The BUY thesis for ACF, page-25

Looks like my original prediction on Uni-Span adding 6 cents per share (minimum) was reasonably close. 5.5c on Friday. While a 20% gain on any stock is a lot, the pro-forma PE is now LOWER (ex synergies too) than what it was pre announcement. That means, despite the increased EARNINGS, the stock is actually CHEAPER even after the gain / acquisition from Friday. I'm expecting a further gain Monday, probably a further 5-10%, which would also confirm the breakout.

As an aside, this is a poorly covered stock that not many people know about. The announcement came after the close on Thursday. That means anyone could have worked out this was huge for the SP and yet it took a while to get to where it closed at during the next day trading. This is both a positive and negative. Positive in that you can still buy this cheap and be ahead of the game, negative, in that momentum, high freq + traders are unaware of this so we're not getting that overshoot/momentum (yet) that can turbo charge returns.

Hopefully the strong gain and the recent acquisition put this on more people's radar as the stock remains ridiculously cheap. I know value stocks are unloved and everyone loves the growth stocks, but a 6x PE with a strong dividend yield and a good outlook is well worth adding to anyone's portfolio.

Anyway, it's taking a bit of time to get through the full rationale so I best kick on just in case the share price gets past my valuation.



Part 4 - Solid Balance Sheet with Carried Forward Tax Losses

Firstly, I love carried forward tax losses. They are a material tailwind to EPS and in the case of ACF, they have $40 million in tax losses.

For some simple context, in a simple scenario where tax losses exist, they would be more accretive than the Uni-Span acquisition. i.e. 30% accretive vs ~22% per ACF report. Do not overlook this on your personal valuation of this stock!

What's important to recognise here is that these losses can only be incurred by the business that incurred the losses. So in this case it's ACF and excludes NatForm and obviously Uni-Span. So simply applying $40m against forward pro-forma profits doesn't work. BUT companies are smart. There is a lot of grey with overheads and shared services so you can bet that Natform and Uni-Span will still make profits but it might be a little bit lower than where it probably should be. What this means is that shareholders will and should be enjoying this asset benefit sooner. Unfortunately I must be blind and I can't see Natform's 2019 profit contribution in the annual report (apparently it's there so feel free to point it out), so I will have to be a bit general. Given earn outs weren't achieved we know that Natform's profits fell in FY2019. I'm working off ~20% of ACF's NPAT, which now pro-forma'd means roughly 15% of total combined NPAT (assuming a rough $10m) of the new group including Uni-Span. So if we're assuming 0% growth (which won't happen), then it will take about 4-5 years to use the full tax losses or another way of looking at it the blended tax rate for a full year is roughly ~12% vs 30% for all other companies making a profit. That's a big positive for EPS and also the fact that there is some tax paid means that franking credits start to get built up, which helps those that love their franked dividends (i.e. Aussie shareholders).

In terms of the balance sheet, we now have new information on what it will look like post Uni-Span. For these type of businesses, cashflow leverage is more important than balance sheet leverage. In other words, Debt/EBITDA is more important than Debt/Capital or Debt/Equity. While I don't know the banking covenants there's likely to be a Debt/EBITDA and probably an EBIT ICR. This business is a cyclical business so there will be ups and downs over the cycle given that capacity utlisation materially impacts the overall profit of the Group. While there is some resi weakness, the runway on CONFIRMED civil projects is large and long, which provides lots of certainty here. For me, 1.1x Debt/EBITDA is very low. In an acquisition scenario I'd be ok (industry conditions normal) to see peak debt of 2x (coming down after an acquisition), so we've got lots of room to move here. Plus if things turn negative they can increase the DRP discount and/or reduce dividends. Debt is not an issue and the fact that the acquisition has largely been 100% debt funded is hugely positive from an EPS point of view - for me at least.

So I think the market has totally missed the carried forward tax losses, which is a huge tailwind for future profits, EPS and the overall share price, while the peak cashflow leverage is a mere 1.1x EBITDA which is very low, and more importantly, the acquisition was largely 100% debt funded which was my preferred mix. GLTAH