Ann: MAP: Sonic Investment & Partnership Investor Presentation, page-8

"I wouldn't mind a nice selldown. Would love to accumulate between $25-$28 odd."

Good chance of being a good call.

Those prices - say $27.00 for easy maths - would equate to a prospective FY2023 P/E multiple of ~18x, which is not out of kilter with the stock's historical average (represented by the black dotted line in the graph below).

[The blue bar represents the P/E multiple at the current $30.50 share price]


(Note: This is predicated on a forecast for FY2023 EPS of $1.50/share, down 50% from the Covid-boosted FY2022)


But, as always, while looking at P/E's is a quick and simple valuation tool, it often gives distorted results.

In this case, what it overlooks is the very dramatic change in SHL's capital structure over the past few years, going from reasonably geared (Pre-Covid, Net Debt-to-EBITDA of 2.0x/2.5x and Net Debt-to-Equity of 40%/50%) to now having an unambiguously lazy balance sheet (turbocharged cash flows when just every citizen is being tested during a global pandemic will do that):





This obviously has bearing when valuing the company on an Enterprise Value basis (which is what I think one should do to avoid a bum valuation steer).

On EV/EBITDA multiples, then, the stock is currently valued at EV/EBITDA of around 8.0x to 8.5x, which is clearly favourable compared to it historical average of around 11.0 times (ignoring FY2021 and FY2022 when EBITDA shot through the roof to obviously abnormal levels):





So, to conclude from the exercise:

Stock looks relatively ho-hum from a P/E standpoint , but is undervalued when viewed through the more relevant lens of EV/EBITDA

So I definitely think it is undervalued, and I commenced buying the stock a few weeks back at $32.00.

But the buying is all on the back foot, because, while the valuation appeal is definitely there for me, I know full well that the company's earnings haven't bottomed yet after the halcyon Covid years.

And I also know that the market can be a bit of an ass, and irrespective of valuation appeal, that there is likely to be some sticker shock when the next two financial results show negative earnings delta.

Which is where your $27 bid might get hit.

But I also think there's a risk that the market stares right across to the other side of the earnings valley.

So while I usually don't like to finesse investments, in this case I think one can afford to adopt a tactical approach of establishing a position now, with a view to getting really properly set should the market - for some silly reason - baulk at the 50% fall in earnings in the current year.

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