Ann: Trading Update for half-year ended 31 December 2020, page-8

The content and tone of this announcement reeks of conservatism and understatement.
Not unlike all commentary made by NTD management in recent years.

I 'm guessing this conservatism is an outworking of the board and management having been emotionally scarred and brutalised by the unhappy events subsequent to the IPO, which saw the company spend the bulk of its listed life trading at a price level which was fully half of the $1.00 per share issue price (at level to which it will - I very strongly expect - return for the first time in more than 2 years, when the market opens this morning.)

Of course, it wasn't management's fault that the prospectus forecasts failed to predict a 20% fall in the A$ over the next two years, from over 0.80 to 0.65 which - for a company that imports all of its products invoiced in US$ terms and which operates in a competitive industry where the ability to pass input cost increases onto customers is limited - wreaked havoc on Gross Profit Margins, as can be seen in the chart below, which shows a near-800bp compression in GP Margins (from 32.9% in DH2017 - the time of listing - to 25% for JH2020), when the  A$:US$ exchange rate went of 0.78 to 0.65:





With the A$:US$ rate now back at DH2017 levels, it stands to reason that there will be scope for the GP Margin to rise considerably (particularly given the underlying cyclical demand is currently very strong).

Heck, even if they don't claw back all of the 800bp margin compression, the uplift in earnings will be significant.

Say they achieve a mere half of the potential GP Margin recovery, so, say, 400bp, on $450m of Revenue that equates to an incremental $18m of Gross Profit that will drop through to the Pre-Tax Profit line.

For context, FY2020's Pre-Tax Profit was $7.4m (reported was $6.2m, but there was $1.2m in net NRI hit to the FY2020 P&L in the second-half).

And then there are also the potential synergy benefits from the T4U acquisition which I reckon will be at least $5m.

So, building an earnings bridge for NTD's prospective  starting with $7.4m in Pre-Tax Profit, we get:

FY2020 Starting Point = $7.4m
Add:  GP Margin Recovery = $18m
Add:  Synergy benefits= $5m

=>  Prospective (i.e., FY2021 exit run rate) = ~$30m

That sort of profitability is more applicable to a +$200m market value, as opposed to a $110m, which is where the company is today.

Accordingly, even after the trebling of the share price over the past few months, on valuation grounds it has scope to double from here.

Accordingly, Target Price = $1.80
(At a modest P/E multiple of a mere 10x)
.