Hi 1DMThe Texas law change will certainly be a speed bump in the...

Hi 1DM

The Texas law change will certainly be a speed bump in the recovery, but I think you might be being a bit pessimistic in your assessment. Some comments below ...

- The Texas change will have very little (if any) effect on FY19 revenue results (as the change occurred so late in the year). Could effect EBIT if there are any writedowns of equipment or restructure costs tho.
- Ongoing, the maximum effect is the loss of all revenue/EBITDA from Texas ... but as per the RDF release, this won’t necessarily be the case. Speculation only on my part ... but they could receive some compensation payments and/or on going revenue from monitoring/warning letter programs (as opposed to fines).
- With $31M of new project revenue over 1H18/2H18/1H19 being higher than previous periods, strong annuity revenue gains and high contrast retention ... your estimate of $113M full year revenue looks low to me (I estimate $118M in FY19). And, prior to the Texas loss, I estimate a running rate of $130M for FY20 based on new business wins/retention already announced (and before the large Pennsylvanian win).

So ... even if 100% of Texas business is lost, I think worst case is that FY20 revenue will be flat with FY19. EBIT a bit harder to predict as could incur restructuring costs and gain compensation payments (my best guess is flat).

So overall, I agree it looks like Texas could knock a year off the recovery but that the business will be on a stronger FY19 profitability when it occurs with upside from accelerating new business wins (and even perhaps some compo or partial ongoing revenue in Texas).

Hence, I think RDF looks very cheap at these EBITDA multiples.