio is a very comfortable 2.7 times. For MergeCo the pro forma Current Ratio would be a manageable 1.3 times.)
2. reduce operational and customer concentration risk through being a more diversified business;
3. offer scope to increase earnings via the removal of duplicated fixed cost overheads (even if MergeCo is able to hold onto just $1m of the $2m in identified synergies, that is not insignificant in the context of $7m of pro forma EBITDA);
4. increase liquidity in the trade of LCM's stock on the ASX.
Valuation-wise, after the merger there will be 200.7m shares on issue which, at a 16cps, equates to $32 market cap, and EV of around $30m. On the projected $7m EBITDA figure, that works out to 4.6x EV/EBITDA (or 4x EV/EBITDA assuming that 50% of the $2m in synergy benefits are retained.)
I think that, if the deal does proceed, based on the latest information, that LCM would be a 25c stock (applying ~6x EV/EBITDA and assuming the cycle still has some legs in it), i.e., 55% upside, say 50%
Of course, there is the risk (I'd say it was a small risk <20% probability) that the deal doesn't proceed. In which I thin LCM would plumb historical lows close to 12c, i.e., 25% downside.
So, the crude investment algorithm looks something like this:
80% chance of 50% upside and 20% chance of 25% downside
=> Probability Weighted Investment Return of 35%
Worth a punt, I think.
(Not much more than a punt; certainly not a high-quality investment)
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