listed peer provides valuation context

One of BSA's listed peers, and competitor, SSM, yesterday provided an update of the earnings expectations for SSM (SSM has a market cap of $180m and Net Interest Bearing Debt of $60m, for an EV of $240m.)

Essentially, for DH2010, SSM recorded unaudited revenues of $300m (up 12.7% on previous corresponding period), and EBITDA of $16.1m (17.5% higher than pcp).

For the full year of FY2011, SSM is forecasting EBITDA of $34m for FY2011, a 26% increase on FY2010.

That puts SSM trading on an EV/EBITDA multiple of 7.1x.

By comparison, on my modelling, BSA is trading on an EV/EBITDA multiple of 3.6x (EV = $71m on EBITDA of $19.5m).

Now I recognise that SSM has a stronger contractual position than BSA in the telecommunications field services space because of its greater scale, but I think BSA more than makes up for this given its added earnings diversity in the form of the Transmission Services business and the Building Services and HVAC space through its subsidiaries Allstaff and Triple M.

More importantly, BSA's balance sheet is in far better health than SSM's, with EBITDA/NIBD at a comfortable 2.5 to 3.0x, compared to SSM's 0.6x. BSA's EBITDA/Net Interest coverage is 10x, while SSM's is 6x.

So in summary here you have two similar companies, the one's EBITDA is 75% higher than the other's (SSM = $34m, BSA = $19.5m) yet the difference in Enterprise Value is almost 3.5 times (SSM = $240m, BSA = $71m [$64m market cap + $7m NIBD]).

I think that, even after the good share price performance in recent months, BSA shareholders should reflect on the fact that they still own a fundamentally undervalued business in BSA, with FCF/EV = 15%, EV/EBITDA = 3.6x, P/E = 7.2x and DY = 6.6% even assuming a 50% payout ratio.

Admittedly, BSA isn't the highest quality business in the world, but maybe 7% or 8% FCF yield, or EV/EBITDA of 5.5x to 6x, are appropriate vauations.

On that score the stock still looks a good 50% to 60% undervalued to me, which is more than I can say for most other listed entities.

Prudent Investing

Cameron