Laserbond Ltd - LBL

[Lizard]

I mentioned this micro-cap on the profitable micro-caps thread and thought I might write it up more fully with it's own thread. However, pre-warn readers that this share is small and highly illiquid, so will not be to everyone's taste!

The company was first formed in 1993 with the aim of providing a parts maintenance service to increase the wear performance of metal parts. They initially provided thermal spray surface coatings, focussing on HP-HVOF (High Pressure High Velocity Oxy Fuel) process. Along with this they also provided cheaper coating methods such as plasma spray and arc spray. In 2001, they launched the Laserbond process, which forms a metallurgical (welded-type) bond between the coating and underlying component using a controlled heat level. This is considered an improvement over the other mechanically-bonded processes.

In 2007 they IPO'd on the ASX with the intention of raising funds for geographical expansion. Given the size of parts that are re-surfaced, it was not proving economical to transport parts from further afield to the plant at Ingleburn, NSW. The IPO raised $3m through the issue of 15m shares at 20cps. Prior to listing, sales had been steadily rising from $2.6m in 2003 to $2.9m in 2006.

In 2008, they used the IPO proceeds to acquire Peachey's Engineering in Queensland. The purchase price was $2.5m cash, $0.5m scrip (@15cps) plus earn-out. Sales for Peachey's were noted as $6.8m and EBIT of $1.4m for the 2008 year.

For FY 2009, with growth in Laserbond and the addition of Peachey's, revenue came in at $9.1m and underlying NPAT at $670k, although some abnormals pulled that down to $271k. Unfortunately, the coffers were drained in financing the acquisition and the company issued 350,000 convertible notes. These notes have the potential to overhang the share price, as they can convert prior to June 2012 at the lesser of 15cps or at 85% of the 5 day VWAP (which could be rather easily manipulated!). It appears that so far, about 110,000 of these notes have been converted at 0.1042 per share.

During 2009/10, the original Ingleburn plant continued to grow, but problems relating to the GFC and management dented returns from Gladstone (formerly Peachey's). This produced a FY result of $10.4m revenue and $0.5m NPAT. Cashflow remained tight as the earn-out payments were made for the acquisition.

However, 2010/11 looks like being the "bounce back" year for this business. Ingleburn revenues were up 40% in first half and, while revenues at Gladstone declined, their order book bounced back, setting them up going into the second half. Free Cashflow also turned positive, to put them in a stronger cash position. The recent update from LBL has forecast FY revenues of $12.7m and NPBT of $1.5m. It also noted that the company was now "perfectly positioned" to meet 2012 growth and profit targets (had to put that in for percy - he'll have to keep up with the latest lingo taking us from "well" to "perfectly" )

In summary, at current price of 11.5cps, the forward P/E is looking like about 8.0 (at 12cps), even after allowing for conversion of remaining notes to about 2m shares. Forward EV/EBIT comes in at around 4.75.

The company has a reasonable record for revenue growth, so could be a good micro-cap to pick for combined value plus growth going into the next result. Just be aware that they may need to work off the convertible note overhang at some point, particularly if the price were to rise to above about 18-20cps, where it would be worth the holder converting at the 15cps maximum and then gradually selling down. I currently see value as closer to 21cps with upside.