Ann: Update - Dividend/Distribution - LBL, page-50

@Michiba My understanding is the 51% ownership is a contractual arrangement to sell us another 11%, and this occurs in three years' time, not within three years. But that's okay....revenue increased from $32m last year (the figure we would have based our $10m purchase price on) to $40m this year. And presumably that doesn't include a full twelve months of the same surface engineering and Laserbond services (namely, Gateway + Laserbond) our 100% owned QLD, VIC, NSW and SA sites offer. So I'd expect that to be even higher next year; especially since the WA economy is apparently doing very well.

First, I'm not surprised LBL was down ten percent on Friday. Our revenue, NPAT, EPS, and margins were all down. Debt and wage costs were up. At first glance, it looked bad. Quickly, where is the "sell" button?!

Yet, if one takes a takes a longer term view, it all seems very reasonable. A concern I have is is the Queensland relocation, US expansion, and the increase of the Gateway WA ownership from 40 to 51%, will all see large once-of expenses in probably each of the next few years. A downturn in the economy or unexpected key personnel loss during this period, and the market would likely be unforgiving towards LBL. Where that leads us to, depends on your view of the company, management, and the services Laserbond offers. As Buffet says, time is the enemy of the poor company, the friend of the good. With Laserbond I see a company with valuable hard-to-replicate I.P., real-world products & services, and strong demand.

I recommend the Curren & Co. analyst report (28/2) available for free at: https://www.laserbond.com/investor-relations/analyst-reports/.
Hopefully an updated copy will be available in the next few days.


The growth from 2021 to 2024 (now) is evident. And if future revenue is anywhere the past's, by 2026 or '27 Laserbond starts really look like a reliable, fast-growing company. We can rely upon organic growth of our four existing sites, the WA expansion, extra capacity with the QLD move, and potential opportunities in the US. It's a lot of operational risk and likely won't come without its challenges. Wayne Hooper says on page 10 of the annual report, "We have grown from two sites to five in the last four years. Revenue from four sites (with the 5th yet to be consolidated) has essentially doubled." The Queensland site has already outgrown LBL's requirements (pg. 14. Annual report).



Importantly, we haven't grown by taking on a lot of debt and dilution, and diworseification (as Peter Lynch puts it when companies expand into new areas for the sake of it). We're only selling our own products and services in different parts of the country. These services are obviously in high demand, and best-in-class, as the increase in revenue and the number of new employees hired shows. In short: where we set-up a site, Laserbond's services are sought after. This gives me some re-assurance of the growth forecast above.

The consolidation issue shouldn't be a surprise to the market or LBL. Curren highlighted it in February:



Laserbond didn't have to spend almost $1m on R&D. Nor did it need to bring 15 Philippine workers here. Or upgrade equipment. It could have bought a smaller WA business and consolidated its accounts into LBL's immediately, with a lower tax rate. I like to think these decisions were made in the best long term interests of the business, by people with a stake in the company. A board focused on hitting targets and receiving bonuses could easily have massaged the numbers by reducing expenditure and investment. They also brought on 3 senior managers -- sales manager, COO, and engineering head to assist with anticipated medium-term growth. Good companies (eg. Aristocrat Leisure or CSL) happily keep spending on R&D to stay ahead of the competition even when their existing offerings are market leading.

I agree with Madamswer that execution risks are present. Also, that it's a small company and results are lumpy. Things like an insolvent supplier has an outsized effect on LBL and its five sites, compared with a large cap company. We're seeing the effects of the WA expansion through share dilution, a higher tax rate, increased borrowing costs, the inability to recognise revenue. Indigestion of sorts. A larger company wouldn't have these issues.

Late last year I was looking at LBL and XRF, which I thought was a similar company (small cap industrial), and decided on LBL because I thought it was cheaper and with better growth prospects. XRF is up almost 50% in that time and trades on a 25x PE multiple, so what would I know!!?? Every time I check, the price is higher (even less appealing). Avoiding the temptation to chase momentum is difficult.

The WA site seems to be a 40% foot in the door of a business -- guaranteed to be 51% -- which the chairman describes in the annual report (Pg. 8) as being at-present a $40m a year in revenue business ($32.6m the year before). Our 40% share set LBL back $10m. Presumably this will increase further as additional LBL surface engineering equipment is set-up there. From the results press release: "Gateway is a larger and higher calibre business than had originally beencontemplated". Our WA presence alone has immediately gone from zero, to being the potential equivalent of 50% of LBL's revenue. This assumes we earned $42m and Gateway brought in an almost identical $40m, of which we'll be able to book half ($20m) in two years' time. By that stage though, perhaps Gateway will be earning $50m with the addition of our surface engineering services.

We haven't just bought revenue, but a presence in WA -- where the head offices of the Australian mining companies we'd be dealing with in the US, are located. I'm thinking of Perth-based South32 and their Hermosa manganese and zinc mine development in Arizona for example.

My average price is 71 cents. It's about 1.5% of my portfolio. I will be watching the share price daily like a hawk! I have resisted the temptation to buy more, but if it falls from 65 cents to anything with a "5" in front of the number, I'll be buying on weakness and putting it in my proverbial bottom drawer. 65 cents is our lowest price since June 2022, but operationally, we're arguably the strongest we've ever been. I have no calculations to justify 59 or 60 cents as a suitable price. Only that another ten percent down seems theoretically probable given Friday's weak numbers, plus it would better allow me to average-down my existing holding. I would happily buy another modest parcel on further weakness given everything I read from Friday's release, and with a better margin of safety.




So, why aren't I buying today? It's nothing to do with Laserbond, and more a lack of conviction, and confidence in my own ability to be right about LBL, I suppose. I'm no finance guru and have been wrong many times in the past about companies' prospects. Also, a constant internal voice telling me to go easy on small/micro caps to avoid exposure to the unnecessary risk of permanent capital loss. Small caps can be addictive and highly profitable (yet also volatile!).

I'm seeing a company in LBL which is growing quickly (mostly self funded) and has technology which is obviously in high demand (thanks, @Snave23!). I'm prepared to look through the current results which are weak on the surface, but disguise the progress made in setting LBL up for growth in the years ahead. As a patient investor, I have seen enough from this company to see there are competent, conservative people at the helm, with a sensible plan for strong growth in the medium term.

Thank you all for reading through this. Typing my ideas seems to help me put things into perspective.