As a CLG holder in RL and SM, I finally got around to doing a deep dive into their results to try understand why they have been slapped down even further over the past 2 weeks.

I know that there have been some extensive writeups by others on this page, so just wanted to add what I managed to find out along the way.

Takeaways from results

• Cash flow -$11m due to $5m earnout component, increased inventory and
• NPAT/EPS down from previous year due to significant 4x Depreciation and amortization increase (mainly 14.7m amortisation for accounting reasons relating to the ISP Tek Services acquisition)
• Extra 150m shares impacted the EPS
• Increased return on capital from the previous year.
• 50% increase in employee benefits
• 4 x increase in occupancy costs
• Imminent debt restructuring will improve their cash flow.

Pros

• Circular economy will be growing over time as resources diminish, and the work they are doing now should hopefully put them in a good position for future growth in resource recovery.
• Ability to scale over time and increase output with another shift at the plant if growth were to occur
• 3 year agreement with HP guarantees the volume and revenue for a longer period of time. I am hopeful that this will lead to some further growth into some more regions once the Mexicali plant starts to scale.
• Close to 35% inside ownership from Senior Executive Leader, means they have a skin in the game
• $40m of cash to fund further acquisitions to expand the offering available for similar circular economy businesses, which will get some better EPS accreditive growth from the loan interest they are accruing (they indicated that they are looking into some acquisitions in the FY Results)
• Hopefully with more scale they will be able to negotiate a much cheaper financing in the future as their business scales.
• Opening of Mexicali plant in Oct 2024 will provide significant cost savings to the business and provide further ability to scale up computer refurbishments for HP and potentially improve margins

Cons

• Packaging industry across the board struggled in 2023/24 due to inventory rundown and this trend could continue going forward (I have been across this from following ORA). Reading between the lines they have also had their margins in this space slightly squeezed.
• Finance costs have significantly gone up since 2023, and the interest rate on the 48m debt from PGIM is very high (11.5+%). Will lose some of their other revenue once they deploy the remaining funding under this arrangement.
• CAPEX required to establish a second TonerPlas facility in Victoria (next 24 months)
• Shareholding could be further diluted over time, and the current share price of 0.195c does not help this.
• I was not able to make the latest CLG call, so unsure whether the Mexicali plant liabilities is already being recognised in the financials.

Valuation

I am expecting NPAT for CLG to increase back to $18m+ this financial year now the earnout component and post transaction amortization are behind them. I am also factoring in some small growth in the European markets from expansion into Spain and Portugal and some organic business growth, which would offset the increase in headcount between 3-5%.

Taking into consideration the opportunities and the vested interests of the Execs, I see this business naturally growing their NPAT in 2-3 years without any further acquisitions or significant contract wins (assuming HP contract is retained).

Expected NPAT in 3 years = $25m

PE = 8.5-10x - hoping that the future growth would warrant their PE being closer to this range.

Value = $0.385 to $0.45

Unless CLG announces some significant game changing acquisition, I don’t really expect that a future purchase would significantly impact my pricing estimates. In the 2-3 year horizon, as any extra income generated from the new business would be offset by the additional OPEX, combination expenses reduced interest revenue, reduction in potential share dilution. (I have not factored any new debt into these calculations and would need to revisit if they were to require a business that warranted further debt facilities)

I do have a level of optimism with the outcome here, however I do agree with @ballermania that the business is quite ‘boring’ or ‘unsexy’ and struggles to get momentum.

This could be partially attributed to the fact that the top 20 shareholders in CLG hold over 70% of the shares in the business, so pricing is likely to be more volatile as the stock doesn’t have great liquidity or backlogs of new buyers.

This ownership breakdown statistic has fascinated me, and I will probably do some number crunching on other small cap businesses with high shareholder concentration (SPZ, AHL, SDR to name a few) to see what this does for the overall figures over time and how it influences liquidity and price movements until they grow into an ASX300 listed company (if at all)