Ann: Half Yearly Report and Accounts, page-3

@stefanis,

I'm surprised you have formed a firm view in which you are unable to see the Montrose project being funded by debt and that a capital raising is likely.

While I do think the stock price is likely to mark time until the project is completed, for me the reasons aren't related to the project's funding risks; rather I think the biggest risk is further delays in getting approval for the project, given the Victorian government bureaucratic red tape being experienced.

Getting back to the funding issue, and starting with the cash flow ability to support maintenance capex and investment in R&D Intangibles, which you raised, this has never been a problem for the company before.

As can be seen in the chart below Free Cash Flow (OCF less PP&E spend less Investment in Intangibles) averages about $3.5m to $4.0m pa (~3c/share), so the company generates meaningful surplus capital:



(The only exceptions were in FY2020 during Covid (obviously) and inFY2022 when a big tax bill was paid as well as a large working capital increase happened.)

So that's not an issue at all, and cumulative surplus capital over the next two-and-a-half years will contribute to the capital cost of Montrose.

In terms of the prospective debt profile, my back of the envelope modelling of the capital flows over the period of the development of Project Montrose, yields the following:




As can be seen, assuming the dividend gets maintained, which I understand is the Board's intention, Net Debt would peak at around $40m at the end of FY2027 according to my analysis.

In terms of liquidity metrics, Net debt to EBIT would peak at 2.1x, which is very palatable and EBIT-to-Interest coverage would get down to 6.0x (8.0x based on EBITDA-to-Net Interest) which again, is very comfortable, certainly unstretched.

And, of course, as you said, there is the cash inflow that will come not long after FY2027 from the sale of the Brunsdon Street properties, which were carried on the books at a value of $9.5m in 2022 (and I don't know when they were last valued even to get to that $9.5m figure), so I think a sale figure of $10m is not an unreasonable expectation (less CGT, so they'll probably net $8m after tax).

So I'm a bit surprised about your seeing a need for additional equity capital; I see the company having balance sheet wiggle room and the Board could always pause the dividend if there was a major capital cost blowout or loss of Revenue (which can never be ruled out completely, although I recently visited the Montrose site and adjacent warehouse and came away thinking this is really not a complicated project: they are essentially building a new empty factory and moving existing equipment from Brunsdon Street into that new facility, i.e., basically a cut-'n-paste job so the commissioning risk shouldn't be meaningful.)