Britelite, you've made some rather large, and what can only be...

Britelite, you've made some rather large, and what can only be described as amateurish mistakes in your calculations.

Also when I say NPAT will increase 300% and EBITDA 50% I didn't just pull these numbers out of the air. No you didn't just pull them out of thin air, but you might as well have.

According to Capital IQ:

BigAir's Dec10 EBITDA was $3.5m and its NPAT was $1.5m
Clever's Dec10 EBITDA was $1.0m and its NPAT was 2.4m. [The fact that NPAT is higher than EBITDA is explained by their asset sales] yes very important observation

Going into June 2011 these P&Ls will be combined along with the organic growth of both companies.

This means the post-merger effects on NPAT and EBITDA are:

BigAir Dec10 EBITDA post merger= 129% of pre-merger EBITDA.
BigAir Dec10 NPAT post merger= 260% of pre-merger NPAT.

Completely wrong because of your above observation on asset sales.

So to go from there to 50% EBITDA and 300% NPAT, all I did was factor in around $1m of organic EBITDA growth sourced from upselling (i.e better asset utilisation) As this means no new infrastructure is required 100% of EBITDA flows to PBT) which takes EBITDA to 150% of pre-merger. And 70% of $1m is $700K, adding this to NPAT takes it to $4.6m which is 307% of BigAir's reported Dec10 NPAT.
A complete exercise in futility because of the above observation about asset sales.

This is slightly a hack but then I was making a HotCopper post not a board preso.

Calling it a hack would be far too generous, just because you are on hotcopper doesn't mean you shouldn't do proper analysis. I suspect though its simply a case of you not knowing how to do the analysis.

So take this growth and add Clever's Dec 10 P&L and EBITDA goes up by 50% and NPAT by 300%.
Only if you suspend reality.

The final thing is that Clever got its $2.4m NPAT substantially from asset sales which aren't really repeatable.

Ahh yes, this is not the final thing, this is the first and most important thing that renders the rest of your analysis above completely meaningless.

Clever's underlying business was basically running at breakeven. You can't combine the NPAT of both companies, it doesn't make any sense based on one off asset sales, as you yourself recognize.

However I also considered that delisting a company saves around $1m pa in compliance costs and that you could probably reduce other costs eg occupancy costs (or allow each company to expand into the other for better utilisation) etc to get the missing $1.2m savings in NPAT by reducing expenses and COGS by $1.2m / 0.7 = 10.1% of the merged entity's $17.026m of COGS and expenses.

So why go through the tortured and utterly useless calculations above if this is where you derive your numbers from?

But even the above is utter nonsense. Let's take a hypothetical company with the following:

EBITDA: $3.5m
NPAT: $1.5m

and further assume EBITDA increases 50% and NPAT 300%. Then we get:

EBITDA: $5.25m
NPAT: $4.5m

Do you see the problem? In order for this to happen the hypothetical company would have to pay a 14% tax rate and have no D&A charges which of course is absurd (the company has already highlighted higher D&A charges going forward). Or, they incur $0.75m in D&A charges (BGL paid $0.86m in 1H10) and pay no tax, or something in between these two extremes, Whichever way you slice it, the numbers just don't add up.


What I am saying is that the market has not fully appreciated the P&L effects of merging Clever.

I think we can all agree on that.