Ann: Managing Director's Address to AGM, page-2

Boy, that's very specific guidance for the current half-year across a range of financial elements, including Revenue, EBITDA, EBIT, depreciation charge, capex, cash flows, and period-end net debt.

They either fancy themselves as having excellent visibility into their business, or they are going to disappoint the market.

Either way, at some 8x P/E and 5x EV/EBITDA, it doesn't look like the stock is exactly priced for any great achievement.

This is another one of those no-organic growth, cyclical businesses which can only grow by acquisition (in fact, an element of their acquisition spend [*] is required for earnings to just stand still).

However, it is a highly cash-generative business;  in the last 10 years it has generated some $95m in Operating Cash Flows, of which a mere $16m has been re-invested in the business as capex, and with $36m going towards acquisitions.  

That's a substantial quantum of Free Cash Flow for a company with an Enterprise Value of around $50m.

There is not a single financial period (i.e., half-year) in which LGD's Free Cash Flow has been negative, irrespective of how tough business conditions have been for its various businesses.

Even if there is no cyclical recovery in earnings, and excluding any deferred consideration payments that will need to be made (if they are required to make any that would be quality problem to have), this company will be essentially debt-free in 18 months' time.

By no means is it a "you-beaut" business, but then again, it certainly isn't priced like it is.

In fact, on a prospective cumulative FCF yield in excess of 30% over the 18 months to JH2019, its almost priced like it will cease to exist by the time the next cycle is completed.

I suspect that it will be around for a lot longer than that, but will need to deploy some of the surplus capital it generates into buying "top-up" earnings.  As it as done to date (And if the SCE acquisition made in 2015 can be replicated, that would not be an altogether bad thing. But I don't know how often those sorts of acquisition opportunities present themselves)

That its cheap on point valuation multiples is beyond much doubt; but what causes the stock to be re-priced I can't really predict.  

With the company's balance sheet being in the best shape it has been in for most of its listed  life, and with more than 10cps in franking credits, I think that one of the things that will happen is that the dividend payout ratio gets cranked up, from the 50% level of recent years, to at least 60%.

A 60% POR would yield DPS of around 1.6cps.  
Which equates to a yield in excess of 7.5% at the current share price.


[*] Maybe 20c or 30c in each dollar of acquisition spend goes to offsetting declines in the core business, is my guess.