The Kiwana Road-widening contract was covered in various media...

The Kiwana Road-widening contract was covered in various media in August, so though news to me, it was no secret. In http://www.brierty.com.au/images/Do...y_preliminary_results_announcement_FY2015.pdf dated 31 August, the words “The order book includes $210 million of work for FY2016 with strong prospects of securing an additional $30 million of new work in the coming month.” suggest more good news this month.

I am not at all surprised that the SP moved to 28.5c. The wonder is why is it still so low when we can expect EPS to be confirmed at about 7c for FY2015, and we can postulate about 8c for FY2016 using the following logic.

In spite of delayed starts and ramp-up costs occurring in FY2015, underlying revenue was about $300m, and underlying EPS was about 7c. The healthy order book, work in progress and expected new contracts suggest a reasonable worst-case expectation of the same revenue ($300m) for FY2016. However, NPAT margin should be better than the underlying 3% achieved in FY2015, because there should be less ramp-up expense. If we accept the underlying revenue was $302m for FY2015, then in round numbers it was $136m in H1, and $166m in H2. If the tempo of revenue stays at the H2 level, revenue for FY2016 should be 2 x $166m = $332m. Consequently, I would not be surprised if BYL achieves a revenue target of $330m in FY2016, and using an NPAT margin of 3%, which is probably too low, NPAT should be $10m, which is an EPS of about 8c. Depending on what PER one uses, one should end up with a valuation much higher than 28.5c a share.

I cannot with confidence guess what the NPAT margin is going to be for FY2016, other than to say 3%, or better. I fail to understand why it cannot easily be improved to 4%, other than that BYL has historically had a low NPAT margin. Just imagine NPAT of  4% x $330m = $13.2m, or an EPS of $13.2m ÷ 126.5m share ≈ 10.43c, would do to the SP. Too good to be true, but pleasant wishful thinking.