Hi Alonso Off the top of my head, I was inclined to answer your...

Hi Alonso
Off the top of my head, I was inclined to answer your question with a simple “yes”, but I decided to give the matter more thought, and in summary, I still think BYL is a buy at 33c. However, I look at it primarily from the perspective of what I think the fundamentals are, and not from the perspective of market sentiment. This means I am happy to hold during periods of negativity, because I think the dividend can be retained at 3c for a long time. Also, it is not a “buy” for me personally, because I hold so many BYL shares (1.025 million), and it may not be a “buy” for others, because their buying considerations are different to mine.

Trying to get into the head of Mr Market, tends me to think that a good H2 result, with a bullish outlook statement for FY2016 should give the SP a fillip. I think this is what will happen, and so on that basis too, I think BYL is a “buy” at 33c. EOY selling may keep the SP low during June, so if one wants to buy, June should be a good month. When investing, I prefer to anticipate what the profit announcements and outlooks are going to be, rather than wait for confirmation, because confirmation of good news comes at a price.

By the 3c DPS mentioned in the first paragraph, I do not mean that the DPS will remain static – it could drop, and it could rise, but because I think the long-term bias favours the latter, it is reasonably conservative to use 3c as the long-term proxy for the dividend stream, and this simplifies the NPV mathematics to 3c plus franking credit divided by RRR (required rate of return). BYL has a low dividend payout ratio, said to be between 25% and 35%, so its DPS should be viewed as having a low downside risk. Similar firms typically have payout ratios of about 50%.

As my BYL holding is substantially in my in-pension-phase SMSF, and hence tax free, my RRR is based on the 4.75% mortgage rate I pay on a flat I own, uplifted by a equity factor of 1.8, which gives 4.75% x 1.8 = 8.55%. That gives me a BYL dividend-based valuation of 3c/8.55% = 35c. Bear in mind that the 1.8 factor adjusts for risk, and to a degree holding the DPS to 3c also adjusts for risk, if one thinks, as I do, that DPS is more likely to rise than fall in the long run. Selecting the 1.8 factor is extremely subjective, and each investor should have a different factor, and they will have a different after tax risk-free return to 4.75% that applies to me. A factor of 1.8 for a dividend-yielding stock with a low payout ratio is, in my view, conservative.

A year or so ago my largest concern was that BYL would chase more work than it could easily digest, so I take comfort from the fact that announcements of new contracts have declined, and the number of people BYL is trying to hire has also declined. My please-slow-down view was set within the context of:

BYL's relatively fat order book (FY2016 ≈ $150m, and FY2017 ≈ $100m);

• the multi-year duration of the RIO contract (expires FY2019) and the Zuccoli Stage 2 contract (expires in 2017);
• the larger contracts that BYL has obtained from Main Roads WA in recent years, which confirms BYL's road-building and bridge-building credentials, plus its ability to win tenders;
• chasing much more work than the equipment fleet can handle would increase CAPEX and debt, and expose BYL to the risk of idle capacity in future, and the alternative of hiring equipment takes a slice out of thin margins; and
• increasing headcount also has elements of future risk (redundancy payments, for one).

Relative to H1 FY2015, profitability in H2 should improve as the RIO contract picks up speed (more revenue), and recruitment slows (less cost). The H1 FY2015 results announcement explains the lower revenue of $135.8m compared to $148.7m for H1 FY14 using these words, “The mining division was in a period of transition during the half, with operations at Karara completed during the period and the Company ramping up work at the Western Turner Syncline Stage 2 Project for Rio Tinto. As a result, mining revenue was lower, however operations are now nearing expected capacity with road haulage of ore set to commence in H2 FY15.” On the expense side, BYL had to a degree to resource itself in advance, and so recruitment, training, induction, and wage costs dragged the NPAT down further. BYL's employee numbers increased by 159 from 30/06/2014 to 514 at 31/12/2014, which is a 45% increase.

On the DPS holding at 3c for FY2015 specifically, management restated the $300m revenue target for FY2015, so expect about $165m in H2 FY2015. Costs will grow at a lower rate, so NPAT for H2 should be higher – say $6m, rather than the $5m that would happen if expenses went up in equal step proportionately. This would deliver an EPS of about 8c, and allow BYL to pay a 3c DPS (35% of EPS, rounded up a bit). It is possible that BYL pay a slightly lower DPS, say 2.75c, but because management held to the 1.75c DPS in H1, which was a poor performing half year, I think the DPS should hold to 1.25c for H2 – both the same as for FY2014.

The strong results for H2 should carry forward into FY2016 to deliver a revenue of $330m and an NPAT of at least $12m, and hence an EPS of $12m ÷ 126.5m ≈ 9.5c, and a DPS of 9.5c x 35% ≈ 3.3c, or 3.25c rounded to the nearest quarter of a cent. Management could keep the DPS at 3c for FY2016 to allow it to reduce the debt incurred to buy equipment for the RIO work. My approach of using 3c as a long-term DPS is conservative, I think.

Notice how frequently I qualified what I wrote with the words, “I think”. What happens is another matter.