After conducting my own research, I reached similar conclusions to Alex about the business, eventually deciding to stop sucking my thumb and to just pay a little extra for some shares. Since I don't think I can put forth the case for investment any better than he already has (and because I'm admittedly a little lazy right now), I recommend you go read his thoughts here and here. Alternatively, he's given me permission to simply copy and paste those posts right here for your convenience. Enjoy!
23 Cents on the Dollar
Boom Logistics (ASX:BOL), Australia’s largest crane and lifting solutions provider, caught my eye recently with its price trading at nearly one fifth of tangible book value. After further inspection and a phone call with management, I took a position at $0.12.
Times have certainly been tough of late for anything marred with the mining service brush, and it has been no different for Boom. While this is not a high quality business by any stretch of the imagination, it seems that the market is currently pricing Boom as if death is imminent. When the herd is avoiding a sector like the plague, this has the potential to create opportunities for the contrarians among us.
Boom’s derives the majority of its revenue through maintenance contracts with Australia's major mining companies (as well as energy, infrastructure and civil construction work) which bodes well as Australia shifts from a mining ‘capex’ cycle to one of operation and maintenance. An improvement in residential construction that is underway, along with the increasing trend of crane intensive high density buildings, is also a positive as it may help to soak up crane supply and boost utilisation across sectors.
While Boom’s profit history has been disappointing due to asset write-downs and restructuring charges, its consistency of operating cash flow is attractive. Over the last 5 years, Boom has averaged $50m of operating cash flow per annum, almost as much as its current market cap. Management have guided they expect capex to be less than depreciation ($20m expected), which coupled with the $11m of asset sales, bodes well for free cash flow (FCF) in the vicinity of $30-40m for FY14. This places Boom on a FCF multiple of less than 2 times!
What is certain is that a stock is unlikely to remain at 2 x FCF or 0.2 of book for long, either free cash flow or book value will reduce or the price will rise. As I expect FCF to be resilient, this gives management optionality in terms of capital management.
Management are aggressively repaying debt (with $12m repaid in the first quarter and a full year target debt balance of $90m) and have stated the intention to buy back stock on market to capitalise on the discount. Boom’ s net debt to equity is currently 33% and is likely to reduce below 30%, which is less than half that of peers such as Ausdrill and Emeco who trade on similar discounts.
The currency sensitivity is also interesting. Boom invested $140m over the last 3 years when the AUD was close to or above parity with the USD. As cranes are sourced from international suppliers, Boom was able to take advantage of the strong currency and replenish its fleet at relatively good prices. However, with the AUD at $0.90 and with expectations that it will continue to fall, cranes are not getting any cheaper in Australia. This bodes well for Boom’s crane values and reduces the probability of future write-downs. However, given the size of the discount at which the price trades at, shareholders have a significant buffer even if write downs do materialise.
There are a number of catalysts which have the potential to provide a rerating: an on market buyback, continued debt reduction announcements, a return to bottom line profitability and a takeover offer from private equity or a trade buyer. Given that sentiment is so bad towards the sector, even a slight normalisation has the ability to provide a rerating.
As Boom trades at such a large discount to NTA, an acquisition creates interesting accounting implications for a potential acquirer. For analysis sake, let’s assume McAleese (ASX:MCS) (who has a large presence in the QLD lifting market and who also has been a substantial shareholder of Boom in the past) is successful at acquiring Boom at $0.20 per share. This represents a ~50% takeover premium for current shareholders. However, as Boom has NTA of $0.51, MCS is likely to record a profit on acquisition of $0.31 per BOL share, as they have acquired $240m of equity for only $94m. No doubt a large profit created by sound capital management would give MCS’s management a tick of approval from their new shareholders. Given its discount, operating cashflow history, relatively lowly geared balance sheet and open register, it seems plausible for Boom to attract some takeover attention.
To me, the epitome of an investment (protection of principal whilst also providing a sound probability of an adequate return) is often found in stocks that have very low expectations incorporated into the share price. If bad news eventuates, the downside is less severe as many were already expecting bad news. However, if good news eventuates, the price is way too low and must quickly rally, thus providing the return. It is these asymmetric opportunities that I love to fill my portfolio with.
Boom is certainly not a buy and hold forever stock idea, nor should one be expecting the price to revert to book value in the near term. My view is that buying at a P/B of 0.20 and waiting for one of the aforementioned catalysts provides a reasonable probability of selling at 0.40 of book (the medium term average) in the next 3 years. If it takes all three, that gives 26% annually. Any sooner is a bonus!
Half Yearly Result Update
Boom Logistics reported its half year results last week which were on par with my expectations . However, with $319m of equity that is currently generating poor returns, management have some decisions to make.
First, let's revisit the thesis. My attraction was based around the ability to buy lots of tangible assets cheaply, and as the group’s cranes were under employed, disposals and reduced capex were two likely drivers of significant free cash flow. Steve Johnson from Intelligent Investor said it best, 'these businesses have been cash sinks as they grow, they should spew out cash as they shrink'. While it is still early days, it seems management are beginning to gain some traction and the wheels are turning in the right direction.
Operating cash flow for the half came in at $11m, which was a little below par. It seems clients have been stretching out payments as Booms receivables only decreased 5% while sales fell 23%. Asset sales of $8m were achieved which contributed to $13m of free cash flow, with the majority directed to reduce the debt balance to $102m on a net basis. Importantly, there was no asset impairments and NTA increased to $0.52 per share. To refinance its banking facilities, management were required to conduct a thorough assessment of its assets and to come through without an impairment certainly adds confidence. I will be eagerly watching the full year result for an improvement in operating cash flow and further debt reduction.
I caught up with CEO Brendan Mitchell last week and we discussed an interesting opportunity for further assets sales. There is currently $65m of assets which lay under utilised with the majority idle due to the BMA contract loss. While it seems the preference is to get them re-employed into another contract, management will consider selling the entire fleet if this doesn't occur in the reasonably near term. While conditions remain tough and there is plenty of surplus equipment for sale in the market, prices for cranes haven't plummeted as far as Booms share price would lead you to believe. Indeed, $1.6m of assets were sold for a profit in January. Here lies the opportunity. $65m is nearly 90% of Booms current market cap, however for the sake of conservatism, if we assume a 50% haircut, management could still repay a further $10m of debt and buy back $22m (30%) of stock. This would most certainly reduce balance sheet risk and create immense value for ongoing shareholders.
It seems odd, but I think missing out on further contract wins could work out to be better for shareholders. And if Boom does win work, its not a negative either, creating somewhat of a win-win situation.