Is the upside still more likely than the downside for BYL? I...

Is the upside still more likely than the downside for BYL? I think so.

When I first invested in BYL in August 2013 at 30¢, the decision was a gamble based on my gut-feel that the upside appeared more likely than the downside, and that there was a good chance that BYL could substantially hold its DPS to compensate me for parking the funds there while I wait to take a capital profit. I increased my holding when the YE 30.06.2013 annual report confirmed my view, so my average price is 34.9¢, but the annual report prompted me to raise my valuation of BYL from 40¢ to 50¢.

The basic logic behind my punt was that:

* BYL's abnormally low PER, which explains the high dividend yield, was based on rocky history that seems to have been corrected since Peter MCBain became CEO;
* BYL has no corporate debt (such debt as it has is hire-purchase debt on equipment); plus
* BYL being an earthmoving business has a large civil works business, rather than being a dyed-in-the-wool mining services provider, so the baby-tossed-out-with-the-bathwater situation applies.

If you look at https://secure.argonaut.com/FileLink.asp?DT=R&DID=1566&DP=6111 you will see that relative to the other 40 stocks in that sector review, BYL still has the lowest PER, in spite of it not having the problems of other low-PER stocks in that survey, so the upside remains, and DPS and EPS do not seem to be under threat. One could buy at a PER of 4.69 and skip out at a PER of say 6.5, and make 38.5% capital gain, other things being equal. However, if the PER moves to 6.5 in the longer term, you can be sure that this will be on the back of improved EPS, so the gain would be greater, because EPS x PER = SP. If EPS and DPS remain flat, and you have to wait for a while, console yourself with the dividend yield of 7.7%, which is 11% if one includes franking credits. Of course, things may get worse than my EPS-up-or-flat prognosis, and that is why I always refer to BYL as a punt.

I have in recent posts pointed out the small contracts that BYL announces on its webpage. BYL seems to regard sub-$15M as small, and does not “announce” them via the ASX. I am not attempting to imply that these are going to save the day, rather I imply that as BYL is substantially an earthmover, it has options beyond mining services. The list below is the work picked up in January 2014. The North Lake Primary School job is probably minute, but it emphasises BYL's repeat-business relationship with Landcorp.

• North Lake Primary School – Client: Lend Lease & Landcorp
• Kalgoorlie Greenview at Karlkurla Stages 2B & 2D Subdivision – Client: Landcorp
• Newman Town Centre Redevelopment Stage 3A – Client: Landcorp
• Wickham South North Link Road – Client: Rio Tinto

Repeat business is not restricted to Landcorp, the same pattern can be seen in respect to Peet Limited, LWP Property Group, Perth Airport Pty Ltd., Fortesque, BHP and Rio Tinto.

Whether BYL finds enough work to keep its equipment and people profitably busy for YE 30/06/2014 and YE 30/06/2015 is the question. Thanks to the Karara Mining Limited (KML), YE 30/06/2014 should be fine, and similarly for the first three quarters of YE30/06/2015 – assuming that, in addition, civil works contracts roll in at circa three a month as is currently the case.

BYL has not landed another mining services contract to augment the KML deal, and there is always a threat that the KML deal may be extended at thinner margins, or not extended beyond the current four-year term, which expires circa March 2015. Disappointingly, BYL has not secured work at Roy Hill. In the FMG deal secured in 2012, BYL subcontracted drilling and blasting work to NWH at Cloudbreak and Summit, and supplementary drilling services at Karara in FY2013. Maybe NWH could reciprocate if it needs more earthmoving to be done than it can handle within the deadlines required for NWH's Roy Hill contract with Samsung, or better still, acquire BYL at 50¢ a share, or more (wishful thinking).