Financial Resources (FRL)

[OutToLunch]

Recently picked up some May 2008 options in this company. FRL are very small (current cap about A$15m) but are trading on a historical p/e of only around 7-8, a divi yield of a bit over 6% and their business is profitable and appears to be growing nicely if their last few announcements are anything to go by. Main exposures are to the gold mining industry via a subsidiary (providing finance and equipment rental) and also through Sovereign Hydrology, a JV working with an increasingly-popular patented waterproofing technology for buildings, structures & the like. Sovereign has just expanded into Singapore throgh a new JV arrangement announced yesterday. Probably because of its small size the co. appears almost completely ignored by the market. Management hold a reasonable stake and have been making numerous additional (mostly small) purchases on-market.

Is anyone else following this company? The shares are reasonably freely traded but the options are currently rather illiquid & hard to get hold of at current prices. These options are one of my 'top drawer' picks for 2006 but until liquidity improves they're probably only attractive to small players (like me). Would be interested on others' opinions on this one.

Disc: Hold 125k FRLO @ 6.8c

[The P.O.D.]

OTL

I would imagine that companies that contract to the mining industry are slightly less risky than the mining companies themselves, although still have upside potential. I also believe that the market has overlooked alot of these small cap companies. And also gone for the miners themselves.

I will have a closer look at FRl although I am already in with AIE and IMD. You might find these interesting as well.

[OutToLunch]

Thanks POD, I'll check these others out too -- though can only be for interest's sake as the kitty's now empty... [:I]

One of the things I like about FRL, as you pointed out, is that they are likely to benefit from the mining boom but without facing the same risks as individual mining companies. There's a saying that "in a gold rush, sell spades" -- similarly to how drilling rig owners, laboratory testing outfits and shipping companies are benefiting form the current commodities boom.

I've gone for FRL's 20c options because:
1) The head shares trade on a low historical p/e (ie there's good potential for a re-rating upwards)
2) The options are long-dated with well over 2 years left to run
3) The company is already profitable, pays a healthy dividend, and appears to be growing
4) Directors are buying
5) The options trade at a low valuation (I ran them through a few online Black-Scholes calculators, using a volatility of 1.1 for the head shares, and got valuations in the range of 14 to 15c -- about twice the current market price)

Should the head shares be re-rated, or the options be re-rated upwards towards fair value, or the company's profits grow (or a combination of all three), the options should rise very strongly. BUT it's a very small company and as I mentioned the options are very illiquid at times so this one's not without risk.

Just my thoughts & not to be taken as any sort of recommendation...

[Damo79]

Hi OTL

I've had a bit of a look through and think it looks pretty good. I bought a very small parcel on Friday with some left over money.

I think the finance and rental side looks very solid and undervalue in the current share price. The hydrology side of things, however, could add a huge upside.

Thanks for the analysis.

Damo

[Beefheart]

Hi OTL

I'm holding (FPO shares, not options)and closely following FRL - for many of the reasons previously mentioned above.

In fact it is one of my picks in the ASX stock pick comp' this year.

Very small company at this stage, so not without its risks but fundamentally looks very sound.

Recent upward price action is interesting.

Regards
BH

[OneUp]

Hi OTL,
yes FRL is one I've been closely following for a couple of months now. I have not yet purchased any.

My understanding is that their finance arm has a wide exposure, with less than 20% being to the mining industry.

Latest profit (best part of $2m) included a $686k revaluation of sovereign - an entirely paper profit. It also appeared to include $1.05m from 1999 brought to account which has finally been settled (notes 3b and 20) by acquiring some technology. But I have to admit I did not entirely understand that transaction and its implications on the 2005 profit result, so corrections are welcome.

FRL is promising BIG things from hydrology tech, but I am waiting to see whether this is more bluster or whether they can actually deliver. Afterall, FRL did not meet its prospectus forecasts. As a side note, I do wonder whether for a small company these guys have their fingers in too many pies.

PS: Perhaps we should fully dilute the issued capital for the large number of options on issue (34m) when working out market cap, i.e. $26m, and deduct any expected cash from exercising options ($7m). On that basis, P/E is about 9-10.

PPS: did you include dividends when working out the value of the options?

[OutToLunch]

Hi OneUp,

Thanks for the extra info. I was aware of the Sovereign revaluation (and am hoping that it is a reflection of true value and may grow further) but I was not aware of the other 1 mill or so of profit that you mention as possibly coming from previous years. If that's the case, then we should exclude it as a one-off which effectively raises the historic p/e quite a bit, though still not to a grossly high level given that FRL's business appears to have good upside potential. It does makes the shares/options somewhat less of a screaming buy however.

I do indeed hope the Sovereign JV is not just talk and will deliver on their growth prospects... we can only wait and see how they go as they work on stitching together new contracts. The 'talk' is very positive (isn't it always!), and director's buying, albeit in small lots, is a good sign. I'm still happy to hold these options and take the punt, acknowledging the risks with such a small company. Time will tell how well a small co like FRL will be able to handle their business as it grows.

Re. option valuation, no I didn't account for any dividends paid on the head shares -- the online calculators I used only used the strike price (20c), the current share price, the length of time remaining until expiry, the current interest rate (I used 8%) and the volatility in the head shares (I used 1.1).

[OneUp]

Hi OTL,
yes I agree FRL certainly do have potential and if it the hydro business meets expectations this will be a multi-bagger. Finance arm also seems to have very aggressive growth aims. and I like the fact Directors have been buying. Definately keeping tabs on this one, but like I mentioned before, in my view there are dividends to doing a bit of "wait and see", especially given the strong price appreciation following the AGM. Best of luck!

By the way, there is a calculator that includes dividends here: www.fintools.org/options/frame_stock.asp

[OneUp]

Hmmm....

Lots of excuses for a 69% decline in NPAT, and lots of promises of better things to come. Overpromising and underdelivering seems to be a bad habit of this board. So like I said before I am happy to wait to see these guys start to deliver before committing any hard earned.

"Our competitive edge comes from our ability to identify an opportunity and the internal capacity to translate those opportunities into value for our shareholders". What nonesense. These guys need to decide what their knitting is, then stick to it!!

Might expect this one to head lower? Comments?

PS: did the maid grammar and spell check FRL's commentary? Maybe the first tangible sign of controlling costs promised ;)

DISC: none

[OutToLunch]

In hindsight I might have jumped in a bit early here. Will file it away for a year and see what happens with the promises of better things ahead, but my initial enthusiasm has waned somewhat with this one. Here's hoping that some of their promises come to fruition... eventually...

[Beefheart]

Agree that the result was dissapointing, also the commentary left a lot to be desired. But I don't think it's all doom and gloom.

Reading between the 'waffling' lines of the commentary may provide reasoning for the relatively poor result.

It is quite difficult to find accurate reference to the 'significant circumstances that are largely non-recurring' let alone any detail as to how they specifically impacted the result. I've summarised them as follows:

1 - FRL Contracting - 'Ceased work on marginal or unprofitable contracts' - Half year 06 impact = reduced revenue plus additional costs associated with exiting this work. Long term impact = company can concentrate only on higher margin contracts going forward.

2 - FRL Contracting - 'St Ives works were virtually dormant for the two months (Nov/Dec 2005) during the tender process' - Half year 06 impact = significant revenue reduction compared to pcp plus it is likely that FRL incurred costs (staff retention, equipment downtime etc) over this period. Long term impact = all good, as tender was won and revenue flows should be well underway.

3 - Sovereign Hydrology - 'Significant delays .... due to the late arrival of specialised equipment from South Africa' - Half year 06 impact = revenue less than anticipated (they were only able to start work in Dec 05 so assume they were not paid anything during the period). Long term impact = good, '2 of the (first) 3 contracts completed and the 3rd is near completion' should mean 2nd half 06 shows major improvement.

Overall they indicate that these circumstances are all resolved and the outlook is rosy. This could just be, as OneUp suggests, 'overpromising and underdelivering' but I'm willing to wait for the full year result to see if they can deliver. I'd say they've painted themselves into a corner here and the 2nd half will have to be very good to regain market confidence.

I'm holding for now, and I'll consider adding if the price retracts significantly.

Regards
BH

[bigbear]

Yes a disapointing HY result. Tend to agree with BH in terms of potential for recovery. Would really like mgmt to quantify problems encountered rather than guess myself. Continue to hold FRL and FRLO at this time.

[OutToLunch]

Positive announcement just out regarding a large remnant mining contract with St Ives worth $5m a year until at least 2008. I'm a bit wary of Barry 'accentuating the positive' after the last profit result and the poor commentary that went with it, but this latest development does sound good.

Wonder how Sovereign Hydrology are getting on?

Disc: Still holding FRLO, almost topped up recently

[thereslifeafter87]

quote:Originally posted by The P.O.D.

OTL

I would imagine that companies that contract to the mining industry are slightly less risky than the mining companies themselves, although still have upside potential. I also believe that the market has overlooked alot of these small cap companies. And also gone for the miners themselves.

I will have a closer look at FRl although I am already in with AIE and IMD. You might find these interesting as well.



I just checked out AIE.

They seem to get most of their revenues from their automotive division - supplying body parts to Holden. This doesn't strike me as a business exposed to the mining sector to any great extent...

Their construction division may be, but it is a much smaller percentage of revenue than the automotive.

[OneUp]

Profit down 73% to a pathetic $539k. And in the middle of a mining boom!

Lots of promises but no delivery (weren't they supposed to be making millions from the hydro venture by now?).

Also a bit worried by their debt:total assets situation, given poor cashflows.

One to avoid IMHO.

PS: happy to revise this view if FRL puts in a verifyable improvement in performance, but management are increasingly coming across as incompetent.

[OutToLunch]

Yes, this one has been disappointing so far despite my initial enthusiasm for the options. Lots of promising, less on the deliveries side of things. I still hold my FRLO and plan to give them another year for FRL to get their house in order. Fortunately my stake was only relatively small! [B)]

[OneUp]

Profit down 73% to a pathetic $539k. And in the middle of a mining boom!

Lots of promises but no delivery (weren't they supposed to be making millions from the hydro venture by now?).

Also a bit worried by their debt:total assets situation, given poor cashflows.

One to avoid IMHO.

PS: happy to revise this view if FRL puts in a verifyable improvement in performance, but management are increasingly coming across as incompetent.

Administrators appointed in June.

Hope no one on this board was caught out.

[OutToLunch]

I'll put my hand up -- I still had my FRLO 20c options (and had pretty much written them off) when the white coats were called in back in June. Communication from management had been woeful with regards to their deteriorating situation which I should have paid heed to at the time. I had originally been very optimistic about the Sovereign Hydrology arm in particular -- but where did that go? Not a word.

One for the 'lessons' book... :(