"ringing the bell on asg group"

Sometime in July under the thread "positive coverage in eureka - $1.69 target" there was some discussion about an appropriate valuation entry level for ASZ. At the time the stock was priced at around 155c.I That was too rich for me, and did not provide enough upside-downside asymmetry.

I articulated my thinking at the time with: "On my forecasts for fiscal 2011 the stock's valuation metrics [at a share price of 157c] are: P/E = 12.8 times, EV/EBITDA = 7.0 times and dividend yield = 4.2%. While this is not horrifically stretched, it is no longer the steal that it was at the 120-level. Sure, this stock historically traded at P/E multiples in the mid-teens, but that was before the global financial crisis. I think that the world has changed for good...12 times is the new 15 times. Not just for ASZ, but for the entire Aussie equity market."

Since then ASZ has reported its full-year result, which saw somewhat disappointingly flat revenue on prior corresponding period, but 8% higher than DH2009.
However, the highlight of the result, overwhelmingly, was the EBITDA margin, at 18.2%, a new record. This was driven by the ratio of Employee Costs to Revenue falling to 66.6%, down significantly from both the prior period (DH2009 = 76.2%) and the previous corresponding period (JH2009 = 74.6%). The result's accounting quality was excellent, too, with 93% conversion of EBITDA to Net Receipts, 53% of EBITDA to Free Cash Flow, and a conservative 32% effective tax rate some of the examples of comfortingly prudential accounting practices.

Despite accelerating software development expenditure to $4.4m in the half (almost two-thirds higher than GFC levels), and undertaking a $7.6m acquisition the company remains virtually debt-free (NIBD = $5.9m, versus EBITDA of some $22m and dwarfed by market cap of $184m). EBITDA/NI = 25 times.

What has also happened since June is that the share price has fallen to below 130. Valuation-wise, the stock is currently trading on the following multiples:
FCF Yield (on EV) = 11.4%
FCF yield (on Market Cap.) = 11.6%
EV/EBITDA = 6.1x
DY = 6.3%
P/E = 10.9x

By my investment process?s BUY signal, this makes the stock's potential return-to-potential residual downside relationship favourable enough to buy.
Accordingly, I have today been adding to my already sizeable holding of the stock at prices between 127c and 129c.

It's rare to find stocks that have generated compound average growth rates in EPS and DPS of 15% pa over reasonably long timeframes (especially ones that culminate in a major global financial crisis). It's even more rare to find those sorts of businesses with a dividend yield above 6%.

Prudent Investing

Regards

Cameron