AWB Limited (AWB) Profitability Ratios
Rohan asked about AWB.
The ratios for this business are lousy as the chart below shows. Past management indiscretions, poor governance, hemorrhaging cash and the lousy business make this an easy pass for me. Maybe some AWB longs can chip in with an elevator pitch.
What’s the current discount to book? To tangible book? Aspect Huntley peg book at $1.54 and tangible book at $1.03. What’s Landmark worth?
Via Aspect Huntley
AWB Recent filing at ASX.
- Debt reduced from $3.4b a year ago to $700M, less than 40% gearing they claim, but my quick calcs make gearing appear higher.
- Too much quoting EBITDA in the presentation. Tell me the earnings or better yet the cash flow.
- Shares out 817M at a closing of $1 gives cap of $817M (roughly).
Prior to the HY10 release StockVal valued AWB at $0.78 almost 22% below the closing price. They’ve now put AWB in quarantine on review.
Here’s what Rohan said:
Been working through the agricultural sector trying to get my head around valuations. Haven’t rummaged through Elders (but given their track record and small cap status – was going take time to get there). My question is have you had a look at AWB? Still a tad difficult to break it into pieces – but from what I can glean it’s looking pretty good. Assuming the grain trading sale and JV go through, the business will have immaterial debt and will essentially revolve around Landmark. Expect transparency to improve – especially as management seem intent on simplifying the business.
Rohan if you worried about track record then AWB may not be worth getting up to dance with, but if you’ve dug deeper and found a gem then please do fill us in.
Related posts:
Dean,
Funny, I liked what I saw in the half year results yesterday. Management are delivering exactly what they said they would – simplifying the business, improving transparency, removing legacy issues and positioning it for growth. In relation to your points;
1) Given they have been writing off “past management indiscretions” and “poor governance”, EBITDA is a much cleaner measure than earnings.
2) As for “hemorrhaging cash and the lousy business” – Landmark is a great business. The commodities trading business is broadly performing in line with past years. And they have kicked out non-performing businesses, written down the rest. Legacy issues have all but been put to bed.
3) I’d be wary of using Aspect Huntley’s numbers
What is Landmark worth? Clearly, not the $825m they paid for it in 2003. Normalised EBITDA is north of $70m – maybe, more like $90m. What multiple do you apply to a business with 100,000 customers across rural Australia?
As for the company’s debt – there was presentation made at the equity raising last year that might help. In short, with ANZ buying the rural financing book, and assuming the sale of the commodity business – the debt structure of the business will be vastly simpler.
From my perspective, what you assume for the sale value of the commodity business is the final arbiter of whether AWB is cheap currently.
Agreed, that AWB is still in transition. If the commodity business sale and JV goes through in June (which is highly likely given the time invested by both parties), then expect transparency to make another step up. The business will be simply Landmark plus 50% of a Australian commodity trading JV (that will be separately capitalised – big tick from the market’s perspective).
As a quick measure of management – which company do you think is getting the better deal if AWB were to buy out Elders from the Hi-Fert JV? (Guess it ultimately depends on price – but given both of them have written down their investment to the value of inventory…)
In summary, I’m in at today’s price – and hoping to load up into further market weakness (which may be wishful thinking given AWB’s relative price action yesterday).
Cheers
Rohan
For a first pass I’ve found Aspect Huntley’s numbers reasonably good. Whose numbers do you prefer? M*? Bloomberg? Source documents are fine for a deeper look, but what about a first pass?
From the HY results, $195M used in operations for HY 2010. Those and other past numbers may be of limited use due to the changing business, and for that reason alone I’d place a low multiple on anticipated earnings from the ‘new’ company.
What multiple. How about 5-7? Let’s be generous and say $120M EBITDA for $600M – $840M valuation. Do you see higher earnings or are you prepared to be more generous with multiples on speculative investments?
There are often gems found when you dig deeper, I hope AWB is one for you. If I didn’t say already, I’ve only spent twenty minutes looking at AWB so I’ve barely scratch the surface.
Hi Dean, what do you think about NUF at 5.95. It’s piqued my interest.
Hi Sean
Can you tell me when and why glyphosate pricing will improve. I’m very wary of statements like “acceptable margins in most markets” as that could be phrased as we won’t make acceptable margins in some markets, in this case that’s the US and it accounts for 25% of sales.
Note: First look at Nufarm, but I see a business that has been in decline since 2006. What will stop the rot and right this business? Or is it a matter of any investment is good if the price is right? – Dean
Thanks Dean.
I’m happy to use a cookie cutter for a quick look – but if you are going to assess a company undergoing structural change like AWB then the numbers that someone like Aspect throws off will be rubbery at best.
The reason I asked about AWB is on the chance that you had looked at the company – given your interest in ELD.
In summary:
1) Gavillon pays book value and AWB leaves 50% on the table to capitalise the JV – leaves AWB with net cash of ~$125m
2) EBITDA for Rural Services (Landmark) $70m at 7x is EV of $490m
3) EBITDA for JV $35m at 4x is EV of $140m
Value per share $0.92
That is the conservative case as I see it. Rural Services normalised EBITDA is closer to $90m (though happy to accept a multiple of 6x is where this business is really ‘good value’). The sale price to Gavillon is book plus premium. Been conservative on capitalisation for JV.
In short, I like what management is doing, like the sector, and am happy to put the toe in the water at these prices. Gets really interesting if it trades down to StockVal’s valuation (ie. $0.80). Not trying to convince you otherwise – I wouldn’t have raised the question if you hadn’t mentioned ELD.
Cheers
Rohan
Okay Dean,
This has been useful cause it’s prompted a deeper look at AWB – and final conclusion is that it’s worth a look only if it gets to $0.80.
Fair value for Landmark looks closer to $400m (Chaney versus the gun wielding Lindberg – wonder who won that shoot-out?). In more favourable conditions it might be $500m – but that’s not the environment we are in.
As for the trading businesses – they are low margin, high inventory businesses. Selling to Gavillon will release capital but don’t think AWB will sell much above book. Assumption still stands that AWB ends up with $125m of cash on the balance sheet. But wouldn’t ascribe much above book for the balance that they keep via the JV. Assume their 50% is valued at $140m.
This adds up to a per share value of $0.84 and compares with NTA of $0.81 – so seems reasonable to me. Conclusion – put it on the watch list. If it trades through $0.80 then it’ll be worth diving in.
Cheers
Rohan
Hi Dean, I don’t know anything everyone else doesn’t.
From Huntley’s latest review of it 22/4/10:
Regarding glycophosphate margins:
“…In addition to suffering steep price falls, NUF and other suppliers also lost market share in 2009. As prices collapsed, distributors in North America unusually sourced product from opportunistic market interlopers who mopped up highly discounted technical product from desperate manufacturers and paid for it to be formulated. As industry equilibrium returns this lost market share should move back to traditional suppliers such as NUF who provide a much richer range of ancillary product and services to the distributors.”
The price action is very interesting in that it has gone back to the rights offering 5.75-5.95, which is steeply discounted from the $14 Sumito paid for 20% of the company earlier this year. It looks like there is some arbitrage activity happening as well as a general effect from the correction in stocks. I bought some today at 5.75 as I’m happy to take the other side at these prices. However if things don’t improve with the company then perhaps it could go down further to who know $4 or zero or something.
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