ACF.Acrow Formwork and Construction Services LTd

[Southern Lad]

Revenue and EBITDA were boosted by the acquisition of Uni-span effective 31 October 2019, so most of this growth (particularly in the second half) due to acquisitions rather than organic growth.

EPS (excluding significant acquisition costs) in 2020 were a healthy 4.62 cps, however they were only up 6% of FY19. Share price is an attractive PE multiple of these underlying earnings amount.

However, i’m concerned by Note 23 of the FY20 financial statements which details the consideration payable for the acquisition of Uni-span. The note states “a contingent payment of up to $4,250,000 cash, provided the Acrow groups EBITDA exceeds $18,000,000 for the FY21 Financial Year. At reporting date the contingent payment is estimated to be nil”.

Underlying EBITDA for FY20 was just north of $15m, which included 8 months of Uni-span. Second half EBITDA was $9.5m. So the directors are saying they don’t expect much EBITDA improvement in FY21 (adjusted for a full year of Uni-span) however if they do manage to improve profitability a bit, it’s going to cost shareholders $4.25m in cash. Therefore if EBITDA improves a bit, shareholders could loose much more than the EBITDA improvement. Worse still, the $4.25m will need to be funded out of net profit after tax so shareholders could be much worse off. Who negotiates deals like this?