This result isn't as bad as I thought it might be. The thing...

This result isn't as bad as I thought it might be. The thing that this company needs to do is stop empire building and get back to their daily knitting for a while. Adam Lamond should be ok in overseeing this as he knows the company well enough and for long enough. It is easy to have short memories and focus on the last year but the margins of the surveying business has been 17.0% (2016), 14.1% (2017), 13.4% (2018) and 6.2% (2019). If you take a look at the two halves for 2019 you will notice that margins of the surveying business have improved from 5.3% (first half 2019) to 7.2% (second half 2019). Revenue in the second half was down marginally.

I notice that all guidance in relation to revenue has been removed which potentially indicates that revenue may even fall although margins will increase. I do think that costs will be down by more than $3m. Cost savings that can't truly be measured will assist and also one off costs (having already been paid in FY19). Cost savings that can't really be identified include savings from equipment and staff under utilisation from not having co-located offices. Having been acquiring firms for the last few years (a total of nine), it would have been a big task to integrate the systems and data to one firm. In doing this there would have been one off costs, some are labelled "restructuring costs" but some are likely in the "corporate expenses" i.e. integration expenses, one off fees (for system set up).

Management should have made a clear statement in the report that they were not declaring a dividend for FY2019, I haven't seen it very often where management mention the dividend for the prior financial year, that was just weird. Also nice to haves would be Aquara's work in hand and whether Elton's work has picked up post the elections.

In relation to D & A, the depreciation will roughly remain about the same due to their fleet of vehicles however the amortisation of customer relationships will eventually cease ($7.8m remaining). This is just an accounting quirk. In some ways I would prefer them to amortise it all in a single year but never the less it will continue to drag EBIT down for another 2 to 3 years. It should be completely amortised by 2022 (subject to any further acquisitions).

So as we look at the stock today at 5.7 cents, we need to remember it has come down from 25 cents last year, a significant fall and so a lot of bad news is priced in. I daresay management have had to learn a lot of hard lessons and hopefully they will hold off acquisitions for the next little while. Assuming EBITDA margins for surveying recover to 10% and there is minimal topline growth, in FY2022 (after customer relationships is almost fully amortised) we should be looking at an NPAT of $4m or so, up from an expected slight profit in FY20. Is a $21m market capitalisation too cheap for something that has a reasonable chance of that sort of profit in three years? I suspect so but as always, time will tell. The outlook for surveying is still reasonable, mining is chugging a long steadily and with the bond yield so low governments should be borrowing to invest in infrastructure, particularly if the economy is deteriorating.