EHE - its a BUY., page-8

@PointBreak5,

Not sure where you get $100m of FCF from (I assume you include the receipt of RAD's in that figure. If you do that's fine, but I'm not sure I would be banking on positive net RAD inflows on an ongoing basis.)

Without RAD's, FCF has averaged around $25m pa since this business was listed (and that FCF calculation of mine includes only maintenance capex and doesn't include any capital for expansion or acquisitions).

This is a really binary situation: when the RAD's are flowing in the right direction (like they have been over the past two years), its all hunky dory [*]. But when they turn the other way, then look out, because they you are suddenly sitting with an acutely leverage balance sheet (those $650m of RADs aren't classified as liabilities for nothing).

And don't forget: there's $250m of debt that needs to be serviced (as well as $84m of deferred acquisition costs that need to be paid out, with a $41m cheque that EHE needs to post out by the end of this month.) .


[*] This whole RAD gig has all the hallmarks of a Ponzi arrangement to my way of thinking; all very advantageous while its flowing in the right direction; but problematic (and potentially catastrophic) when it starts to go the other way. (And you are right: not all RAD's will be recalled at once, but you don't even need it to get to that; all you need is for the tide to turn moderately the wrong way for a period and then you will get all sorts of solvency question starting to be asked... if they aren't already.)


PS. As for your observation of Price-to-Book being 0.70 and therefore its assets are worth 30% more: this is a bit of a flawed way to look at it, I'm afraid: because more than 150% of book value is represented by Intangible Assets (120% is Goodwill).

Stripping out the value of the Intagibles leaves you with a negative Net Tangible Asset backing.

Please don't shoot the messenger, but this situation looks potentially precarious to me.