GREY:AIIFF - Post by User
Post by
NYI25on Jun 12, 2011 10:36am
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Post# 18704109
Covenants and Valuation
Covenants and ValuationI've been reading through the comments of the past few days and wanted to clarify a few things.
Goodwill and Intangibles - these are real assets. Armtec has done a number of acquisitions over the past few years. When doing acquisitions, there are detailed accounting calculations that need to be completed to determine how much value is attributed to PP&E, goodwill and intangibles (ie. DCF calculations, replacement values etc). Goodwill and Intangibles are both subject to annual impairment tests which are audited, the same as PP&E.
Bond Covenants - no bank in their right mind is going force liquidation because a bond covenant was breached. No doubt that ARF will not meet the current covenants over the next few quarters, but they are negotiating with the banks right now to adjust. It will likely result in a combo of raising the covenants and reducing the facility. Eliminating the dividend was the best move to manage the creditors. It was never sustainable anyway. I've been watching these guys since $16 and was waiting for this to happen. Now that it has happened, they can make meaningful headway to clean up their balance sheet which will be better for shareholders long term. They are still producing $35m EBITDA in a bad year, $70m in a good year which is very sustainable.
Valuation - use your own judgement on analyst recommendations. There are very good analysts and very bad ones. I seriously question any analyst whose target moves from $18 to $2.50. First, there are a number of methods of valuation such as dividend discount model, discounted cash flow (DCF), multiple analysis etc. The most universal method for valuing stocks is the DCF which discounts the free cash of a business before paying any dividends. So, paying dividends vs not paying dividends will have almost no effect on the valuation, except for its impact on cash taxes. I've run my own DCF on Armtec with some reasonable EBITDA and Capex forecasts and I get a range of $7 to $10 depending on my assumptions.
Bottom line, its oversold. There will be continued pressure on the stock from people exiting, but there is a sustainable business here and they've just removed the biggest question mark facing them which was the dividend.