So a bit more of an expansive post today as I was able to build...

So a bit more of an expansive post today as I was able to build a bigger position.

Let me state right upfront that the whole thesis is about this being a very good business at a reasonable price.

As a transport operator this will never make very high margins, high operating leverage is not possible, it's very high capex, it's very competitive and it's two biggest costs are wages and fuel, both of which are growing rapidly. The competitive environment is high and maintaining safety is paramount, so keeping the average age of the fleet at an appropriate level helps to mitigate this - but requires ongoing maintenance capex.

That all sounds really tough but let's provide some additional data points that I think shows the quality of the business has improved at the same time as the multiple for the business has deteriorated - basically a great thing for new investors.

Firstly, last year was the company's best on record based on data that I have going back to 1997. Essentially it generated the highest sales at its highest ever margins leading to a material step change in profit and ROIC.

There were two things that happened that were important.

1. The market remained robust but Scotts exited, which meant that Lindsay, which picked up those specialised assets was able to win market share and price appropriately. This led to a gross margin of 35%, the highest the business has achieved. Having share and scale in this game is important as it enables the business to service the bigger companies nationally, which many operators can't. These customers can also be 'stickier' as some of their transport needs either become embedded or are time consuming to replace.



2. Growth was achieved while maintaining disciplined cost growth. While wages and fuel will no doubt rise, their contracts had fuel levy recoveries built in, which provided some protection. Fuel levy recoveries remain in place from what I understand. The chart below shows all other operating costs below gross margin as a percentage on sales i.e. the lower the better. To me it looks like the business is gaining some scale efficiencies, which I believe are more permanent in nature (to an extent) than investors give the company credit for. Remember the business has grown sales by 55% in two years - it's not the same business as it used to be.



In effect, Lindsay's scale is driving both margin and efficiency gains. This is GREAT for margins and hence EPS.

BUT, it looks like the market either hasn't grasped that the business has changed for the better and/or they could be worried about wage and fuel inflation. Fair enough.

But today the Chairman provided guidance of EBITDA of $102m to $108m ($105m mid point). That's broadly in line with the 4 brokers that cover the stock that have a median of $107m. But EBITDA is not EPS.

The brokers are forecasting D&A of $37.2m and $9.4m in net interest expense.

So it looks something like this:

EBITDA guidance: $105m (mid point)
D&A consensus: $37.2m
Interest expense: $9.4m
EBT: $58.4m
Less 30% tax...
NPAT: $40.9m

Shares on issue: 312.8m
EPS: 13c

PE: 7.8x

Now a good way to determine an appropriate PE is to look at history. Over the last 5 years the average PE has been 22.6x but as you can see from the green spike in the graph below, those years were covid affected and heavily skew the data. If I take that period out, the average PE for the last 5 years is 14.2x

If I ascribe that multiple to the above EPS I get $1.85. I'm a bit more conservative and think that even though the quality of the business has improved as well as their market position, I'll use 12x.

At a PE of 12 that gives me a FY2024 share price of $1.56 (the market has between $1.50 to $1.70 BTW)
Add in consensus dividends of 6 cents per share and the estimated total return is almost 60%. Even if you prescribe a margin of safety you would still be looking at a healthy return.

So with a FY2024 PE of just 7.8x the market is pricing in a VERY VERY pessimistic scenario despite the tailwind of the recent acquisition, a strong balance sheet etc. My thesis is that this multiple is too low even in a higher interest rate environment. It's hard to buy this type of quality for this type of price and even if I get no capital appreciation, I'm still getting a ~6% dividend yield.