DGX - Mcap $18m, forward P/E <4, low debt, strong operating cash flow

[Corporate]

All - DGX might be worth a look

From a finanical point of view:

Market cap: $18m
FY14 NPAT guidence: $4.6m
Forward P/e: < 4x
FY14 EBIT guidence: $7m
FY14 debt guidence: $4.1m

The most recent half year results so that the business is on track to meet this guidence:

HY14 NPAT: $1.9m
HY14 EBIT: $3.3m
HY14 Debt:$6.8m (they also have $13m cash on hand)

And importanly...

Operating cash flow: $6.3m
FCF: $5.9m

If this can be extrapolated for the full year then the FCF/EV yeild is almost 50%.

I also like the fact that they have aggressively reduced operating costs. Including the MD taking a large salary drop in return for options that vest at a share price twice today's value.

[stoploss]

Hi Corp sounds good ,what industry are they in ? How do they generate their cash ?

[Snow Leopard]

So does construction and property development.

Historical revenue up and down like something that goes up and down a lot on a biennial (once every 2 years and not twice a year, that would be biannual) basis.

Disastrous set of accounts for Full Year 2012 and then a cap raising in Aug2013.

Price all over the shop in the last year 6c 6-Aug-2013 down to 3c 19-Sep currently $0.037 and maybe at the bottom of a 4y decline from $0.50.

Current trading (since Sep 13) 500,000 shares a day average which is only $18,500/day.

Earnings for Full Year 13 $1M553 on 152M8 shares: EPS $0.010
Earnings for Half Year 14 $1M903 on 470M7 shares: EPS $0.004

Notice that the got accused by ASIC of not disclosing a potential sale in a timely fashion.

If they have truly got their act together then could go places as a turn around.

Best Wishes
Paper Tiger

[upside_umop]

Looks interesting corp. Good find.

A relatively high payables balance (~$51m per presentation), which I suspect makes a few people nervous.

I also note that they have an internal development of $30m, which could be a risk to liquidity.

All the same, looks interesting alright...

[Corporate]

Tiger - agree with all of what you say. A couple of additional points

The capital raising was in my opinion a good thing. First of all it recapitalised the balance sheet and enabled the company to reduce debt and interest chargers. Secondly, it opened the register up to new investors and has provided more liquidity.

They ventured into UAE and got badly burnt. The business has returned to its core WA focus.

[Corporate]

Also, looking at the chart DGX seems to be making a bit of a base. I could easily see if running to 6c (57%) upside in the short-term. This would only make it a $28m company producing significant FCF on a forward P/E of 6.

[steve fleming]

I've looked at this a few times but the lumpy earnings and exposure to the WA economy/property market scared me off

MND, a huge WA employer, had an amazing statement in their result today: "The Company’s total workforce at 31 December 2013 was 5,656, a decrease of 25.6 per cent on alike-for-like basis from 12 months earlier when employee numbers were near peak levels."..then FGE etc

DGX will talk up the property market, but I just can't see how all these redundancies and negative sentiment it creates, is not going to hit the economy.

Charlie (below) reckons it is already pretty tough out there!

http://rogermontgomery.com/a-viral-recession/

PS: A reader of the Insights Blog commented below and I thought his insights is worthy of attention in this blog post itself.
“Hi Roger and the team. I am a business owner of a wholesale and direct sales company here in Perth Western Australia (inception 1990). I concur with your comments about the onset of recessionary conditions in this state. I have been through severe downturns twice before here and I can categorically confirm that extremely tough times are upon us here. Now either the people in high positions that count are in denial or they are oblivious to the terrible downturn in business conditions that are unfolding here. Frugality has set in and no one is spending money. Retrenchments have begun and the fear factor is setting in. I first noticed the ‘signs’ in December last year and then a definite up-tick in poorer trading conditions about early March and then in late April/early May it was a case of “Whoah! Who switched the lights out?” I supply hardware equipment and matching consumeables to a broad spectrum of industries, be it government (federal, state and local) corporate organisations and the printing industry. I always say the printing industry is a good barometer for local business conditions and I can guarantee that when I walk into their printshops and there are little or no stacked pallets of paper waiting to be worked on and the hubbub of activity is non-existent, you know there is something not right with the economy. I just left one printer today who has returned his 5 station Heidelberg press because he cannot find enough work to keep up with its repayments not to mention they closed their Sydney operations last month and his business partner returned to Perth to help the company fight for the ever diminishing scraps of print business that is available in this state. Add to this that their already generous 90 day trading terms are stretching out to 120 days and heaven forbid 150 days; alarm bells are ringing. As an owner /director I have the added advantage of being able to speak directly with other small business owner operators and I can assure you that there is an overwhelming feeling of hopelessness among a large number who are struggling with the conditions and they all think the worst is yet to come and that there is no end in sight and as you could probably guess there is not a lot of love here for the current federal government and its leadership and as if as ‘one’…………………….. my fellow business associates despair at the wasted opportunities this country has missed out on because of our leaders extreme selfish political agendas and ideologue and lack of business ‘nouse”! No one may want to call it, but believe me guys; I know what a recession looks and feels like and certainly in my business dealings and circles; we are in one helluva nasty one this time in. Regards, CHARLIE.”

[soulman]

I've looked at this a few times but the lumpy earnings and exposure to the WA economy/property market scared me off

MND, a huge WA employer, had an amazing statement in their result today: "The Company’s total workforce at 31 December 2013 was 5,656, a decrease of 25.6 per cent on alike-for-like basis from 12 months earlier when employee numbers were near peak levels."..then FGE etc

DGX will talk up the property market, but I just can't see how all these redundancies and negative sentiment it creates, is not going to hit the economy.

Charlie (below) reckons it is already pretty tough out there!

http://rogermontgomery.com/a-viral-recession/

PS: A reader of the Insights Blog commented below and I thought his insights is worthy of attention in this blog post itself.
“Hi Roger and the team. I am a business owner of a wholesale and direct sales company here in Perth Western Australia (inception 1990). I concur with your comments about the onset of recessionary conditions in this state. I have been through severe downturns twice before here and I can categorically confirm that extremely tough times are upon us here. Now either the people in high positions that count are in denial or they are oblivious to the terrible downturn in business conditions that are unfolding here. Frugality has set in and no one is spending money. Retrenchments have begun and the fear factor is setting in. I first noticed the ‘signs’ in December last year and then a definite up-tick in poorer trading conditions about early March and then in late April/early May it was a case of “Whoah! Who switched the lights out?” I supply hardware equipment and matching consumeables to a broad spectrum of industries, be it government (federal, state and local) corporate organisations and the printing industry. I always say the printing industry is a good barometer for local business conditions and I can guarantee that when I walk into their printshops and there are little or no stacked pallets of paper waiting to be worked on and the hubbub of activity is non-existent, you know there is something not right with the economy. I just left one printer today who has returned his 5 station Heidelberg press because he cannot find enough work to keep up with its repayments not to mention they closed their Sydney operations last month and his business partner returned to Perth to help the company fight for the ever diminishing scraps of print business that is available in this state. Add to this that their already generous 90 day trading terms are stretching out to 120 days and heaven forbid 150 days; alarm bells are ringing. As an owner /director I have the added advantage of being able to speak directly with other small business owner operators and I can assure you that there is an overwhelming feeling of hopelessness among a large number who are struggling with the conditions and they all think the worst is yet to come and that there is no end in sight and as you could probably guess there is not a lot of love here for the current federal government and its leadership and as if as ‘one’…………………….. my fellow business associates despair at the wasted opportunities this country has missed out on because of our leaders extreme selfish political agendas and ideologue and lack of business ‘nouse”! No one may want to call it, but believe me guys; I know what a recession looks and feels like and certainly in my business dealings and circles; we are in one helluva nasty one this time in. Regards, CHARLIE.”

IMO, the balloon in WA can burst anytime. Eastern states hits with the car industry. WA hits with the mining. Although BHP and RIO still report solid results.

As with property market in WA, if you are coming in now, can only end in tears. :(

[Buffett Jr]

Where is the downside protection trading 35-40% above book value?

There doesn't look like any consistency in their earnings or free cashflow either so I'm not sure on what basis you have calculated the value of the company.

Can you please explain your workings.

Thanks,
Buffett Jr

[Corporate]

Where is the downside protection trading 35-40% above book value?

There doesn't look like any consistency in their earnings or free cashflow either so I'm not sure on what basis you have calculated the value of the company.

Can you please explain your workings.

Thanks,
Buffett Jr

I couldn't care less about discount to book value. There are plenty of companies with inflated asset values. The downside protection is that this company is only priced at $18m, yet it makes a reasonable profit, has low debt and is cash flow positive (albeit inconsistently).

I haven't calculated the value of the company.

I'm happy to provide explanations for any workings, which in particular?

[Buffett Jr]

I couldn't care less about discount to book value. There are plenty of companies with inflated asset values. The downside protection is that this company is only priced at $18m, yet it makes a reasonable profit, has low debt and is cash flow positive (albeit inconsistently).

I haven't calculated the value of the company.

Low debt?

The equity (going off the latest 6 monthly report) of the company is 13.4 million and the interest bearing liabilities, i.e. bank debts are around 6.8 million so debt/equity is roughly 0.50. This would be equivalent of you owning a rental property of 100k and having debt of 33k. So manageable but not "low" as you would say. This is only my opinion and is very suggestive depending on the type of company. If it was a company that was very stable and consistent I wouldn't be worried but a construction/contract type company it could be a cause for concern.

The trade and other payables are 48.5 million and the inventory and accounts recievable combined are 41 million. I'm not sure when these come due as due to accural accounting you can put these in the accounts now for payments far into the future. Generally I'd expect the accounts payable to be paid first for this they would need to buy the raw materials for construction.

As you stated cashflow is up and down but this is in my opinion largely due to the nature of the industry that the company is in. They only get paid as they create buildings. The reciepts from customers of 128.3 million and then the payments to suppliers and staff is 121.4 million. Only a mark up margin of 5.6% which isn't that big. If they were high volume, low margin then fine. But they are a small company with low/medium volume.

All I'm saying is, yes on first impressions it looks cheap. But if you delve into the financial statements with the nature of the industry kept in mind, the downsides for me far outweigh the upsides.

I also don't understand your point that the downside risk is mitigated because the company is only 18 million. It isn't the price that matters but the price in relation to the true value of the assets and earning power of the business in the future.

Lastly, if you haven't valued the company, how do you know if it is above, around or below value at the current price?

[Corporate]

Buffet, don't get me wrong this isn't a premium business. It probably a 5/10 business being valued as say a 2/10 business. The margins are slim in this industry and you know that going in. That's why trimming admin costs has had such a impact in profit.

Don't get caught up in debt to equity. For a business like this, a better comparison is the number of times EBITDA exceeds annual interest charges and how many times debt exceeds EBITDA.

$18m market cap is cheap when debt is low and we are looking at a $4m profit for the year.

Obviously, I should have said this initially, DYOR.

[Buffett Jr]

Ok thanks for the EBITDA vs interest charges comparison. I'll look into this.

I must admit that construction is not within the industries that I generally look to invest into but always good to learn and expand my knowledge.

I'm interested to see how this little company pans out over the coming years. I'll add it to my watchlist out of pure curiosity.