"Definitely not a sexy company that was impacted as the mining boom ended. Would expect some growth to return as the governments infrastructure spend increases and the mining sector slowly improves as the next upstage of the commodities cycle seems to be with us."
Trouble is, @whitepointer , that it is not just the cycle that has been impacting them in recent years, but it is that one of their business segments, namely Innovative Electrical Solutions (aka IES, the one involved in optical fibre and semi-conductor supplies), has been in a state of secular decline for more than a decade.
In 2006, what is today called IES represented 100% of LGD's business, and generated some $200m in Revenue (although more than half of that came from sales outside of Australia, which subsequently ceased because it was unprofitable).
But even in its current form, the IES business has seen its Revenue decline from $25m a decade ago, to well under $10m today, although its EBITDA has held up pretty well (until last year, that is, when it slumped to $2m due - they claim - to a major customer deferring sales):
So this is a business which, if not in terminal decline, is unlikely to ever recover even close to its former glory levels.
Thanks to the significant free cash flow the company generates, it's management have been lucky enough to have access to capital with which to make acquisitions [*] to help plug the gaping earnings hole left by the decay in the legacy IES businesses.
Not that they have necessarily acquired well: given the downturn in their business cycle over the past 3 years, it is difficult to know how effective the acquisitions, made during the peak of the cycle (and amounting to around $25m), have been. I suspect not very.
However, the largest single acquisition, the $11m acquisition in 2015 of Systems Control Engineering looks like it is a winner, with the business generating $3.8m in EBITDA in FY2017 (so an implied EV/EBITDA multiple of under 3 times).
So, make no mistake, it isn't just the vanilla forces of the normal business cycle at play here. There has also been a significant structural decline in one of LGD's core businesses.
The good news is that the stock is now more than fully priced for that particular business becoming obsolete.
[*] Almost 40c out of each dollar of Operating Cash Flow has been applied to acquisitions over the period under review.
LGD Price at posting:
20.5¢ Sentiment: Buy Disclosure: Held
