The BUY thesis for ACF

As mentioned in a previous thread, I said I’d share some of my research into ACF. I’ve done a fair bit of research on the Group, their market etc and I’m comfortable buying at these levels for a variety of reasons, which I will explain in greater detail below.

At a very high level here are a few things to think about for holders /potential holders

1. There is a major, high probability, near-term catalyst that should materially re-rate the business

2. Limited downside at these levels

3. Strong tailwind in key markets that ACF operates in

4. Solid balance sheet with carried forward tax losses

5. Excessive market pessimism on construction / housing exposed businesses

6. Valuation (I’ve kept this last deliberately)

1. The Uni-Span acquisition should CONSERVATIVELYadd at least 6 cents per share to the share price

Unfortunately the Company had to "go-early" with the announcement that they were in negotiations to acquire Uni-Span because Uni-Span emailed their staff to advise them that they would soon be part of Acrow. This is important as it implies intention to sell. Secondly, the Company has advised that their exclusive period with Uni-Span finishes at the end of October and that they're in final stages of due diligence, which is often code for negotiation. Given that Uni-Span has been mentioned many times in announcements and that their owners have shown their hand re intention to sell, the main key things that could block a transaction would be (1) price and (2) something uncovered in the due diligence. I put the chance of this transaction happening @ 90%

Firstly, on due diligence findings. Given the advanced stage and fact that management have NOT come out saying that this transaction will not go ahead, by now financial, operational and legal due diligence will have been completed. That likely implies no major red flags.
On price, Acrow's acquisition of Nat Form was on ~4x EV/EBITDA. For the purpose of this analysis I will use 5x, which is a 25% premium to NatForm just to be super conservative.

ASIC filings show that Uni-Span generated sales of $30.7m in FY2018 (up 16.7% YoY) and generated net income of $2.8m (up 48.5% YoY) for a net income margin of 9.1%. Acrow will have more up to date information than me including full year FY2019 information, which should be lodged with ASIC in a month or two. For the purpose of this analysis I will use latest audited numbers as my FY2019 (base case).

FY2018 EBITDA for Uni-Span was $6.3m * 5x gives me a $31.5m EV. For those following the investor presentations this amount is higher than the Company's present debt capacity. Discussions with management have confirmed that WBC will increase facilities such that any acquisition should be 100% debt funded (with 70% paid upfront and the rest deferred in line with previous transactions - this structure is my assumption). Also, back calculations of 100% debt funding on standard bank covenants suggests that pro-forma peak Debt/EBITDA would ~1.6x, which should reduce quickly given facilities are likely to include amortisation. This is a manageable level of gearing for this type of business where the cycle is right now so there are no balance sheet / debt concerns here.

To get to some simple pro-forma profit numbers I'll take my $2.8m net income, add back interest of $0.9m (as the combined group will incur interest) less new interest costs @ 5% on $31.5m gives me $1.6m. Importantly, this acquisition will incur material synergies as it's likely to be an integrated acquisition as opposed to a bolt on (i.e NatForm). This means that there will be easy savings on duplicated costs, which for this business is management costs and depots. Analysis of depot locations suggest that Uni-Span has 3 depots including 2 in QLD. There is a high probability that there could be some consolidation here given overlap with ACF's locations. As I don't know lease terms and I want to stay super conservative just to show you how compelling this is, I will assume $0 in synergies! So my pro forma net income is $9.6m (the above calcs plus ACF of $7.5m - normalised).

As a reminder I'm using a purchase price that is 25% higher than what they normally pay and I have my synergies at $0. I've done alternative scenarios with my estimated synergies but I'll keep this scenario for simplicity and conservatism.

So here's the share price impact at the following PE's - more on what an appropriate PE should be in another post
PE of 6x = +5.8c (or a 30.3c share price which is 23.7% higher than today's close)
7x = 6.7c
8x = 7.7c
9x = 8.7c
10x = 9.6c
11x = 10.6c
12x = 11.6c

So that's the thinking on the near term catalyst impacts. I'll post separately (2) through to (6) to fill out the BUY thesis more hopefully soon [this is not advice and DYOR]