KGIC Inc LGLTF

Cash Flow should be the key focus on LOY

[Mopoke]

Hi All,

I'm trying to make sense of the post on Seeking Alpha (link below) vs my valuation of the business. Below is a bit of a brain dump.

The analyst on Seeking Alpha has done some comprehensive work and values the business at $1.05 based on 10.5x FY15 EBITDA of $19m. I see two problems with this approach (outlined below) and think a DCF or cash flow multiple is better.

Based on my numbers, normalised CF for Loyalist is somewhere around $5m - $6m (growing organically and through acquisitions). Based on the current EV of $70m implies a cash flow multiple of 12x - 14x.

If you run the numbers vs peers and businesses of similar size and growth, I think this is fair.

Feedback and criticism welcome.

My views on Seeking Alpha's EBITDA multiple valuation

https://seekingalpha.com/article/2717195-loyalist-group-ltd-continues-its-aggressive-growth-and-announces-record-earnings 

Outlined below are my views based on my own calculations. I do not own any LOY.

1. EBITDA of $19m appears high

- LOY's current run-rate revenue is around $70m (FY14)
- 15% EBITDA margin puts the the run-rate EBITDA around $10m
- Ignoring acquisitions (however likely) and assuming the business can do another 10% organic growth next year gives us +$1m of EBITDA
- CFO believes the business can get $3.2m of EBITDA from the South Korea acquisition and lets say that in FY15 they can get +$2m of this total
- Total EBITDA based on the above assumptions gives a number around $13m
- If the the $6m gap (vs Seeking Alpha) were to come from acquisitions, it would require a lot of capital to be deployed (greater than new debt facility)

2. EBITDA is not the right number to be looking at

- If you check the SEDAR filings for the business, you can see the business is not only capital intensive in acquisitions, but is also capital intensive in the underlying business
- This is due to three elements (capex, integration expenses, working cap)
- It looks likes FY14 organic capital expenditure will be around $3m (including textbook project), and lets conservatively keep this number going forward (around 4% of sales)
- The integration expenses are around $1m - $2m per annum (redundacies etc.)
- Working capital is a big cash drain in the business, and based on my numbers runs at $1m - $2m per annum (probably driven by the Saudi students)
- Lastly, business lets assume normalised tax payments of another $1m - $2m
- All in all, the cash outflows of the business are around $6m - $7m
- This gives a normalised cash flow number of around $5m - $6m (vs $13m of EBITDA)

[60606060]

Now in summary what do you want to say or project. Thanks.

[Mopoke]

Purely thoughts for discussion.... I guess in summary I would say the current valuation of $0.40 - $0.50 appears fair. I think talk of LOY being worth $1.00 - $1.80 per share (i.e brokers + other views) isn't justified based on the business' cash flow. Sure its a big ESL market and lots of growth available, but I don't think LOY is a good investment at these prices. What do you think

[wpgweatherman]

Agree.. And I will add the market is always correct. If this stock was worth more it would be priced higher.  

[60606060]

Man you are posting at 5:00 A.M. ET. I assume you live in the UK. It's nice to get a rational thought on this board.

[alister33]

Revenues and cash flow will be rising ....

[Yun321]

" Revenues and cash flow will be rising .... " But stock price is low