21/2/20 December 2019 Appendix 4D & Financial Report
LBL released a messy 1H20 report yesterday, with the market reacting accordingly with a 23% sell off. The clear negative was a 9.1% fall in the revenue of the previously high flying Products division. On top of that, the reported financials were impacted heavily by the adoption of AASB 16 given they lease the majority of their equipment through financiers.
Trying to back out the best like for like comparison of profitability I think using EBITDA and removing the benefit of additional interest and D&A from the 1H20 result is the best metric. This results in EBITDA of $2.25m vs $2.07m in 1H19 or a 9% increase. While I don't like using EBITDA (particularly for a business like LBL), it is helpful here because it puts the AASB 16 impact below the line.
9% is definitely disappointing compared to expectations and a sharp slowdown from the AGM update in October, however it is positive that they were able to maintain some operating leverage even as revenue came in lighter than expected. This was driven by leverage in the Services division with 21% growth resulting in gross margins improving strongly from 45% to 50%. This was good to see as a return to the historical levels of ~50% had been flagged in previous reporting periods after the segment had invested heavily in new equipment and training for new employees.
Turning to Products, management commentary suggests the result was not as bad fundamentally as it was reported, with orders actually slightly up on the prior period however due to timing of shipments reported revenue declined. They re-iterated their belief that it represents the highest potential for revenue growth for their medium term $40m revenue target, highlighting some customers wins from late in the year.
As expected there was no contribution from the Technology division, but the update was positive with management stating they expect one more sale in the 2H and the first license payments from the UK customer won last year.
Cashflow was weaker than the prior period however the prior period did have the benefit of residual payments from the Technology sale last year.
Looking at operating expenses, other than the higher D&A and interest costs from AASB 16, they fell from $3.3m to $3.1m. With higher gross margins and good operating cost control, if Products revenue can re-accelerate in the 2H as management expects then they are a chance of hitting my original target of 25% profit growth.
Given a large part of the Products growth is shipments to US steel customers, they can be tracked at https://panjiva.com/Laserbond/39198550. It is definitely worth checking every couple of weeks to track whether the recovery is happening as planned. Note that there has been no shipments registered so far in the 2H which is a concern.
Laserbond took a bath yesterday, closing 22% down after the release of their half-year results. At a glance:
Looking at that alone, it is a big miss given recent margin expansion and NPAT upgrades.
Management flagged 'timing' as the main reason behind the lower product sales - "later than anticipated delivery of key customer contracts in our Products Division". Whilst rev in this vertical was down, orders received were up ~2% with "further growth expected in the second half".
The previous miss in 2HFY19 in the Products Division was due to prioritising the Technology Division sale as it obviously had corresponding consumables attached to the contract. Perhaps Laserbond are having some teething issues keeping up with the growth curve? With this is mind, a new lathe came online in Jan 2020 (increase capacity and efficiency), March 2020 will see a CNC grinder installed (increased productivity and margins) and management flagged further plans for additional upgrades.
I feel as if management are investing in the right areas, but I would like to see growth in one vertical not come at the expense of another.
Management stood by the 2022 target of $40m in sales, double-digit rev growth in both the Services and Products Divisions and gradual margin expansion. They basically have their target of one Tech sale in the bag for FY20 and a new tech-focused sales rep now online with the goal of 2 Tech sales in FY21. I think a ~20% SP decline was rather harsh but when multiples are inflated across the board, any perceiving miss will do that. My $.78 IV remains and likely wont be increased until I gain confidence in management's ability to grow multiple verticals simultanesouly.
Original announcement here.
TC's recommendation for LBL is "Outperform", with a DCF price target of 76c. LBL closed yesterday (06-Mar-20) at 45.5c ($0.455).
I think it is very hard for anyone to accurately predict on a macro level how long the current downturn lasts for and the long term effects of it. What we can and should do though is look at individual businesses and assess the impacts to them from the coronavirus, positive or negative.
For LBL I emailed CEO Wayne Hooper who subsequently released an announcement to the market. He confirmed that the business has seen no material impact on the business so far and they remain confident in their short and medium term targets. Their customers and suppliers have been exempt from restrictions so far and no issues with freighting either.
In a sign of their confidence LBL continued with their dividend payment and Wayne has recently bought some small amounts of stock on market.
Laserbond have finally joined the party and released a COVID-19 impact statement.
In said announcement, LBL declared that COVID-19 has had “no apparent effects on its customers or demand” yet “overall sales performance has fallen short of the company’s stated target of double-digit sales growth” (one month after providing that guidance).
If it wasn't COVID-19 causing the sudden downgrade I guess we can just chalk this up to poor management performance?
A little disingenuous but they will get a pass if they can in fact hold on to the $40m revenue target by 2022 (which they reiterated).
Original announcement here.
Laserbond 2019 Annual Report
LBL released their annual report today which was a solid beat on their previous guidance.
Revenue came in at $22.7m, beating to top end of guidance ($22.2m) and profit before tax of $3.8 smashed the top end of guidance ($3.5m).
The highlight of the result was the margin expansion with gross margin of 47.4% compared to 44.5% in FY18 and EBITDA margin of 21.6% compared to 14.2% in FY18. This beat my expectations of 20% EBITDA margins.
While revenues were slightly lower than I expected (Services revenue declined half on half) management addressed this by clarifying this was due to capacity constraints with key machinery being used in the period to satisfy the Technology sale.
Overall the outlook was extremely positive with the long term goal of $40m revenue by FY22 confirmed, with initial guidance of double digit revenue growth in FY20. To hit the target of $40m revenue, LBL will need roughly 20% CAGR revenue growth over the next three years, which is certainly likely given the pace of current growth and new equipment installed to increase capacity over the year.
Management have been conservative by stating they expect margins to remain flat, made up of an increase in the gross margin offsetting the loss of roughly a $500k government grant. However, assuming 20% revenue growth in FY20, I think margins expand and EPS can grow by at least 25%.
Operating cash flow of $4m was a great result, with the vast majority ($3.4m) invested back into the business in a heavy investment year. This will help address the capacity concerns and drive revenue growth in the future.
Finally, management provided an in-depth breakdown of the Technology division, in particular the various ways it will generate revenue. The first is the production of the Laserbond system itself generating revenue between $1.2-1.7m (note the FY19 tech sale was for $1.9m as the client required some customised automation within the system). Secondly, there will be on-going license payments of "hundreds of thousands" of dollars for the term of the agreement, with the FY19 tech sale being a 7 year term. This will be extremely high margin with "little in the way of additional costs". Finally, customers will be contracted to purchase LBL's consumables, being the powders used by the Laserbond system. Each system can use up to $1m of powder at full utilisation, but management did note this revenue would be lower margin to the other streams.
Management have a goal of one Tech sale in FY20 with two in FY21 and beyond. The Tech division represents the largest blue sky for LBL as it could signify the shift away from a manufacturer to an IP business.
Well established, well run and tightly held micro-cap story.
When asked what LaserBond do, I have told friends that they "zap metal with lasers so that it lasts longer." Needless to say, I'm far more interested in the financials than the technology itself here.
Currently, all 3 divisions are growing AND SCALING impressively. For a manufacturing / engineering services business, gross margins are surprisingly high, though this within itself is a key risk. The company has certainly managed to carve out its own little niche, and many years (decades) of investment in R+D should prove a barrier to entry for competitors.
Products division has recently begun selling direct to US steel industry providing significant revenue bump initially, and I remain hopeful that this can be a key growth driver into the future. 2H19 Technology sale of $1.8m (upfront) demonstrated an ability for the performance here to significantly affect performance at company level. The pipeline for future sales looks strong, however it is worth noting that revenue is lumpy and requires increased CapEx before recognition of sale.
The technology division also looks to capture very attractive trailing revenues (recently indicated for 7 years after the initial purchase) so any sharp uptick in sales will provide some revenue base for future years also.
The company has previously projected its goal to reach $40m in revenue by FY22.
Assuming this can be achieved, I have posted a (quite crude) valuation of ~ $0.685
Having been in $LBL personally since $0.135, an element of confirmation bias has potentially crept into calculations here. Also note that there is LOTS TO ACHIEVE BETWEEN HERE AND THIS VALUATION, however the price target is indicative of the opportunity if management can continue to deliver.
22/02/19 December 2018 Appendix 4D & Half Yearly Financial Report
LBL reported their 1H19 results. Revenue of $10.49m came in at the top end of guidance, with EBITDA of $2.07m beating guidance of $1.8-1.9m.
The result was driven by strong growth from the Products division, which grew 103% to $4.80m to make up 46% of revenue (from 33% last year). This helped EBITDA margins grow from 7% to 20% as Products have a 35% EBITDA margin compared to Services at 14%.
Looking forward, management didn't provide specific guidance, however commented that first half growth will be "reflected" in the second half, with January "already demonstrating continued growth".
Services gross margin was 45%, however management confirmed that the margin is still depressed due to the extra investment in skilled employees and are targeting a return to the historical 50% levels as those employees become more proficient.
Despite not being broken out, management stated that there were some one off costs in this period associated with the Technology sale due in 2H19.
The Technology sale was confirmed to be over $1.8m, a nice increase on the $1.5m I was expecting. Further sales are expected in FY20 as a "significant part of the company's planned growth".
Management outlined roughly $500k of planned capex in the next few months to service current growth.
5/12/18 LaserBond successfully breaks into the US Steel Industry
As flagged in their Annual Report, LBL have shipped their first order of Composite Carbide Steel Mill Rolls to the US. This builds on the $2.6m of Products that were exported in FY18, targeting the US steel industry which is 15x larger than Australia's.
Importantly, the business continues to focus on international growth, both with new regions and new products. Hopefully more information in the 1H19 report.
11/10/2018 First Quarter Revenue Up 44%
As the title suggests, LBL announced that unaudited figures for the first quarter of FY19 has shown organic revenue growth of 44%, accelerating from the 27% organic growth in FY18. The Technology sale announced a couple of months ago to a UK multi-national will also add at least another 10% on top of this to FY19 revenue growth.
Management stressed that while there can be fluctuations with quarter to quarter results, there are no signs that the increased demand from customers is slowing down.
Importantly, further information on the FY19 outlook will be provided at the AGM in a couple of weeks to potentially give an indication as to margin recovery.
27/8/18 Laserbond 2018 Annual Report
LBL reported their FY18 results. Revenue increased 13.8% to $15.65m and NPAT increased 12.3% to $1.25m after excluding a one-off inventory impairment management are confident of being compensated for.
A very strong result after keeping two things in mind; first, FY17 included the company's first sale in the newly created Technology division for $1.44m. FY18 did not have a Technology sale, however one has been recorded so far in FY19 with management confident of more. Excluding the Technology sale from FY17 and "core" revenue grew 27%. Second, 1H18 was an investment period for LBL as they increased their workforce by over 40% to meet the increased demand from customers. This resulted in higher training and overtime costs which impacted profit margins in the short term. However, 2H18 saw a rebound to higher profit margins in line with historical figures. Isolating the 2H18 NPAT results in $1.02m, a more accurate number for the on-going earnings of the business.
Looking at other comments from the Chairman and Executive commentaries:
Core revenues are expected to grow at "similar" levels to FY18 with margins returning to higher historical percentages.
Several EPS accretive acquisitions have been identified and currently in negotiations.
New product designed for the steel industry has had successful trials with an Australian customer and now in talks with major US steel producer.
Strategic plan put in place to generate $40m revenue within 4 years.
10/8/18 LaserBond signs Technology Licensing Agreement with UK Multinational
As flagged in their FY18 guidance, LBL has signed their second Technology sale. The customer is a UK based multi-billion, multi-national engineering company. Based on my back of the envelope numbers this will add $1.5-2m to revenue in FY19 which would be in line with the first Technology sale of $1.4m.
LBL stated that this sale only relates to the customer's UK operations, but given they have operations in all major continents the chance of further Technology sales is high. A further comment of other enquiries being received about Technology licensing also sounds promising.
5/2/18 FY18 Revenue
LBL announced core revenue growth of 27% with margins rebounding to historical highs after 1H18 was a period for re-investment. Guidance for FY19 was for continued double digit growth with margins remaining consistent.
LBL's new Technology division which involves LBL licensing their technology reports lumpy upfront sales with on-going licensing payments. After reporting their first sale in 2H17 ($1.4m) there was no sale in FY18. However opportunities have developed and LBL expects to announce a second Technology sale in FY19.
Tiny family-run business focused on the provision of laser coating services primarily for mining and manufacturing. Product provides a longer useful life for equipment used for drilling or grinding. Tied to mining capex and share price has languished since 2012.
However company remains profitable and paying a small dividend. FY18 results muted by investment in staff and R&D, however experienced management team believe benefits will flow through in FY19.
18 September 2019: Taylor Collison Limited (TC): "Laserbond (LBL.ASX) Recommendation Outperform - Initiating coverage: the clever Australian"
"Our view – initiate with outperform
TC initiates coverage of Laserbond with Outperform and a DCF price target of 84 cents.
Valuation and recommendation
Laserbond offers good value at current levels with a P/E of 18.2X FY20 and 13.4X FY21 driven strong eps growth profile. This growth is supported by a solid established competitive advantage, lowly geared balance sheet, a humble business culture and a good corporate governance. It is a quality business.
Macro conditions remains relatively favourable with many major commodity prices at solid levels, firm infrastructure spend and plethora of sunk heavy machinery investment that needs repair and /or improvement post the mining investment boom."