Consistently Making Profit $$$ Again, page-4

@burner_7 thx for the tag in the BCC thread

For what it's worth I've taken a look. At first pass it's made my watchlist and I'll probably watch it closely from here. Here are some of my thoughts:

Firstly, there are a few things I like.

• The latest trading update had YTD NPAT of $2.8m to Nov, which is excellent
• There seems to be an IMPROVING trend in performance, which could be a sign of inflection
• The balance sheet looks fixed after the raise and as others have alluded, there is clearly a path to a dividend
• The market cap is very low, providing lots of upside. Even at ~240m shares, total SOI is not overly high although I will add that the last raise, while needed given debt, was pretty disastrous

If I think about valuation, very simplistically (I haven't spent that much time on this) but if I annualise Nov NPAT as my upper bound best case I get $6.7m in NPAT. On 236.6m shares that gives me an EPS of 2.8c, which compares favourably against an 11c close (i.e. PE of ~4x for a likely dividend paying stock)

BUT, the likelihood of that run-rate being achieved for the full year is low given the business benefited from various product launches like the new iPhone and there's probably a seasonal skew given Christmas.

A more appropriate - and I might defer to longer holders - but if I say that the business has 'banked' that $2.8m NPAT YTD and will make $100k monthly to the end of the year. Using that scenario gives me a full year NPAT of $3.5m. This is my lower bound conservative estimate. While 2H21 could be weak, we don't have Dec numbers and they will likely be >$100k given Christmas, providing a bigger buffer and run rate for the likely seasonally slower months from Jan to June. I think this is more than achievable.

Using the above scenario I get a FY2021 PE of 7.4x, strong balance sheet, the potential of a dividend, a low market cap business and potential for upside given it looks like the business has inflected - I like these types of businesses. This gets on my watchlist but I can think of a number of other similar businesses with low PE's and/or the capacity to pay a dividend (eg AMO, EGL, CXZ) - all are very low market cap too. Also, while this could/will pay a dividend I also think there are more sustainable dividend paying stocks that will have a similar (higher) yield like AVA or IMA

But, there are a few things worth considering - or at least what bothers me.
1. Holders might celebrate a small dividend but capital management has not been good. The raise was severe and at a very low share price. To do a CR at a low price and then pay a dividend later or do a buy-back (unlikely) at a high price is not good and reflects poorly on management. Sure, you can blame covid but even then, debt looked too high for this business
2. I think the competitive advantage of the business is generally pretty weak. Sure it has a few exclusive licenses but it is essentially a wholesaler and wholesalers are typically capped in how much profit they can earn as they don't own the IP. There's limited scale or network gains from wholesalers
3. A key question for me is how sustainable are the earnings. Sure, a PE <8x is great but it's somewhat pointless if the business only has one good year and makes a small profit/loss every year - you won't make bags that way. From capital IQ I've got +20 years of NPAT (see below). The one good thing is that the business has, outside of a bad 4 year patch, generally remained profitable, but for material SP appreciation you need growing profits and that's not evident - while I don't know the company history, as a wholesaler this is somewhat in line
4. While the immediate metrics looks good, the most important question for any investor is, is this the best place in the market for me to park my capital and what is my expected return. While I think I can make a return at these levels, my capital is finite and I think there are better options based on my risk appetite. This is obviously highly subjective
5. Lastly, if I look at management and the board, there seems to be lots of the same people and insiders. Clearly they need to be held to account for the 3c raise, which saw SOI grow by 4x!!! The chairman looks like a resources guy so not sure how his expertise aligns to this business and there is no one that looks amazing (lack of diversity too). Ultimately it's management that drive the business

Anyway, I'll start watching. Thx again for bring this to my attention. It wasn't on my radar.

CLT: NPAT (1999 to 2020) $A