LCM.ASX - Logicamms

[Laxputs]

Logicamms

 

Share price .73. Net-Cash/share of .31. FCF positive during last year's OZ mining downturn. Share buyback program active daily. Trailing 7.5% sustainable dividend. EV/FY15EBITDA of 2.5x. 4x FCF ex-cash. Share price is worth double current price.

 

Micro-cap Australian engineering systems company.  The Company is a provider of engineering, project delivery and asset performance services to minerals, metals, hydrocarbons and infrastructure industries. The products and services offered by the Company include engineering, project delivery, asset performance, and consulting and support services. The Company’s engineering services include process, civil and structural, mechanical and piping, electrical and instrumentation and automation and controls. The Company is engaged in gathering, processing and production facilities; transmission pipelines; and downstream plants and export facilities. The Company operates from execution centers around Australia and New Zealand.

 

Before OZ mining downturn, they had 65% of revenue from mining. Now retooled to service LNG as well where 65% of revenue comes from.

 

Mgmt is guiding to 140 revenue FY15 (ending June/15) at 8-10% EBITDA margins. They did 11% margins in 2012-2013. 9% 1hFY15. 40-60% dividend payout policy.

 

They operate in one of the most unloved sectors there is: Australian mining and O&G. Their current valuation is ridiculous and the net-cash per share and stable/growing revenues offers a margin of safety.

 

 

[Max Alpha]

The valuation is pretty straight forward and compelling:

Market Cap $53m

Net Cash $22.8m

Tax Asset $3.5m

Sustainable FCF of $10-12m

 

Generates tax credits from R&D of $1m-$2m every year and never pays anywhere near the full tax rate.

 

I get a fair value of $2 / share (versus $0.74 currently) with fairly conservative numbers on a DCF basis.

 

Catalysts:

Dividend- 3.5c interim dividend announced, should be able to support a 3.5 final dividend, giving a yield of 9.5% at current prices.

Share Buybacks - Buying back shares daily and have 5,235,524 (about 7% of shares outstanding) remaining under the current program

 

The management team have helped promote a transition away from capex greenfield works towards asset optimisation works and ongoing brownfield asset works. Despite being small and having started out mainly as a control system / instrumentation designer they now perform quite a wide range of services.

 

The table below outlines the operating history of LogiCamms and shows their transition from predominantly a mining engineering services firm to predominantly LNG services.

 

http://lapload.com/image.uploads/05-03-2015/original-e569366825f5173f1f12b99495708916.png

 

[snow pea]

From what I can see share count seems to have increased over the last few years despite buybacks.  A lot of options and share appreciation rights given out as executive compensation?  It seems there was also a share issuance as part of an acquisition in 2013, but even setting that aside net share count seems to have gone up over the last few years.

 

Otherwise I agree it looks pretty compelling at first glance, I will probably dig in a bit more and think about getting in.

[Max Alpha]

From what I can see share count seems to have increased over the last few years despite buybacks.  A lot of options and share appreciation rights given out as executive compensation?  It seems there was also a share issuance as part of an acquisition in 2013, but even setting that aside net share count seems to have gone up over the last few years.

 

Otherwise I agree it looks pretty compelling at first glance, I will probably dig in a bit more and think about getting in.

 

You are right to question the options program dilution however i think post their formative capital raisings the dilution does not materially impact the thesis given the huge undervaluation, i think the threat of meaningful dilution now is relatively small.

 

At the start of 2012 there was 67.2m shares outstanding, fully diluted share count is at 71.2m now. The major jump occurred with the issuance of 3.3m shares at a price of $1.29 per share, much closer to fair value, for partial payment in the ITL acquisition which was hugely value accretive in the range of 3.5-4x EBITDA and helped the business weather and circumvent the mining down turn. 

 

The majority of the options were forfeited in 2014 i believe and the outstanding ones are narrowly out of the money.

 

A meaningful buyback program was only implemented in the last 6 months (any shares bought back in the past years were not meaningful amounts). The outstanding shares to be bought under the existing buyback program is substantially more than the options dilution of the last couple of years combined so i expect to see the share count start declining.

 

The poor remuneration program and low insider ownership is a mark against the company but i don't believe valuations like this arise without some ugliness. With a dividend yield approaching 9.5% and a buyback program in place for  7% of shares outstanding, investors are paid to wait and the risk of management misrepresenting shareholders is mitigated heavily.

 

[Laxputs]

I believe the total share repurchase program is for a max 2mm AUD. They have spent 1'357'136 AUD repurchasing, so 650k left. Their daily share repurchase states ~5m more shares can be bought but I think that is limited by the 2mm AUD cap? I think they could buy all those shares only if they traded low enough that the max shares could be purchased for 2mm.

 

The language they use:

Up to $2,000,000 by value equating to not more than 7,117,817, being 10% of the minimum number of ordinary shares on issue over the last 12 months.

 

But the company is still extremely cheap at ~4x FCF ex-cash and a large sustainable dividend yield.

[Max Alpha]

My mistake you are correct its only $2m aud value as the total cap on the share buybacks.

 

I don't think this materially impacts the thesis, i think the dividend is much more likely to gain attention in the Australian market.

 

 

 

[Laxputs]

Guidance reaffirmed. About 140m revenue and 8-10% EBITDA margins for FY15 (ending June 30).

http://www.logicamms.com.au/investor-relations/asx-announcements/

 

That puts the company on 2.4x EV/EBITDA. 38% share price in net cash. Growing revenues. 65% from hydrocarbons (LNG, pipelines). The rest from mining. Give it 5x EBITDA, or 5% dividend yield plus net cash/share(40-60% payout policy) on FY15 earnings and there is 100% IRR by H1 2016 earnings release date.

 

Operating (quite profitably) in an unsexy industry in an unloved country.

 

6% holding.

 

 

[Guest Schwab711]

Is it common for AU small-caps to report in USD? Also, why has 2Hs been so volatile while 1Hs have been fairly consistent lately? Billing cycle?

[netnet]

It seems that they have completed their buybacks, per the latest announcement.

 

Also, some have asserted that the revenues are sustainable,  what is the evidence that they are sustainable.  If they are sustainable then this is a very, very interesting company.

 

Does anyone have any scuttlebutt on the management?

 

 

[frommi]

Are they just renting out people to other mining companies?

It looks like they are working on a project base like any other mining service company, but their balance sheet has 50 million AUD of intangibles. Has anyone an idea whats behing that number or did they just buy other businesses to grow their workworce and this number is just air?

[misterkrusty]

guys-  this company will have a decent 2015 because projects take time to roll off.  but on 2016+ estimates it's probably not as cheap as many of you think.  check out the quote near the end of their most recent presentation: 

 

"The outlook into FY16 remains difficult should current market conditions prevail."

 

it's the trend in new orders (book to bill, whatever way you want to look at it) that you want to keep an eye on

[NeverLoseMoney]

guys-  this company will have a decent 2015 because projects take time to roll off.  but on 2016+ estimates it's probably not as cheap as many of you think.  check out the quote near the end of their most recent presentation: 

 

"The outlook into FY16 remains difficult should current market conditions prevail."

 

it's the trend in new orders (book to bill, whatever way you want to look at it) that you want to keep an eye on

Sure the outlook is terrible. But when the trend in new orders starts to look better, the share price will be a lot higher. To be able to invest successfully in this space you need to invest when commodity prices are crashing and the outlook is terrible. Companies like this look relatively cheap when they are the most dangerous and terrible when they are safest.

 

I'm thinking of buying a basket of small cap mine servicing companies. There are a few with little or no debt that should be able to survive a few bad years. I need to look at Logicamms as well because it fits the profile.

[misterkrusty]

yes, i'm familiar with the concept of contrarian investing.  I posted that quote since there are a bunch of people on this thread who seemed to be citing price to earnings multiples as if those earnings weren't going to fall off a cliff next year.  I'm not saying it couldn't still be cheap.  I am saying it's not as cheap as some of those multiples imply

[yadayada]

You have to keep two things in mind. They seem to be at peak earnings with 10m$. And we are near the end of the commodity super cycle. So the next 10 years will likely be bad with a LOT less mines being built. And mining activity in general going down. That also will mean inflation for the AUD (which hurts margin of safety with regards to cash balance).

 

Then I am also not so sure about their competitive advantage. If things get worse, margins could get squeezed, and reduced to break even.

 

So if you say the business without the cash is worth 10x that 10m$, your saying they will do just fine 10 years through the super cycle. I think a fair value multiple of 6-7x is fair. So that leaves some upside, but also with some risk (as it likely will trade around NCAV if earnings would start falling down).

 

So I am staying away with the alternatives available.

 

And maybe in 2016 the share price will crash if revenue goes down (which looks likely), and you can pick up the shares for around their net cash value!

[frommi]

When someone really wants to invest in this space i would look at NWH.AX, it trades at 1.2 x last years earnings and has some balance sheet protection. Because of the experience i had with that stock i would only chose NCAV stocks or stocks that trade below net cash in that sector.

[Max Alpha]

Logicamms is predominantly an LNG / Coal Seam Gas engineering services company, not mining services.

 

Mining services only makes up 30% of revenues and is decreasing every half after they transitioned away from it with an acquisition of a New Zealand based oil and gas engineering services company. They have also been refocusing on brown field asset optimisation works rather than greenfield works to help reduce exposure to the capex cycle.

 

The area value investors keep losing money in mining / energy services stocks is by buying companies that have enormous contract risk and asset plays. Miners are repeatedly playing the large contractors off against each other to grind down prices so there is very little stability with companies which rely on 2 or 3 large contracts.

 

Asset plays are extremely risky because unless that asset is net cash (which LCM has 40% of its market cap of) there is no way of realising the value of PP&E in the current environment (even Receivables in many cases), and many of those assets aren't generating any cash flows and will stay that way.

 

Companies like LCM are far more preferable because they don't have dominant contracts that will cripple the business if lost, and they are asset light which means they have been able to right-size and generate FCF all the way through the cycle. Mining services fell off a cliff industry wide in July 2012 however Logicamms have weathered the storm well so far by acquiring their way away from it, in their worst year (2014) they still generated $4.4m in FCF.

 

They are an EPCM for instrument panels and control systems, and also provide asset maintenance and optimisation engineering services to brownfield LNG plants, CSG pipelines, mining, and oil and gas operations. They acquired a small environmental consultancy that does work for utilities continuing their push away from mining services.

 

In some respects its out of the frying pan and into the fire with their transition into LNG / Oil and Gas, but someone has to provide maintenance solutions and ongoing engineering services for the $100B's of LNG plants and pipelines that have been built.

 

They generate R&D credits from the specialised work they do so typically pay a low tax rate. That they generate these credits each year should suggest they aren't just supplying bodies to miners / oil and gas.

 

They have been using their EPCM / project business to generate leads for their asset maintenance / optimisation business on the LNG side.

 

The market is assigning no value to their cash levels. I expect the organic business revenues will shrink slightly in FY16 as some projects come off but will be offset by the recent and future acquisitions.

 

Management have shown a preference for acquisitions over buybacks which adds a little more risk. However in this environment of fire-sales it is pretty difficult to overpay, particularly for the engineering services / consultancy firms where they use variable earn-out structures.

 

Undoubtedly some risk with a lack of order book transparency however they have a lot of dry powder in their 40% net cash position, and you don't buy companies at 2.5x EBITDA (with 70% FCF conversion) with transparent predictable growth.

[Max Alpha]

Just to provide some clarity, this is what the composition of revenues looks like (+/-2% for FY15):

 

                                        FY12 FY13 FY14 FY15

Mining Revenue            (%) 50% 57% 36% 30%

Hydrocarbons Revenue (%) 20% 30% 57% 65%

Infrastructure Revenue (%) 30% 13%   7%   4%

Monarc Enviro Revenue (%)   0%   0%   0%   1%

 

Infrastructure revenue was much higher previously due to a multi billion dollar desalination plant that they built control systems for. The primary business of LCM is providing engineering services to Coal Seam Gas, LNG, pipelines, onshore oil, and offshore oil.

 

The majority of their work is on existing brownfield assets. In 2014 "More than 80% of our revenue came from projects and services related to existing (or brownfield) operating facilities and projects."

 

They have $23m of annualised revenue from FY15 for Roy Hill and Epic Energy projects that will end early in FY16. This is not abnormal for the company, the majority of their construction works last 6-12 months, with the exception of the desal plant they were involved in.

 

In FY16 this $23m drop will largely be offset by:

- Asset performance business continuing to grow adding $5-$10m in revenue (revenues of $25m FY13, $30m FY14, and $35m-$40m FY15)

- Addition of approx $5m revenue from Monarc acquisition

- Any ongoing work picked up from Roy Hill & Epic Energy

- Any additional project work won in the course of the year

 

Assuming no new major project wins at all, organic revenues would likely decline to about $127m-$130m in FY16, which would provide EBITDA of $10.1m-10.4m @ 8% margin. It is still extremely cheap at these levels.

 

The revenue stream is very diversified "Completion of more than 1,200 projects during the year (2014), with our 20 largest customers contributing around 60% of revenue. This shows that we are not overly reliant on any individual customer or project. No client in the financial year accounted for more than 15% of revenue."

 

Earnings aren't very sensitive because the company has little operating leverage. Earnings aren't about to fall off a cliff if they lose 10% from the top line. They are on track to generate $14m of FCF in FY15 thanks to working capital improvements, at an enterprise value of $31.1m, the valuation isn't exactly demanding.

 

Management have made it clear that they plan to use up some of the $20m net cash buffer on acquisitions.

 

They paid $13.3m AUD or 3.6x EBITDA for ITL back when oil was at $100 a barrel.

 

If they can continue to buy well in FY16 with everything on sale, I think the stock could end up in a position with much improved earnings power and a modest cash balance of $5m-$10m which would be priced much more favourably by the market.

[frommi]

You can directly compare it to MND.ASX, it has the same asset light business, a net cash position and is diversified in LNG and mining (but has higher RoE`s). The problem is that all these companies don`t have competitive advantages and just compete on price which will pressure margins in the future, because the huge resource boom of the past decade is over. Any FCF will be used just to maintain the current revenue stream, so is it worth a lot more than a P/E of 10 or EV/EBITDA of around 5-6? I don`t think the market is so wrong on valuing these businesses, maybe the value is 20-30% higher, but thats not a big enough margin of safety for me in these kind of businesses.

 

[Max Alpha]

If you make the assumption that the industry is going to be significantly worse in the future when you are already at a terribly low point where companies are failing, sure, nothing is going to be undervalued. Similarly, if you assume all FCF is used to sustain the revenue base, nothing looks cheap.

 

I don't agree with that because that currently isn't the case in the current tough environment, and I don't believe the industry is going to be significantly tougher in the future than it is right now, it is in the process of rationalising and consolidating.

 

We will have to agree to disagree and wait and see!  :)

[frommi]

With NWH i am exposed to the same sector, but i believe that it is a lot more undervalued because there is this big uncertainty with their samsung contract (that is in court in singapore at the moment) and they posted a big loss last quarter where they have written down asset values. But this uncertainty will go away by next year when their dispute with Samsung is cleared and their future earnings power becomes clearer. But of course the risk of bankruptcy is higher than in LCM. In the end it comes down to the probabilities one assigns to each scenario and the expected payoffs. Should there be  a new resource boom in australia, NWH can easily be a tenbagger from here. ( in case they survive :) )

[yadayada]

Interesting counterpoints Max alpha. Im fully invested, but i guess i will keep an eye on this one.

[SpecOps]

Just came across this on Barel Karsan

 

http://www.barelkarsan.com/2015/06/logicamms.html

 

An interesting company, I suppose a lot hinges on what happens with hydrocarbons in Australia in the medium term, as we have seen with mining, their revenue streams seem to quickly disappear in the bear supercycle.

 

There are two other things that stopped me investing in this company,

1. The founder cashed out a couple of years ago, never a good sign, could he have seen the writing on the wall?

2. The order pipeline was in the 2011 Annual Report that I read, but is suspiciously absent from the latest one. The cynic in me thinks there's a reason for that.

[constala]

very high volume today: 2.5m shares: unseen since 3 years! 4.7% of free float.. indicates strong support at this valuation.  Will be worthy following who's be buying, or adding...

[Laxputs]

FY 2015

 

The company missed by 5% on revenue projections but hit on EBITDA margins and cash levels. Mgmt has guided to 9% margins being sustainable.

 

40% of share price in net cash.

 

Their revenue resiliency during the challenging Oz commodity environment is impressive.

 

There seems to be a high MOS in their net cash per share and their resilient revenue.

They are acquiring asset light companies at 3-4x EBITDA and bought the most recent one Petromod with little cash up front and full payment if strong results are reached.

It seems their strategy is to acquire cheap businesses that are in their general field but less specific to developing, engineering, operating, optimizing LNG, mining and infrastructure and more consultancy and niche oriented.

 

Valuation

LCM is trading at 4x FCF after backing out net cash per share. 2.6 trailing EV/EBITDA. 2-3x forward EBITDA. Policy of 40-60% payout ratio. Company seems pretty resilient and conservatively and well managed given the cash levels and previous share buybacks and cheap well structured acquisitions. Upside does not have that lottery ticket aspect like some other ones, but 2x appreciation seems reasonable with safety and a large dividend of around 10% yield in the meantime.