What are some of the factors that will crash a company’s stock price?
Asaleo’s revenues ranged from $615m to $629m in the five years to 2015 (FY2015 Annual Report, p.40). With management forecasting about 10% decline in “underlying EBITDA”, and about 15% decline in NPAT for FY2016 (HY2016 presentation, slide 4).
So revenue and profit is not going to lift the share price. Particularly if the FY16 were to include the impact of about $4.3m after tax non-recurring cost that were left out from that 10% forecast decline.
The repurchase of up to 10% of existing stocks will help with the reported earnings per share (EPS), Return on Equity (ROE) – and maybe management bonuses; but not sure the reduction of equity through increased borrowings would go down well with Asaleo’s lenders. As a lender, I’d probably want a bit more interest to take on more load in Asaleo’s capital structure.
So while an improved EPS would keep the share price from crashing, what would attract investors and other funds would be the “stable” and high yielding dividend payout.
ASALEO’S DIVIDEND CAPABILITY
I’m quite simple when it comes to judging how capable a business is at paying its vital costs and expenditure: I simply take put its net operating cash flow before interest (NOCBI) against the various expenses to see how they stacked up.
So from the Net Op.Cash and Vital Finance etc. chart, Asaleo’s NOCBI looks like it could easily pay for the dividends, interests and capex. Will get into the details soon, but if we were to stack the $100m share buyback (pink), it’s obvious Asaleo’s operating cash could not pay for all these expenses.
True, the buyback announced on 26 August 2015 will be conducted in stages – so management missed their forecast for the remaining financial year; or are fine with the added costs since a buyback will be conducted in stages and the company’s shares is a bargain that far outweigh any acquisition cost. Either way, by the end of FY2015 (ended 31 December 2015), Asaleo had bought back 37 million shares for an average of $1.68 a share, or a “total cost of $62,170,500 including $86,658 of after-tax transaction costs” (2015 AR, p.68-69). So that’s $62m down with up to $38m more to spend.
Cash inclusive of GST…
A closer look at FY2015’s $139m net operating cash from operation show that both receipts from customers, and payments to suppliers and employees include a 10% GST.
We can be conservative and assume that the $694m receipts include $69.4m in GST to be paid… while the $554m of payment are to supplier (claim GST back) but employees they cannot. But let’s be generous and say that the net $139m operating cash includes about $14m in GST to be paid within the year.
That mean the total net operating cash flows of $117m is actually $103m after GST is paid – and they are paid on a monthly basis for company of Asaleo’s size.
QUICK CASH FLOW CALCULATION
What should Asaleo use that $103m in cash?
The $22.8 investing activities they have to. That leaves $80.2m (103 – 22.8) in the bank.
Should Asaleo repay the $80m in debt, or pay the $56.7m in dividends? They chose to do both. So that leaves -$56.5m (80.2 – 80 – 56.7).
Looks bad to have a negative cash at the end of the year. So $105m was borrowed. That brings the cash position back to positive $48.5m
Leaving it there will look bad as you’re borrowing to make ends meet here… so you buy back shares as a cover? Too cynical?
Well, they did spent $62m buying the shares. That leaves a -$13.5m.
Remember that $14m GST cash?
Conclusion: Asaleo is a terrible business whose management is living beyond their company’s means. That is, without debt financing, it cannot do what it is doing.
But you’re saying… mate, in the real world of business, companies do borrow and it’s only smart and proactive managers who know how to take advantage of cheap money.
True, Asaleo’s debt ratios etc., looks reasonable… so no sweat… until just before 30th September 2017.
End of September next year, $191m ($157.5 + $33.5) of Asaleo’s current $320m total borrowings are matures. i.e., repaid in full.
Can Asaleo’s new and improved plants and machineries bring in enough cost savings to pay that and the operational expenses, the dividends and the interests etc. etc.?
So by mid 2017, dividends will either have to be cut or drastically reduced – or maybe reduced with dividend reinvestment plan introduced.
That or some friendly bankers are willing to lend $200m so Asaleo can keep kicking that debt further down the road.
That and with a lot of imagination, management might manage to shift and delay cash flows to make the numbers just right.
As an investor, you don’t want to be buying businesses that will do just fine if things work out as they hope. I know that, so why has Asaleo’s management gone out, spent $175K to borrow $105m to buy shares they just sold a couple of years ago? Especially when the company could do a lot more with whatever cash they managed to have – like repaying back the debt that’s coming in 11 months.
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