Galba Your questions tempted me to write a blurb, but on...

Galba

Your questions tempted me to write a blurb, but on rereading your post, I realised that I had drifted of course, and not answered all your questions. I decided to convert your post into a series of questions and answers, and seeing that the blurb is now written, paste it thereafter.

When does one attempt to value BYL?

If you are bold, try to do so now, because when things become more patent, the share price would tend to adjust to the reality. Increasing certainty by waiting for more information may come at price.

What will trigger a re-rate in the value of this company?

The replacement of the helmsman by a man of Ray Bushnell's calibre could, I imagine, occasion a rerate by those who know Ray, and in time this gaggle of cognoscenti will grow.

Recognition that the North West Coastal Highway was a one-off fiasco, not a symptom of a terminal disease. I understand those to whom blame could be attached, are now out of the picture.

Have the necessary write downs and impairments all been taken?

Probably, and more than was necessary. Total impairment was $20m in H2 plus $2.1m in H1, or $22.1m for the year. Companies often use an annus horribilis (horrible year) occasion to write off the maximum possible, thus setting the scene for the years that follow (less to depreciate and tax credits to offset future taxes and so bump up NPAT, and hence increase EPS). It was only recently that BYL went in the opposite direction, and reduced the depreciation by changing its straight-line method to an equipment-usage method. As a consequence, recent profitable years may in fact not have been that profitable.

How inaccurate are the TCEs?

The Thomson Consensus Estimates are now called the Morningstar Analyst Estimate. The DPS for FY15 is correct – BYL paid that as an interim dividend, then when there was uncertainty about an insurance claim and a Main Roads claim for extra work (more rock), management decided to suspend the dividend until they could see how FY16 was fairing. Then came the North West Coastal Highway fiasco, and dividends were not resumed.

Commsec indicates a dividend being paid this year?

I would dismiss any likelihood of a dividend being paid for FY16, and to be conservative, I would write-off FY17 too.

The EPS estimates are so way out that they warrant no attention. You should attempt to estimate the EPS yourself. Remember, FY17 will be a loss, and for about four years after that, tax would be offset by the resultant tax credits. If you can nut out what is included and excluded in “underlying NPAT”, then strip out overflows from FY15, then take out North West Coastal Highway loss, then you might get a feel for the underlying profit before tax. Then take off 30% to get a normalised NPAT. You can use this to guess what FY17 NPAT might be.

For a small company like BYL, these Morningstar estimates are not a consensus of brokers, but rather, they are often the opinion of a single broker, and if that broker has a client relationship with the company, the opinion may be rose tinted.

FY 16 Loss is lower than the $10-$12m?

Yes it could be. I do not know where the negotiation with Main Roads went in respect to the additional rock encountered on the Great Eastern Highway project in in late FY15. From Hansard, I read that this was worth $9.55 million and $0.64 million, so the after tax impact is significant, $7.133m. Even a compromise could be significant. This is one piece of good news that would give the SP a fillip. The matter had not been settled by 12 May 2016 when the matter was discussed in Parliament WA.

Any mention of a return or forecast of profitability FY17 or a positive outlook?

Not of which I am aware. We know that Executive remuneration is going to be reduced, and that the new CEO is going to get less than the previous incumbent.

…............................. My original Blurb …........................................................

Catalyst for rerating BYL

Good news could be that the underlying loss turns out to be less, because BYL has recovered some money from Main Roads WA, insurance, and subcontractors who built houses in NT that BYL had to make-good on warranty claims. To see the new CEO buying up shares in a meaningful way, would be a good sign. A token purchase should be taken with a pinch of salt.

We need to see contract wins at viable NPAT margins, and we need to see head-office expenses reduced. The latter would help realise the former. One could go further, and want to see X, Y and Z (improved financial metrics). Alternatively, one could make the leap of faith that BYL is going to progress well. The problem with waiting to see the evidence though, is that by the time it manifests itself, the SP would have jumped the gun – certainty comes at a price. BYL shares closed 8.5c on 22 July, and they closed on Friday, 19 August, at 15c. A leap of faith could value them at twice that, and create a buy price at say 20c, or lower.

Sad History

From an investor's perspective, BYL has been a long-term disaster. It floated in 2007 at 50c, so even the years when it paid a 3c dividend, that was hardly a dividend yield to brag about. The subsequent disappearance of the dividend and the erosion of the share price speaks for itself.

When I first invested in BYL in August 2013, I bought 50,000 at 30c on a punt that the CEO appointed in 2011, Peter BcBain, would be an improvement, because BYL had been poorly managed for its first few years as a listed company. Things improved, so I bought more at a higher prices, but disappointingly, administration expenses remained high, and NPAT margin remained low compared to the likes of MACA (MLD) and NRW Holdings (NWH). My average buy price is 40c, but this is misleading, because of a bonus dividend of 8c. For most of the time that I held those shares, the dividend was 3c.

Some Numbers to Consider

EPS performance for FY12 to FY14 was:

....... FY12 .. FY13 .. FY14
EPS .. 8.6 ...... 9.3 ...... 8.8

This suggested an SP in the 45c-to-50c range, using PERs of a bit higher than 5.

FY15 was heading for an EPS of 7.3c (NPAT $9.2), but because of unsettled claims against Main Roads WA and an insurance company, a NPAT of $3.1 was declared. The insurance claim came good in FY16, and the Main Roads WA claim may not have been settled in late FY16. This was the year when the Western Turner Syncline project ramped up, so I expected a lower EPS, so 7.3c would have been OK in my book.

The $22m loss on the North West Coastal Highway (NWCH) project, and impairments mooted at another $22.1m ($2.1m in H1), is going to ensure that FY16 will report an underlying loss of $10m to $12m, as suggested in a recent guidance. The statutory loss will be something like $36m – pushed up by impairments. The bright side is that BYL will not pay tax for a few years, and but for the $22m NWCH project loss, BYL would have had an NPAT of about $10m ($22m-$12m) to $12m ($22 -$10m), although some of that relates to FY15 – e.g., FY15 claims not recognised that succeeded in FY16.

I have no idea what occasioned the large loss on the NWCH contract. That is, who cocked up, and how? A loss of $22m (before tax) on that contract on a per-share basis is $22m x .7 ÷ 126.5m = 12c a share. So if we deduct that from a valuation of 45c (mentioned earlier), that suggests BYL could be worth about 33c. If we can extract from the facts that but for the NWCH matter BYL made an average NPAT for FY15 and FY16 of $10m, and will do so in future, that suggests a non-growing EPS of $10m ÷ 126.5m = 8c, giving BYL a valuation of about 40c. If you think 40c is too high, remember that BYL is going to have less depreciation in future, because of impairments, and it will have tax credits, that have a value. If the statutory loss is going to be $36m, the tax loss would be $10.8m (8.5c a share). So if you used a lower future EPS (normalised for tax) of say 6c, multiplied it by 5 to get 30c, you should add the value per share of the tax credits if you believe BYL is going to survive and use the tax credits. Obviously, each investor who tries to value BYL is going to end up with different values – probably clustered between 20c and 40c.

Can the new CEO fix Things?

I am prepared to accept that as a one-off cock-up, not a symptom of a general problem – the $300m RIO contract (Western Turner Syncline) seems to be panning out well, as have other contracts. Hiring Troy Busby may also not have been a good idea – the continual reference to Brierty as a company, and Mr Busby as an individual, in Hansard suggest that he may be the object of unhealthy-for BYL Labor Party hostility.

I think the new CEO, Ray Bushnell, may resolve some of the problems at BYL. Ray's experience is in mining, processing, civil construction, and mobile-and-fixed plant asset management. That he has just over a year of history at BYL means he does not have to go through a familiarisation and cultural integration process that an outsider would have required. Amongst other things, Ray Bushnell was the project manager for the above mentioned Western Turner Syncline project. He joined BYL in July 2015 as GM Mining, and was promoted to Chief Operating Officer in April this year. His background at both WPH, where he was CEO, and Mineral Resources, where he was General Manager, are both very appropriate – see http://www.wph.net.au/ and http://www.mineralresources.com.au/ to get an idea of these two Perth-based companies. He has also worked for other relevant firms, like Lund Constructions Pty Ltd – see https://au.linkedin.com/in/ray-bushnell-61472017, where he (I presume) describes himself as:

“Business Management professional - experience in rebuilding and restructuring businesses which are under performing in the contract mining and civil construction sectors. Implementing and achieving strategic marketing / growth.

Specialties: Contract Mining, Crushing and Screening, Drill and Blast, Asset management, Maintenance & Reliability Improvement, Culture Change, OHS / IMS development, Business System Implementation, Business Development and Growth, Strategic Planning, Financial Modelling and Budgets.”