HLO valuation thread

So I participated in the large block trade at $1.72, which hasn't worked out so well for me so far. But if I ignore the poor trading thus far, I must say it's looking amazing value at the moment. Here's some numbers.

Point 1. Looking at how the market historically has valued HLO

The above chart looks at the share price tracked against the historical EV/EBITDA multiple (green line). What we're looking for is an average over a long period. Obviously covid and the losses meant there is no ratio in FY21/22, but if we go back further we can see some useful data points.

The key point is that over the last 6 years the average EV/EBITDA for HLO has been 9.6x and as high as 25x

Point 2. Reaffirming guidance

FY2023 EBITDA guidance has been reaffirmed at $22-26m. If I take the mid point of $24m, then FY23 EV/EBITDA is 6x (clearly very cheap vs history). If I work back and apply a 9.6x historical multiple I get a June 30 2023 target price of $1.92 or 36% higher than the present price of $1.42. That includes using leases as debt (note no formal debt) and cash to get my EV.

Point 3. What about all those CTD shares?
That's right, HLO also own 3.57m CTD shares worth approximately $51m. These are as good as cash as there is a liquid market for them and no selling restrictions. If I add the $51m to my cash pile, then HLO's EV (also accounting for leases as debt) comes to just $104m. Using my EBITDA mid point of $24m gives me a FY23 EV/EBITDA of just 4.3x. That's less than half the historical multiple so if I back calculate and include CTD shares as cash than using a 9.6x EV/EBITDA multiple I get a June 30 2023 price target of $2.25 or 59% higher than now.

Point 4. What about all those dividends?
Well prior to covid, HLO was known for paying dividends and prided itself on increasing the amount year on year. With covid headwinds largely gone the company has recommenced paying dividends again with a 10c final dividend paid in Sep of this year. That's a 7% yield and does not even include an interim dividend. If we look at what used to be paid we can perhaps estimate the full year amount for FY2023. Given the profit performance will be stronger this year it's a fair case to say that the total should be more than 10c. My baseline expectation would be for 12-14c total. At 14c, the yield is about 10%. The total payout at 14c would be less than $22m, so FY23 profit and some of that large cash pile would easily cover it.



Point 5. What do the analysts think?
The average target price is $2.51 for FY2023 with the lowest price $1.91, providing plenty of upside at current levels.




Point 6. What about beyond FY2023?
Well the good news from what I can ascertain is that even though profit will improve this year, it really hasn't clicked into gear. If I look at what the brokers are forecasting for EBITDA I can see some very large gains with up to $78m expected in FY2026.

Now that's a bit too far into the future for me, particularly with interest rates rising. But if I take $40m EBITDA for FY2024 and if I use my 9.6x long term historical EV/EBITDA multiple (holding my cash and debt levels constant but excluding CTD shares) I get a FY2024 price target of $2.92 (note: With CTD shares it's $3.24)



So bottom line, it looks fairly compelling at these levels with material capital growth upside. In the meantime we're being compensated with a dividend yield that could be anywhere between 7% and 10% this year. GLTAH