WAK 3.77% 5.1¢ wa kaolin limited

EBIT Margin I do not remember where I got the idea of a 16% EBIT...

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    EBIT Margin

    I do not remember where I got the idea of a 16% EBIT margin, but I think I had taken metrics based on CIF revenue, and adjusted EBIT margin % down to suit FOB revenue by excluding shipping from the CIF-based revenue. The DFS has various metrics ranging from circa 20% to 30% for Stage 1 (that is about 200,000 tonnes a year) at Table 28 . I have no idea if the DFS can be relied on, which is why I introduced a down-scaling factor to suggest a lower % for now. The July 2021 Breakaway analysis has the estimated EBIT margin at just above 24% for FY24, but this too would have been relative to CIF-based revenue.

    Also, using the same EBIT/Revenue % for 200,000 tonnes; 400,000 tonnes; and 600,000 tonnes could be questioned. My attitude was that it was probably OK for 200,000 tonnes a year, and any economies of scale can be ignored in the interest of conservatism. Any opinions on the EBIT % would be welcome. One could telephone the CEO, and ask him for the target margin that Management is gunning for.

    Usefulness of a model

    Models like this are never correct, but I find trying to build one forces me to do more research.

    Why include a third plant?

    I strongly suspect that Management will build a third plant to be ready circa January 2025 if the market can absorb more dry-processed K99S, and if that is not the case, January 2026 (to be ready when the rail connection is available). A third bog-standard K99 plant could be located at the mine early, and the wet-processing add-on facility to be located at Wedin could follow later. WAK has a number of products. K99F is the fibreglass product. K99P is for paper applications. K99C-45 is for ceramics, and K99S is for general use.

    Share Dilution

    I have not treated dilution in a mindful way. All I did was sum everything we know what the share tally could be. There is no recognition that value has been given for shares issued, and value would be given for options taken up. For now, I'll not give the matter any attention, unless I am prompted to do so.

    60c a share

    I think it is possible that the SP gets to 60c, but I would not be so bold as to set 60c as a 12-month target. The ability to reduce transport by shifting to rail, the significant pricing premium that would flow from exporting K99P to the paper sector are two factors that should give the SP a fillip.

    WAK has a huge advantage with K99P relative to competitors, and that is the quality of the ore avoids the need for wet-processing to eliminate contaminants; WAK's need is limited to making dry-processed K99 less viscous, whereas competitors often need processes to remove contaminants and to bleach the product. Exporting K99P at premium prices and railing product to port are what is going to shift the EBIT margin higher than I have in my model.

    When Breakaway suggested 60c, they had in mind adding 500,000 tonnes to the 400,000 tonnes a year that Stages 1 and 2 will deliver. My model does not look that far ahead, because I only needed a target SP of about 25c to incline me to "hold" for now. Of course, the entire business could be rooted by ineptitude, malfeasance and uninsured disasters.

    You mentioned EBIT margin in dollars, which is what it is. As I have alluded in the opening sentence, the percentage can be misleading, depending on what costs are included. In exporting, exporters aim to have an FOB price, and if the client prefers CIF, the price quoted would add shipping costs to the price, but the profit remains substantially the same in dollar terms.
 
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