Ann: Market Update, page-9

"An issue that I have seen over and over again is when a new CEO comes on board they have their own vision for the company and that vision can initially increase costs though restructure or a change of focus. There is not much in the announcement to get a good an idea of whether the impact is ongoing or what action is being taken but there is a new CEO that may answer some of the questions.
This company has a history of missing and and providing sub par announcements so I'm in no hurry to become a shareholder again but it is now on my watchlist again.
There will also probably be a further fall when the results are actually announced.
@madamswer are you still a shareholder?"

@gordon_gecko,

No, I'm not.
I sold my shares in July last year, having owned them for a mere 6 months, roughly.

I did not profit from my association with GAP.
Not many do, I sense.

However, a bit like a dog returning to his vomit, I'm back having another look at the stock in the light of developments since I sold, as well as the latest "update", all in the context of the significantly changed value being ascribed by the market to the company.

The stock is trading at a meaningful discount to NTA (~36% currently), the first time this has been the case for several years (since 2015) and the discount has only been materially bigger during the GFC.



While this is an "indicator" of value, it is just that - indicative.

Because GAP's NTA is comprised mostly of stock ($47m) and debtors ($34m), and I'm not sure how much of that inventory is able to be monetise-able. Ditto for the $30m of PP&E.

If we assume 75c in the dollar of inventory, and 50c in the dollar for the PP&E, are realisable - somewhat conservative assumptions - then the resulting NTA is roughly on par with the current market capitalisation.

So, as a starting point, the company's asset backing does suggest that the downside to the share price is, in theory, limited.

The issue, when it comes to a decision of whether or not to buy the stock is dimensioning what the potential upside is, and what will be the catalysts for that upside to materialise.

And that's what I'm struggling with.

Because, while December half-years are seasonally weaker, the last one looks particularly weak, so much so that it reeks of a serious case of hollow log creation, that favourite incoming CEO trick.:



(I'll be sure to have a look for movements in short-term provisions in the next two reported balance sheets to see to what extent there has been opex padded into FY2020.)

So FY2020 is certainly not going to be a representative year off which valuations can be derived, even if HJ2020 shows a strong rebound.

So what is the "right" level of earnings to use for establishing a base valuation for GAP?

The best way to answer that, I think, is to look at GAP's earnings history (in this case, let's take EBIT as a proxy for the operating performance of the company), as a indicator of the kind of future levels of earnings, post-FY2020, one might expect.

As can be seen from the chart below, since the GFC, GAP'S EBIT has averaged ~$11.5m, and its low over that period was $8m (FY2015):


[Note: FY2020 forecast merely notional, not prescriptive]

Using the low EBIT of $8m, the current $70m EV ($58m Market Cap and $12m average Net Debt) means the business is capitalised at 8.8x (the EV/EBITDA equivalent is a modest 5x).

And using the average EBIT of $11.5m, the business is capitalised at an EV/EBIT multiple of just 6.1x (corresponds to EV/EBITDA of just 4.0x).

So, prima facie, based on several different criteria, the stock is cheap.
Very cheap.

But it will take a recovery to "normalised" levels of profitability for that apparent cheapness to be addressed.

And I suspect that will only occur in FY2021, at the earliest.

So it will require some patience on the part of investors.

But patience is the one thing I have in spades.

Which is why I once again conducting a diagnosis of this injured patient, which is lying in a coma.

To make sure that the injuries it has sustained are ones from from which it can recover, as opposed to them being life-threatening.