Alright, I think I understand why the share price is where it...

Alright, I think I understand why the share price is where it is, finally.

It's because:
1) This is a coiled spring where the business performance and share price performance are about to jump
2) The Management Team don't understand ROIC/Attribution accounting/Corporate Finance fully
3) DGL operates in a lousy, sh***y industry requiring capital after capital after capital

or some combination of the above, or all of the above.

My conclusion is that it's 90% the former, and 5% each for the latter two.

First, here are the reported figures. All figures are in '000s and for half-year periods, except for FY2020 which is full year.




Now comes the more nuanced part. If you lay out (aka invest) $1, you'd expect to earn say 6% each year or $0.06. If you find a phenomenal investment, you might receive 20% each year or $0.20.

Below I have calculated what DGL earns per outlay for M&A. In the 6-month period to 31 Dec 2020, DGL spent $5.085m on M&A. Assuming a 9% full-year ROIC, they should receive (call it) 4.5% every 6 months 5.085 x 0.045 = 228.8. In the subsequent 6-month period to 30 June 2021, they spent $23.568m. At the same ROIC, they should receive 23568 x 0.045 = 1060.56 for this outlay of cash.

Cumulatively, they should be receiving 1060.56 + 228.8 = 1289.4 for both outlays of capital. And so on.

If you continue up to the present reporting period, at 31 Dec 2023 operating profit should be $7.6m higher per 6 month period. If the management team are able to pull off sweet investments and earn ROIC of 20% in M&A, operating income should be $16.975m higher every 6 months.



Now, we were told that in 1HFY24 trading conditions were tough, weather forecasting was s***t, etc etc blah blah blah.

If all of DGL's units hummed in 1HFY24 and DGL achieved a 13.5% operating margin (which was DGL's peak in 2022), then operating income would've been $29.291m. It came in $15m lower than this.

Notice how this "shortfall" is close to the $16m uplift you would expect to see if ROIC of M&A was 20%.

So, my conclusion is that:

i) DGL's businesses pre M&A have been weak
ii) the ROIC for M&A is just under 20%
iii) if trading conditions improve and all business units hum, Operating Profit per 6 months should come in at ~$29m (or ~$58m for the full year)

because I believe SH when he says trading conditions have improved, which will then allow us to see the true ROIC of M&A net of the performance of the business pre M&A.

Of course, you may conclude differently and that:
i) DGL's businesses pre M&A have been robustly growing
ii) ROIC for M&A is not contributing at all
iii) trading conditions were weak and is turning around

or

i) DGL's businesses pre M&A have been robustly growing
ii) ROIC for M&A is not contributing at all
iii) trading conditions are in fact robust and this is just the lousy nature of the industry.

DYOR