What can the market possibly be thinking?

@Dejavoo,

Pursuant to our chat about LAU on the General thread, I spent a few hours earlier this week updating my model for LAU, which was about two years stale.

I have to say, I was quite surprised at what has happened, and how the business has performed, in the interim.

This is best represented in pictures, which are self-explanatory in just how well the company has done. The additive forces of strong growth in Revenue plus a pick-up in Operating Margins....



...have served to give EBIT a solid uplift:


And the important thing about this is that this has occurred without any recourse to shareholders for funding, and it has been achieved by purely organic means - acknowledging that the company benefited from the demise of Scotts Transport in the second half of FY2023, which obviously boosted the JH2023 result; but even then, that would only have been a part period benefit, so it will still annualise in coming periods.

This earnings momentum will be accompanied by debut earnings from the one acquisition that the company has made in many years, namely the $35m acquisition of WB Hunter, made at the start of this financial year.

So, despite cycling a seasonally strong FY2023, with the aforementioned earnings uplifts it is hard to conceive FY2024 not delivering continued growth (indeed, at the release of the FY2023 results in late August, management reported positive momentum continuing into this year).

But, for the sake of conservativeness (and it is sure to end up being conservative), let's strike valuation based on trailing financials, i.e., using FY2023 EBITDA, EBIT and EPS of, respectively, $90m, $58m and 11.5cps

LAU's EV is now around $350m - derived by Mkt Cap of $315m and Net Debt of $30m (after the WB Hunter acquisition), so that means:

EV/EBITDA = 3.8x,
EV/EBIT = 5.9x and
P/E = 8.9x

Objectively, very cheap for a business now generating more than 20% ROE and becoming dominant in certain market segments.

Who knows why the stock has become this undervalued in recent months?
Perhaps it was on the back of the retirement of its long-serving founder CEO.
Or perhaps concerns about the state of the agricultural sector after a period of possibly over-earning during the agricultural sector boom of the past year or two.
Maybe its just because its a tiddler of a company and tiddlers are experiencing a buyers' strike.
Probably a combination of all of the above.

So what sort of valuation multiples should be applied to LAU?

While the company has a good operating and financial track record, it is not one of the world's most excellent business: it operates in a competitive market in which pricing power is hard to retain, it faces cyclical demand conditions in some of its business segments and, most importantly, it utilises very lease-intensive funding (almost $190m of leases, of which $115m relates to equipment [*]).

This all needs to be taken into account in the valuation multiple. (And it is a small (microcap?) stock, as well, so there's that.)

I therefore don't think this is a market multiple business by any means. But I think a P/E of 12x or 13x is justifiable (for context, the corresponding EV/EBITDA and EV/EBIT multiples at 13x P/E are 5.2x and 8.1x, respectively).

That level of valuation would represent a share price of around $1.40 to $1.50.

Conclusion:
No matter which way I try to cut it, I can't conclude anything other than the stocks is fundamentally undervalued.
I think the odds of it being a successful investment today are very high.


[*] Even if one treated all of those equipment leases as debt (which would be a bit harsh), the stock would be at EV/EBITDA of 5.1x and EV/EBIT of 7.8x ... still not fundamentally expensive.

.