The most undervalued roll-up stock on the ASX, page-2

"ZNT has got to be the cheapest roll up play in the market right now. FY18 guidance is for $13.5M EBITDA and the recent acquisitions should add a further run rate of circa $2.5M EBITDA. That's a total of $16M run rate EBITDA. The company should deploy a further $20M or more from the recent cap raise at around 5x which should add another $4M EBITDA before the end of FY18. Therefore as a base case start for FY19 we should have a diversified national healthcare services company with $20M EBITDA and growing organically at 5-10% pa. The current market cap is $94M. I estimate NPAT run rate based on FY19 assumptions above to be circa $11M. That's an EPS of 15 cents. The stock should trade on at least 15x PE multiple. Therefore ZNT is worth at least $2.25 next year. With only 2 brokers covering the stock it is still very much under the radar......"


@johhnsham,

I agree wholeheartedly with your assessment on the financials of the company: I also see ZNT having a $20m EBITDA run-rate within the next 12 months. Meaning the company is trading on the following prospective valuation multiples:

P/E = 8.5x
EV/EBITDA = 5.0x
FCF Yield = 15%

As you say, undeniably cheap.

But where I differ somewhat from you is in your assessment of a potential re-rating multiple for the stock (i.e, to a P/E of 15x).

In my experience, because many roll-up strategies go awry, they are not very easily trusted by the market, especially in their early years.

So I think the market will only be prepared to pay around 11x P/E (6.5x EV/EBITDA) in the short-term (say 12 months), corresponding to a share price of ~$1.70, and thereafter - providing the integration of the acquired businesses proceeds seamlessly - the stock with re-rate further to its final level around 13x (7.5xEV/EBITDA) (equivalent to $2.00 a share) 12-18 months later.

Still, handsome returns on offer by any objective measure, even with the attendant execution risk.


"With only 2 brokers covering the stock it is still very much under the radar......"

And even one of them can't get it right.
Refer the Bell Potter commentary on ZNT (page 15 of BP's Top Pick for 2018 report below), where the analyst talks about a P/E multiple today of 14x.

https://dpsi7pmz5b6vt.cloudfront.ne...072/Bell_Potter_Analyst_Outlook_for_2018_.pdf