Historically LYL have proven themselves to be a prudent and conservative allocator of cash through the cycles - though perhaps over lenient in the terms it offers on receivables. (Memo: take a leaf out of the GNG book where they collect in advance).

Strategically, the SAXUM acquisition makes some sense.

Various podcasts and information by LYL suggests they are grappling with staff shortages and this move to acquire SAXUM gives them access to an additional 34 high profile engineering staff (see their (SAXUM) website) and just as importantly exposure to the Americas and their ongoing workflows.

BUT…is it worth it?

Here’s my take on what might be the likely acquisition cost of SAXUM and why it will not only torpedo the dividend, but chew into cash balances as well.

Background Facts (all figures rounded):

Dividends paid in FY24 circa $33m

FY25 div – 0c to 15c on 39m shares- zero or $6m

Assuming a historically prudent business might be using the available surplus cash (from not paying the dividend) for the SAXUM purchase - then they have ponied up between $27m and $33m to acquire 60% 

This would value 100% at between $45m and $55m

So, what might they be buying – and is it in our interests to forgo the dividend?

Rule of thumb valuation methodologies for a professional engineering business – courtesy of Peak Business Valuation is as follows: 

Given the tight labour market presently, I’d be sure there will be a premium over and above the above multiples.

 This might suggest revenue at around $50m to $60m

EBITDA at between (say a 4x) of $11m to $14m (roughly in line with what LYL are presently generating)

I wouldn’t assume D&A of a straight-out professional engineering biz would be all that high.

 Note the terminology ‘SDE’ refers to “Sellers Discretionary Excess”. I’m presuming it is the equivalent of NPAT and after paying the owner a wage for his labour (and many private businesses don’t include this figure).

 Yes, I keep looking at LYL, at face value it looks the goods, but follow the cash and there is something to be concerned about.

 You can diddle the profit, but not the cash, and the following has been occurring for some time (at least for 3 halves and 2HFY24 was just a pass.

One would expect in an orderly world that the ratio of cash ops/NPAT + D&A would be around 100% - hopefully a tad more. This is certainly the case for fellow miner GNG and that company can do so because they collect cash in advance of doing the work – smart move.

So, LYL can report a decent NPAT, but the cash is getting soaked up in the biz.

Where is the leakage in LYL?

If they are making profits, how come it is not translating into cash? And how can they possibly pay some $33m in dividends (FY24) over the same time?  

The answer (roughly) will be found in 2 areas:

• Cash balances have been depleting from $101m at FY22 to $67m at FY24
• Receivables less payables have swelled from $41m to $60m at FY24

I understand that the bloated receivables are possibly part of their ‘modus operandi’ of winning business in Africa where they get higher margins than say GNG operating is Australia.

 Sure, this is okay when you have no debt, but eventually the cash balances will work themselves down to Zero and in pretty quick time when you make an acquisition – like SAXUM.  

 Should the FY25 outlook figures follow past history and assume the midpoint NPAT of $43m + D&A of say $6m is recouped as cash at the same rate as FY24 (45%) = $22m in operational cash - short of what they will require for SAXUM

 My Conclusions:

 Yes, the SAXUM acquisition looks strategically a good move and I don’t think it will deter much from the present high ROE

 BUT, the SAXUM acquisition will not only kybosh the dividend, but will be a draw on the cash balance to boot and this, at a time when we are entering the cyclical downside when a healthy cash balance is required for survival.

 Whilst respecting the quality if management, this cash issue, plus attendant risks of operating in Africa and some softness in director resolve to hold their shares will keep me on the sidelines.

The most recent insider share transaction was by independent non-executive director, Steven Chadwick, who purchased 8000 shares at $12.20 on 23 August 2024 (2 days after the FY24 results were released) totalling $97,572. Steven currently holds 27,657 shares worth $293,440 at yesterday’s close. Steven is remunerated $102,770 for his role on the board.

In March this year there were some large sales by MD & ED, Peter de Leo (50,000 shares @ $12.85) and ED, Bruno Ruggiero (135,000 shares @ $11.91).

I don’t know whether you can read much into these transactions except; there are many reasons why insiders sell shares, but only one reason why insiders buy shares.

Source: Simply Wall Street

I’m trying to understand more about the SAXUM acquisition to get a better handle on the current valuation of Lycopodium. However, the financial details of the acquisition seem to be missing. I have no idea what LYL are paying for a 60% shareholding in the business. All I can assume is that it is likely to be less than A$68 million, the total cash reserves at 30 June 2024 (since it’s to be funded from cash reserves).

I have no idea how SAXUM is performing financially other than “Holding no debt and with consistent revenue growth and strong profit margins, SAXUM will contribute immediately to Lycopodium’s revenue and profitability and the acquisition supports Lycopodium’s key strategic initiative to further geographically expand its global presence in the Americas.” I wonder how it’s ROE or ROIC compare? Will it dilute LYL’s recent 30% to 40% ROE metric?

I agree with @Slideup’s comment “The part I am struggling to follow with this update is why is NPAT lower than the preceding two years on stable to growing revenue.” When you also consider that “SAXUM will contribute immediately to Lycopodium’s revenue and profitability”, why will NPAT be lower in FY25? Does this mean other parts of the existing business are not expected to do well?

I don’t know what others think, but the lack of financial detail re the SAXUM acquisition seems a bit strange, unless management are still negotiating the price? Then it’s like “Trust us, we know what we are doing”! I guess that’s worked so far!

Tell me if I’m missing some important information here. It makes it difficult to refine the LYL valuation without more financial detail on SAXUM.

PERTH, 18 October 2024

Lycopodium Limited (“Lycopodium” or the “Company”) is pleased to advise that, following a due diligence process, it has entered into a Heads of Agreement to acquire a majority interest in SAXUM, an Argentinian headquartered engineering company. Under the terms of the agreement, Lycopodium will acquire a 60% shareholding in SAXUM with options over the remaining share capital in subsequent years.

SAXUM is a multi-disciplinary engineering and project management services company, founded in 1996, which provides services to the Mineral Processing, Cement & Lime, Manufacturing & Infrastructure and Oil & Gas sectors. It consists of four companies which are established in Argentina,

Brazil, USA and Australia and operates from five offices around the globe – Tucumán and Buenos Aires, Argentina; Irving, Texas; Belo Horizonte, Brazil; and Perth, Western Australia.

Holding no debt and with consistent revenue growth and strong profit margins, SAXUM will contribute immediately to Lycopodium’s revenue and profitability and the acquisition supports Lycopodium’s key strategic initiative to further geographically expand its global presence in the Americas.

Lycopodium’s Managing Director, Peter De Leo, said: “We are extremely pleased to announce this acquisition, which will further enhance our capabilities, expand our service offering and position us more competitively in the global market. SAXUM is a mature business, is culturally aligned with Lycopodium and is an appropriately sized business for us to establish a material footprint in Latin America to complement our Lima office as well as supporting our ingress into the US market.”

Post-acquisition, the SAXUM brand will be retained and the company will continue to be managed by the incumbent leadership team, which will not only secure trust with existing clients but also positions SAXUM for further expansion and success in its markets.

SAXUM founder and CEO, Dr Guillermo Etse, said: “We are thrilled with the opportunity to join the global Lycopodium family. I believe this is an excellent fit for our business, as we too are a technically led, client focused and value centric business.”

The acquisition will be funded from cash reserves, and it is anticipated the purchase will be finalised in Q1 2025, at which point further details will be provided.

@Bear77 interested in your perspective on the $LYL AGM today.

Guided for a materially smaller dividend in FY25, given balance sheet requirements for larger projects being tendered and the 60% stake in SAXUM.

Personally, I think that's very prudent as you want an engineer that conservatively manages theor balance sheet. However, judging by the SP reaction, I guess the market didn't see this coming. When SAXUM was announced I didn't see anything foreshadowed on dividend, but I wasn't across the portfolio well enough to understand the project mix and balance sheet implications.

I'm watching this, because if dividend investors take flight, it might offer an opportunity to increase my intial position. I'm assume a decent share of their retail register is interested in the dividends.

Also - what did you think about the FY25 guidance,...underwhelming?

Interesting.

Friday 8th November 2024:

The Overlooked Way to Play the Commodity Cycle (Baza Capital) Money of Mine [08-Nov-2024 podcast]

Some of the chapters:

0:26:26 Unloved Mining Services companies

0:28:36 Euroz Hartleys

0:33:59 Lycopodium

0:42:58 Vysarn

Disc: I hold LYL shares.

Interesting announcement this morning by $LYL to acquire majority interest (60%) in South American engineer SAXUM.

ASX Announcement

SAXUM is a multi-disciplinary engineering and project management services company, founded in 1996, which provides services to the Mineral Processing, Cement & Lime, Manufacturing & Infrastructure and Oil & Gas sectors. It consists of four companies which are established in Argentina, Brazil, USA and Australia and operates from five offices around the globe – Tucumán and Buenos Aires, Argentina; Irving, Texas; Belo Horizonte, Brazil; and Perth, Western Australia.

No financial details offered, but more info promised when the deal is finalised in Q1 2025. Acquisition will be funded from cash reserves. SAXUM has no debt, consistent revenue growth and strong profit margins, and will contribute immediately to $LYL's revenue and profits.

Announcement was not even marked price senstive.

My Assessment

The move is intended to expand $LYL's global footprint, beefing up its presence in the Americas.

$LYL had cash at EOFY of $67m - so that should give some indication of the order or magnitude upper limit for the deal. However, it is clear that SAXUM is a lot smaller than this, as follows:

• SAXUM's total staff, including board, appears to number 34 - they are all listed on the SAXUM website.
• Given that $LYL has 1300 direct staff, it's almost 40x the scale of SAXUM. So, assuming comparable value per employee, that would indicate that SAXUM has a scale of $433m / 40 = $11m ... but perhaps anwhere from $5m to $20m.
• The method is OK for a ballpark, as SAXUM appears to perform similar work to $LYL
• The estimate also supports why the announcement wasn't marked price sensitive.

$LYL is a high-performing engineer with, from my earlier assessments, a stable core workforce. It will be interesting to see how this deal pans out. SAXUM looks like a South American mini-$LYL.

$LYL already operates in a global market with a concentration on projects in Africa. The bolt-on will help with staffing projects in the Americas - an area $LYL wants to do more work in, and which will give it greater geopolitcal diversification. See the chart below showing $LYL's curent geographic concentration. SAXUM will create a significant step up in American Revenue, taking it from 3% of total to probably (I'm guesstimating here) 5-6%. I guess the point is, at 3% of revenue that indicates to me it would be challenging to staff project from the region. Of course, people in this industry tend to move where the projects are and a lot of engineering design work is done remotely, but if the vision is to be a global company, it makes sense to have a more material regional capacity.

There are some small office overlaps in South America and WA, so perhaps some small real estate rationalisation opportunities. Limited synergy opportunity as the entities will continue to run as separate businesses.

Not knowing anything about SAXUM or much about the deal, it's hard to assess the deal, and I'm trusting management on this one.

Leadership alignment will be important for this, and so it will be interesting to learn more about how much the management teams know each other, for example, have they collaborated before on projects?

Superficially, the industrial logic makes sense.

Disc: Held in RL only

19-Sep-2024: Lycopodium (LYL) has gone ex-div this morning for a 40 cents/share fully franked dividend, so their SP will likely drop by more than 40 cents - they usually drift sideways or down when the go ex-div, until or unless they announce a guidance upgrade (which they have a history of doing) or one or more decent new contracts.

LYL is my second largest real-life holdings - and one of the two largest holdings I have here (I'm at my 20% limit here) so I already hold plenty, but for anyone who has done the work, likes the company, and wants to hold some - or more than they do now, the next few weeks might present a reasonable opportunity to buy some as other people who trade in and out for Lycopodium's very healthy (and generous) dividends rotate into something else.

21-Aug-2024: Lycopodium (LYL), my favourite ASX-listed company, reported today and the market has sold them down on their report. I have taken the opportunity to top up at $12.28/share (average price paid) and I now hold 10,000 LYL shares and they're currently my second largest real-money position behind WLE, but I fully expect LYL's position in that portfolio of mine to leapfrog the 100,000 WLE that I hold once the LYL share price recovers. In dollar terms I've spent more on my LYL stake now than I have on my WLE stake - after all, LYL is a far superior company than WLE (which is a large-cap LIC run by Matt Haupt at WAM Funds) - WLE is there for dividends mostly, and because of limited downside risk.

LYL is there for dividends and growth. I reckon a lot of why the market has dumped LYL today (currently -12.8%) is because they have declared a dividend that is lower than expected. I was expecting around 46 cents/share and they have declared a 40 cps dividend. However that's not terrible. It means that their dividends for FY24 total 77 cps vs 81 cps for FY23, a drop of around -5% and they're still on a high dividend yield compared to the wider market.

Their cash balance is also lower, but as they said in their report, they are currently very busy and their cash balance moves around a lot depending on the timing of milestone payments on their EPC projects and other factors. Importantly they remain in a very healthy net cash position with zero debt.

All in all, I'm still very happy with this report, especially the outlook statement, remembering that they have very conservative management who like to underpromise and overdeliver.

The only other negative (apart from the slightly lower dividend) is that their ROE has fallen -4% from 44% in FY23 to 42.2% for FY24. Whoop-de-do! It was 29% in FY22 and that was outstanding. The overall margin and ROE trends have been up since FY20 - the Covid pandemic increased their costs and restricted their movements and their access to the sites around the world where they were doing studies and construction in FY21 - as well as during the second half of FY20 and during part of FY22 also. ROE of over 40% is outstanding, even if it has fallen from 44% to 42.2%. That's not material at all.

LYL remain a highly profitable company that specialises in Gold Mill design and construction - so they have PLENTY of tailwinds - with a very high ROE of over 40% (for both FY23 and FY24) who currently have a HEAP of work, and good margin work too. I would have preferred a higher dividend, but the silver lining on that cloud is that I have been able to increase my LYL stake at lower levels when there is nothing structurally wrong with the company - the market just wanted more than what they got. That's what we thrive on, irrational exhuberance and irrational despair - the severe mood swings of Mr Market. LYL were already cheap, and they got cheaper today!

LYL-FY2024-Results-Announcement.PDF

FY2024 Investor Presentation.PDF

FY2024 Shareholder Report.PDF

FY2024 Financial Report.PDF

Please! I sold LYL out of my largest portfolio in June (liquidated that entire portfolio) and I've been looking to buy back in - in a different portfolio - but they won't pull back!!

I can't hold them in my super because it's within an industry super fund and LYL aren't in the ASX300, so do not qualify for inclusion there, and the only place I currently hold them is here in my SM virtual portfolio (where they remain one of my largest exposures) and also in the one-stock-portfolio I "manage" for our two children. But I want exposure to them IRL again - and they're not giving me that chance at this point.

I can only imagine they'll just go higher in the lead-up to their next dividend - which will be another juicy one - but I'm going to hold off because they CAN bounce around on low liquidity every now and then, and I'd hate to pay top dollar now and then see them drop back a couple of dollars soon afterwards...

Patience is often rewarded, but it ain't easy!!

It’s been a bit quiet on Strawman since Easter. My two lovely granddaughters have kept me busy playing Sequence, drafts, checkers, chess amongst other things. I don’t even get the chance to knock out a straw before breakfast because they’re in our bed from 6am! :)

It hasn’t stopped me from adding a few shares though. I notice there’s been a lack of interest in Lycopodium shares by the market since it went ex-dividend on 25 March 2024. When a business paying a 7% fully franked dividend goes ex-div you might expect a decent pull back. However, yesterday Lycopodium traded at $11.00, and at that price I think it’s a BUY.

I maintain my valuation of $15.00 for Lycopodium shares, and I am even more bullish on the business than a month ago. I’ve been adding more shares at just over $11.00. Buying at today’s share price I think you could expect an annual return of 18% per year. The share price only needs to grow at 8% per year to achieve that.

Gold is trading at record prices and most of Lycopodium’s projects are in servicing gold miners in Africa.

1H24 Presentation

With a strong pipeline of studies and projects in delivery, the Company remains on track to achieve the previously advised full year guidance of approximately $345 million in revenue and NPAT in the range of $46 to $50 million. The total value of capital projects currently in delivery is in the order of A$4 billion.

Bell Potter Unearthed Conference Presentation

Assuming mid-range NPAT of $48 million ($1.21 per share) Lycopodium is trading at 9 x FY24 earnings. I think Lycopodium’s guidance is very conservative and I expect guidance might be upgraded toward the top end in the next month or two.

What I really like about this business is the ROE has been increasing for several years and now sits on c. 40%. it has achieved this with zero debt and increasing cash reserves. The balance sheet is impeccable! While it is paying out a massive dividend of c. 7% fully franked, it continues to reinvest 30% of its earnings back into growth at a 40% internal rate of return. You get all this for a low PE of just 9 times NPAT. It’s a bargain in my eyes, even at an historically lofty share price of $11.00.

Source: Commsec Website

It’s important to remember that Lycopodium is a cyclical stock, and it will follow the fortunes of the resource industries, particularly gold. I think the outlook for the business should remain strong while the gold price is near record highs.

Held IRL (4.8%) and adding

Dear Shareholders and Stakeholders,

The Board of Tivan Limited (ASX: TVN) (“Tivan” or the “Company”) is pleased to advise that it has appointed engineering and construction company Lycopodium to oversee the pre-feasibility study (“PFS”) for Tivan’s Speewah Fluorite Project in the Kimberley region of north-east Western Australia. Tivan announced in January 2024 that the Board had resolved to progress the project, including commencement of a PFS, following completion of a positive internal assessment (see ASX announcement of 30 January 2024).

Fluorite ore is used to produce commercial grade fluorspar products and fluorine; industrial applications include steel, aluminum and chemical manufacturing, and emerging sectors including next-generation lithium-ion batteries, solar cells and semiconductor manufacturing. In December 2023, the Australian Government added fluorine to Australia’s Critical Minerals List, in recognition of its role in the energy transition and lack of production in-country.

Lycopodium is a global process, engineering and project delivery organisation, founded and headquartered in Perth, Western Australia. Working across the resources, rail infrastructure and industrial processes sectors, Lycopodium employs over 1,200 staff globally, with the value of capital projects currently in delivery in the order of A$4 billion. Resources sector project engagements in Western Australia include Kathleen Valley (lithium; Liontown Resources), Greenbushes (lithium; Talison Lithium), Tropicana (gold; AngloGold Ashanti), Marandoo (iron ore; Rio Tinto) and Mt Weld (rare earths; Lynas).

Lycopodium provides a full suite of project development and execution services, including feasibility studies, engineering and design, process development and optimisation, construction management and commissioning and operational support services. Lycopodium owns Orway Mineral Consultants, who offer extractive metallurgy and process engineering services with expertise in comminution, beneficiation and hydrometallurgy, and provides full EPC services via Mondium, its incorporated joint venture with Monadelphous.

The PFS for the Speewah Fluorite Project will assess the technical and economic feasibility of a mining and processing operation at the Speewah site to produce acid grade fluorspar, building on a significant body of work previously undertaken on the Speewah fluorite deposit during the exploration and scoping phases. The PFS will include studies focused on mining, hydrology, tailings, engineering and project economics, and is expected to be completed by June 2024.  

For full information please see our ASX announcements page.

Today (Friday 22nd December 2023): TWO New Contract Awards:

https://www.lycopodium.com/wp-content/uploads/2023/12/Award-of-Baomahun-Gold-Project-EPCM_-Announcement.pdf

[Award of the Engineering, Procurement and Construction Management (EPCM) Services and reimbursable Supply contract for the process plant and associated non-process infrastructure for FG Gold Limited’s (FG Gold) Baomahun Gold Project in Sierra Leone, advancement of the project subject to FG Gold attaining financial close. The contract includes detailed engineering, procurement of equipment and materials, construction management, preoperational testing, and commissioning. This EPCM Services and Supply contract is valued at approximately A$100 million, with work anticipated to commence in Q1 2024.]

https://www.lycopodium.com/wp-content/uploads/2023/12/Yanqul-Copper-Gold-Project-EPCM-Contract_-Announcement_FINAL.pdf

[Award of the Engineering, Procurement and Construction Management (EPCM) services contract for the Yanqul Copper Gold Project in the Sultanate of Oman, being developed by Mazoon Mining LLC (MMC), a subsidiary of Minerals Development Oman SAOC (MDO), the flagship mining group in the Sultanate of Oman. This EPCM services contract is valued at approximately A$45 million. It is anticipated works will commence in Q1 2024 and conclude in Q2 2026.]

Friday 11th December 2023:

https://www.lycopodium.com/wp-content/uploads/2023/12/Lumwana-Copper-Mine-Expansion-Project-Contract_-Announcement_FINAL.pdf

[LYL were awarded a Contract from Barrick Lumwana for the Feasibility Study and Basic Engineering for the expansion of Barrick’s Lumwana Copper Mine in Zambia, valued at approximately A$19 million, with the project having a capital cost investment of almost US$2 billion. Work has commenced, with the accelerated development program targeting completion of the Feasibility Study by the end of 2024 and expanded process plant production anticipated in 2028. It pays to note that studies like this FS (feasibility study) and basic engineering contracts often lead to larger EPCM contracts like the ones above announced today.]

Further Reading: 14th November 2023 AGM Presentation: PowerPoint Presentation (lycopodium.com)

Disclosure: I hold LYL in three of the four real money portfolios that I manage and I also hold them here in my Strawman.com virtual portfolio. They are a high conviction holding. The only reason they are not in my fourth real money portfolio (my SMSF) is because they are not yet in the ASX300 Index, which is a prerequisite of the industry super fund (CBUS) that I use for my SMSF. If I could add them to that portfolio, they'd be in there as well.

See also: https://strawman.com/reports/LYL/all

And:

https://fggoldmining.com/projects/baomahun-gold-project/

And:

https://www.omanobserver.om/article/1139784/business/economy/revenues-of-ro-500myear-seen-from-key-oman-copper-gold-mining-project [08-July-2023]

And:

https://www.lusakatimes.com/2022/10/31/barrick-hoping-to-extend-lumwana-mine-to-2042/ [31-Oct-2022]

Source: Facebook

Source: BARRICK GOLD TO EXPAND LIFE OF LUMWANA MINE ~ (znbc.co.zm) [8-July-2023]

Source: Mining Weekly - Lumwana copper mine expansion, Zambia – update [15-Dec-2023]

The transformation of Lumwana from a marginal copper asset into a world-class operation demonstrates the commitment of Barrick to expanding… | Instagram [27-Oct-2022]

https://www.reuters.com/markets/commodities/barrick-ceo-says-zambias-lumwana-mine-life-could-be-extended-2060-2022-10-26/ [27-Oct-2022]

Barrick to spend $2B on Lumwana expansion - Mining Magazine [04-Oct-2023]

Lycopodium released its FY23 AGM Presentation this morning. Sandwiched in the middle of the presentation was a slide titled “Current Snapshot” which contained FY24 Guidance:

How does this compare to FY23?

Management expect FY24 Revenue to be $345 million which would be up 6.5% on FY23 revenue of $324 million.

Management expect FY24 NPAT to be flat to 7% higher than FY23 NPAT of $46.8 million

Importantly, FY24 ROE should remain between 40% and 44% which is exceptional, particularly when you consider LYL has a lazy $82.4 million of the $113 million in total shareholder equity sitting in cash.

LYL is obviously building some sort of ‘moat’ around their expertise to be increasing ROE every year to this level without the need for leverage and with so much lazy cash sitting almost idle on the balance sheet. Since 2020 LYL has definitely landed in a sweet spot, and this looks set to continue into the near future.

I also like that LYL management are very forward thinking and try to seperate themselves by focusing on a unique suite of specialised engineering and professional services rather than trying to compete in the mainstream. The slide below is an example of how management is always thinking forward to stay ahead of the pack.

As @Bear77 has already mentioned LYL is also diversifying away from their heavy reliance on expertise to the Western African gold mimers, which @Bear77 pointed out is an area where they are also specialists in the field of electrical engineering.

This slide demonstrates LYL have several irons in the fire, and are are carving out a unique niche in each. I’m liking this business more each year, and have continued to add more shares to our portfolio.

Better leave something for @Bear77 to talk about!

Disc: Held IRL (2.6%)

Friday 10-Nov-2023: Firstly, I've written plenty on LYL previously - which you can read here: https://strawman.com/reports/LYL/Bear77 including a straw titled, "Income, Growth, Both?" - which you can probably find towards the top of the pile here: https://strawman.com/reports/LYL/all

Having failed to highlight the insider ownership with EGL in my recent straw on them (and a few other things that Harley Grosser pointed out in his own recent Livewire Markets "wire" on EGL: https://www.livewiremarkets.com/wires/an-undervalued-small-cap-growth-story), I thought I'd kick off this LYL update with that insider ownership data, before I forget again:

Lycopodium (LYL) has HEAPS of insider ownership, so plenty of shareholder alignment:

Source: Commsec data plus Lycopodium's FY23 Annual Report and their FY23 Shareholder Report.

The Board and Management own 36% of the shares on issue, which reduces the "free float" and is a factor in why it has taken LYL so long to be included in the All Ords Index (XAO) - they were only added in March this year. They are still not in the ASX300 index.

They also don't like issuing new shares very often - in fact the shares on issuee have been stable for the past decade - as highlighted by me in green below:

As highlighted by me in blue at the bottom of that Commsec screenshot above, LYL are trading at a reasonably low PE compared with their average PE over the previous decade. Their PE Ratio was 6.5 on June 30, and it's just over 8 currently. They are NOT expensive.

However, they are relatively small, and they can be quite illiquid at times, with usually less offers on the SELL side and more bids on the BUY side, which I assume is because the majority of LYL shareholders aren't looking to sell their shares. As a result of the low liquidity and the gaps between the bids and between the offers, their share price can bounce around quite a bit on relatively small volume (of shares traded).

Screenshots taken from Commsec and added to by me.

They do pay excellent fully franked dividends, with their trailing dividend yield being over 8% (plus the value of their franking credits, so over 12% grossed up to include the full value of those FCs).

Their dividends rise along with their earnings, and their earnings have been rising - see the top of the previous screenshot above - the Earnings chart - and now take a gander at the ROE chart beside it - how's that for a services company that is involved in engineering and construction - an ROE of over 40% - and rising!!

Now - while their shares on issue haven't changed for a decade (it's been 39.7m shares every year, as shown above), they are going to be issuing a small amount of extra shares to management as share-based payments and so forth, as explained here:

Source: Page 74 of Lycopodium's FY23 Annual Report.

The company has been ASX-listed for almost two decades, mostly with the same management and Board who include the company's founders, so they have been doing this for some time, and they know what they're doing.

I found some good stuff in their recent Shareholder Report (released with their FY23 Full Year Results in August):

Above, we see that they have become diversified across Infrastructure and Industrial Processes, in addition to their traditional core sector, Resources.

Below we also see that they have diversified across geographies (Regions), however it's worth noting that Africa remains a large part of their revenue, and they remain very active in West Africa in particular.

West Africa has plenty of risks, and LYL have become impressively proficient at managing those risks, which is why they continue to specialise in West Africa, where many other industry players (who do similar work to LYL) would prefer not to work. This also means that LYL can and do charge a premium to compensate them for taking on those risks, so as long as they continue to manage those risks as they have done to date, that work will remain very profitable for them.

LYL work for some very big players like Barrick Gold Corporation - the world's second largest gold producer - LYL-Award-of-Reko-Diq-Copper-Gold-Contract.PDF [12-June-2023] as well as some very small players like the tiny (A$14.7m) Toubani Resources Inc. (TRE.asx), which is an ASX-listed and Canadian-listed gold exploration and development company primarily focused on the development of the Kobada Gold Project in Southern Mali (Toubani are HQ'd in Canada, not Australia, despite being ASX-listed) - Lycopodium-Appointed-as-Lead-Engineer-for-Kobada-DFS-Update.PDF

Lycopodium's Office Locations Globally:

Here's some of the projects they were involved in during FY23:

As you can see, most were in the Resources sector, but there were also some in Infrastructure and some in Industrial Processes. That is page 26 of their FY23 Shareholder Report, and they provide details of all of those projects on the pages listed above. I'll give you just one example - the CSL Seqirus "Banksia Flu Cell Culture Manufacturing Facility" Project - which is on page 40 of the report (as indicated above):

For details of the other projects, click on the link above to access the full report.

That'll probably do for tonight.

Pacific National, another LYL client.

https://www.lycopodium.com/

Disclosure: Yep, I sure do hold LYL shares.

27-Aug-2023: Yesterday I highlighted GR Engineering Services (GRES, GNG.asx) and their income and growth history and future prospects. Today it's Lycopodium (LYL.asx).

So there's the income - LYL's current 12m trailing dividend yield is 7.9% plus franking, and all of their dividends have been fully franked. That's a grossed-up trailing yield of 11.2% (including the full value of the franking credits). The trend here is also your friend. Their dividends are increasing along with their revenue and earnings. Their revenue and earnings can be lumpy due to the one-off nature of much of their project work, however their downtrends don't seem to last long, and the overall trend is up.

Here's their interim results summary released in Feb for the 6 months ending Dec 31st, 2022:

And here's their full year results published last week for the 12 months ending June 30, 2023:

Source: LYL-FY2023-Full-Year-Results-Announcement-22-Aug-2023.PDF

See also: LYL-Investor-Presentation-FY2023-22-Aug-2023.PDF

And we have share price growth as well:

And here's that graph I showed yesterday in the straw on GNG that highlights the return from the same amount invested in GNG, LYL and the All Ords Index 10 years ago:

GNG has returned 6.6 x the All Ords Accumulation index, just in share price appreciation, with all the fully franked dividends on top of that. LYL has returned 3 x the All Ords return, plus dividends (dividends are already included in the green line coz the XAO is the All Ords Accumulation index which assumes all dividends are reinvested back into the underlying companies whereas the Blue and Orange lines for GNG and LYL do NOT include dividends).

The thing to note however is that LYL are really hitting their straps at this point in time, with rapid revenue and earnings growth, big dividend rises, and big share price movement to boot. GNG have done it more consistently, however LYL are catching up now.

Both companies do similar work, with both specialising in the design and construction of gold processing plants (mills) and both also do other commodities as well as gold, and both have other divisions as well with their Mineral Processing Engineering & Construction division being their main revenue driver. That project work is lumpy, but they're both very good at it and they are usually busy. Both companies have very high insider ownership as well.

In LYL's case, it's 36% Board and Management ownership, and a notional 39% free float, but they're just as illiquid as GNG are, so selling a heap of shares in a hurry will almost certainly move the share price, and it could be by quite a bit, depending on how many you need to sell and how fast. Once again, suitable for patient money.

You can see there that their market cap is very similar to GNG and they actually have a similar amount of cash in the bank ($82.4m vs GNG's $86m at June 30th), however LYL, unlike GNG, do actually have some debt, and it's a trade-off, because while they have manageable debt, they are also growing faster and have a higher ROE (44%). They are more profitable than GNG are.

They are also more global, with more full-time employees than GNG and with more offices that they work out of. They do a lot of work overseas, especially in Africa, and particularly West Africa, where there are more risk factors to consider, but LYL have become very good at that. More on that in a minute.

OK, now to their revenue sources, first by sector and then by geography:

The first slide shows little change from FY22 to FY23, however the "...by Geography" slide shows that they are relying less on Africa (in FY23 vs FY22) even though over half of their revenue is still derived from work done in Africa. Another way of looking at it is that they (Lycopodium) are now getting more work here in Australia.

The majority of GNG's revenue is derived from work here in Australia, although they do work overseas as well, just less than LYL do. Most of LYL's work is done overseas or else for clients who have mines/processing plants located overseas, and that's mostly still in Africa, and in West Africa in particular.

The next slide slows you the status of their major projects, and also gives you a fair idea of what commodities they are into; it's mostly lithium, gold and copper to a lesser extent, as well as mineral sands.

The next slide shows you the total of all projects and studies that LYL are working on currently, split into commodities, and we see that Diamonds/Gems feature now as well (below), although not in the previous slide - which was just their "Major" projects - so we can assume that those Diamonds/Gems Projects and Studies are smaller in nature. I do note that "De Beers Group" is listed as one of LYL's clients (two slides up from here).

Finally, the Outlook and Strategy slide:

OK, so that's just 12 slides from the deck of 26 - you can view the entire deck here: LYL-Investor-Presentation-FY2023-22-Aug-2023.PDF

I recommend having a look at slides 16 through 18 on "Business Improvements" and "Innovative Thinking", and also slides 12 through 14 on Lycopodium's FY23 Operational Highlights Details.

If you're interested.

Summary: Lycopodium (LYL) is a microcap that has low liquidity (not too many buyers or sellers much of the time and often substantial gaps between the price points of both the bids and the offers, and more often than not a reasonable gap between the highest bid and the lowest offer) that is suitable for patient money that is looking for income plus growth. The company is highly profitable (ROE of 44%), paying very good dividends (which are growing), and the business is growing at a good clip, and is well managed by a Board and Management who own 36% of the company - which provides good shareholder alignment which usually results in positive shareholder-friendly outcomes (such as good total shareholder returns).

Their revenue is diversified across commodities and across geographies, and they are expanding their offering beyond traditional engineering and construction project work.

One feature I have noticed is that a couple of recent contracts (in the past year) have been EPM contracts rather than the traditional EPC or EPCM contracts. E=Engineering. P=Procurement (sourcing everything needed for the project to be constructed and commissioned). C=Construction. M or PM=(Project) Management. So with an EPM contract (sometimes called an EP and PM contract), LYL do the design (E), procurement (P) and they manage (M) the project, but another company does the actual construction work, usually a local company that is based (HQ'd) in the country where the project is being constructed. This is likely another form of risk management. Use a local company to do the actual construction work, employing locals, and LYL manage the whole process and clip the ticket on everything. One example of where they have done this is with the Goulamina Lithium Project in Mali - see here: Award-of-Contract-for-the-Goulamina-Lithium-Project.PDF [14-Nov-2022]

Anyway, while a lot of their work is one-off project work, so their revenue and earnings will be lumpy at times, they are very good at what they do, and the industries that they work in recognise that, so I have good reason to think they'll stay busy and keep growing.

They don't overpromise and then undeliver; they give conservative guidance and then try to beat it, often positively upgrading their guidance as the year progresses and then still beating it on at least one metric.

Disclosure: Of course I do hold LYL (and GNG) in my real life portfolios as well as here on SM.

Further Reading:

https://www.lycopodium.com/

Our Story | Lycopodium Limited

What We Do | Lycopodium Limited

Our Engineering and Project Management Principles | Lycopodium

Where We Work | Lycopodium Limited

Case Studies (lycopodium.com)

Investor Relations | Lycopodium

@Bear77 @Scott NIce call on asx:LYL

Just wanted to give a shout out for there Valuations / comments & Analysis. I didnt make a trade on it though was certainly following. Hope you both made some coin on it or anyone else that took a position. We have to call out the wins people.

LYL reported today and provided guidance for the full year.

Lots of good numbers but NPAT up 30%.

Full year guidance has increased and is now $40M NPAT. They are very good with making forecasts so there is a high certainty they will hit that.

THe price has increased today to 8.30 as I write this. Even so that is a market cap of $330M so the forward P/E is 8 for a business with a strong outlook. Add to this the dividend. Half dividend is 36c. Assuming this doubles for full year that will make the yield (which is usually fully franked) about 8.5% based on the current price.

There is always the chance that the mining services businesses will be re-rated and p/e lifted.

Here is their commentary on the outlook. Monadelphus has some the same yesterday

OUTLOOK

• Demand for base metals is expected to remain strong, in support of the energy transition

• Market for resources used in new and low emission technologies continuing to grow, including lithium, copper, nickel cobalt, graphite, vanadium and manganese

• Demand for gold continues to be buoyed by investment in ‘safe’ assets amid rising inflation and ongoing geopolitical uncertainty, and growing consumption in technology

• The transition to green energy, with the development of systems to operate on low carbon energy sources, maximising waste recovery and reuse, sets the foundation for a period of challenge, innovation and change

• Domestic manufacturing continues to present opportunities for the Industrial Processes sector

24-Aug-2022: As I said in my "Strategy & Outlook" straw for Macmahon (MAH) early this morning (about 2am), the Lycopodium (LYL) result was going to be good. It was. You can view the "#Great FY22 Result" straw by @Rick here: https://strawman.com/reports/LYL/Rick?view-straw=19458 and a "#Management" straw by @Scott here: https://strawman.com/reports/LYL/Scott?view-straw=19464

@Scott has also updated his valuation for LYL: https://strawman.com/reports/LYL/Scott

I think their dividend increase was well hidden in their announcements and presentations, it was certainly not highlighted by them, but it's definitely one of the major positives, and there were a lot of positives.

As I said last night (or early this morning), I hold LYL in a portfolio that is structured partly to provide a decent income stream, and LYL are certainly contributing to that. A dividend yield of 9%, and a grossed up yield (including the full value of the franking credits) of 12.6%. And there's capital growth as well, because the company is growing revenue, profits, EPS, etc. at a very decent clip. There's a LOT to like about Lycopodium. $100m cash in the bank. 29% ROE. 39% of the company is owned by their Board and Management. Lots of skin in the game and terrific results.

Investor Presentation - Full Year Results FY2022

FY2022 Annual Financial Report

FY2022 Shareholder Report

FY2022 Full Year Results Announcement

About Us | Lycopodium Limited

Investor Relations | Lycopodium

Lycopodium Limited | The Science of Engineering, Maximising Commercial Value

They are the quiet achievers. They just get on with the job and deliver. No promotion, no blowing their own trumpet, no fanfare, just brilliant management and a wonderful company that does everything right.

Disclosure: I hold LYL shares.

See Rick's post about today's full year results.

You know that management is conservative when they report a near doubling of NPAT as a simple green arrow with no magnitude. They started the fin year with no guidance, then in Feb said it would be $22M NPAT, then in April $25M NPAT and now deliver $27M NPAT.

Fully franked dividend for the year at yesterday's share price is almost 10%.

Looking forward.

The market is about $200M and then have $100M in the bank! Not sure how much it will rise in price today but this P/E at yesterdays close is 8.5.

If you want a 10% return and assuming they only grow at 5% ad the P/E goes to 10 then you can pay $7.1

Lycopodium just released a very pleasing FY22 results announcement. I couldn’t find the percentage improvements over last year, so I made a few quick calculations below the table:

Revenue +43%

EBITDA +71%

NPAT +92%

EPS + 92%

Cash +31%

…and a nice juicy ROE of 29% which puts LYC back on track with the good ol’ days of 2013!

Outlook:

Given the general outlook and level of committed work, we expect our financial performance in FY2023 to be broadly in line with that achieved in FY2022. We do however undertake to provide further revenue and profit guidance as part of our Annual General Meeting update in November.

A quick valuation on my StockVal spreadsheet puts the valuation up to approx $12 after lifting ROE from 20% to 29%. This was quick and dirty as I still need to rework 2022 equity values, payout ratios etc. I’m just after a ball park for when the market opens.

Disc: Small holding IRL (0.4%)

19-Nov-2021: Lycopodium, once the engineering arm of Monadelphous many moons ago, and involved in a JV with Mono's again now (called Mondium) have seen a decent share price move since they held their AGM yesterday. They closed up +7.4% today at $5.21, after having risen +1.8% yesterday. They closed at $4.44/share on Wednesday, but have finished the week at $5.21, some +17.3% higher. I do hold LYL shares (and MND shares). I also hold GNG shares. GR Engineering (GNG) and Lycopodium (LYL) both specialise in designing and building gold processing plants. That's their specialty, although both also work with other commodities and in other industries. GNG do most of their work in Australia, and LYL do most of theirs in Africa. The following shows LYL's breakdown of revenue by sector and geography:

With 90% of their work coming from the Resources sector in FY2020 and 87% in FY21, it is certainly the main game for Lycopodium:

However, I believe their infrastructure division is underappreciated and has plenty of potential:

And they also do other stuff, like working for CSL, on facilities for base vaccine component production, and on plasma and blood product production facilities...

LYL ticks a LOT of boxes for me. Firstly, they are a company that is solving a problem, i.e. providing services that are clearly needed and are in demand, and what they do is something that I understand - i.e. engineering, design, procurement, construction, and management (including construction management) - so EPC/EP(C)/EPCM work.

They work in sectors that I understand, and sectors with good tailwinds for the most part too. And they are GOOD at what they do, hence they win a lot of repeat work from clients.

They have a top notch Board and Management team, with plenty of skin in the game, so their interests are aligned well with ordinary retail shareholders.

41% of the company's shares are held by their Board and Management. 30% is held by Insto's, leaving only 29% for the rest of us (retail investors). They can go nowhere for months and then have quite big moves (like today), on relatively low volume often, because of that lack of liquidity. They are a microcap (currently just under $200m market cap) company with a small free float, so they can be very thinly traded. On the 2nd and 4th of this month (November 2021), less than 1,000 LYL shares traded over the entire day. The volume for those two days was 299 and 573 shares respectively. While they did move up +7.4% today, that was on volume of only 32,886 shares. That's 32 thousand shares, not 32 million shares. They are very illiquid. And I do like that as well. It means you can quite often pick up shares at low prices when there is no good news and people aren't interested in buying them.

I also like their solid balance sheet, with minimal debt, and the reasonable ROE.

They have their "Mondium" JV (joint venture) with MND (Monadelphous Group) which tackles some fairly large projects, like this one for RIO:

But what they do best, in my opinion, is design and build gold processing plants, on time, and on budget, even during a global pandemic, like this one:

That's the Yaouré Gold Project in Côte d'Ivoire that Lycopodium have just delivered for Perseus Mining (PRU). They won that project award after successfully delivering the Sissingue gold project for PRU, and then completing the definitive feasibility study (DFS) and the front-end engineering and design (FEED) for Yaouré. I don't like investing in gold miners who work only in or predominantly in Africa or some of the other less stable and less predictable parts of the globe, however I do admire Lycopodium's track record of successful project delivery of gold processing plants in Africa. I guess their involvement is usually at the front end of a project's life cycle, and the "sovereign risk" issues tend to pop up further down the track, after the gold plant has been in production for a year or three and the local government wants a larger slice of the pie. When the excrement does hit the air blower, LYL are usually elsewhere working for someone else. Such is the nature of shorter-term contracting work. And that is clearly a risk worth mentioning. It can be a long time between drinks - in terms of very large projects, however I have found that both LYL and GNG have managed to diversify their revenue away from purely gold miners in recent years and have navigated through a variety of different operating conditions with aplomb, i.e. apparent ease. It hasn't stopped them being sold down on occasion, but GNG is now flying, and LYL are just taking off it seems.

But then, with their liquidity issues, it can be hard to tell. Probably need to wait until LYL get over $6 with conviction to call an uptrend. Those charts are over 5 years, and over 10 years the picture looks different, as LYL were trading at over $6 (and up to $7.31) in 2012. Still, as a gold bug myself, and a holder of both GNG and LYL shares in one of my real life portfolios (my income portfolio) - and also here in my SM portfolio - It's good to see the positive SP movement. And the great dividends continue as well. Based on their closing share prices today, the trailing yields for GNG and LYL are 6% (5.97%) and 4.8% respectively, PLUS franking, and both are paying fully franked dividends, so the grossed up yields are even higher. If you can handle the lack of liquidity, and the lumpy nature of a large part of their annual revenue, there is a lot to like about these two little engineering companies. I'm not sure I'd be buying much more GNG up here, but LYL could well have further to run.

Disclosure: I hold LYL, GNG and MND shares.

Further Reading (source of graphics/images used in this straw, other than the Commsec charts): Lycopodium 2021 AGM (18-Nov-2021) Presentation

Further Presso's: Presentations | Lycopodium

Case Studies: Case Studies (lycopodium.com)

Website: Lycopodium Limited | The Science of Engineering, Maximising Commercial Value

27-Aug-2021:  Euroz Hartley's Analyst Harry Stevenson has maintained his "Buy" call on LYL, but lowered his PT (price target) from $6.62 to $6.50.  LYL closed at $4.75 on Friday (03-Sep-2021).  I have attached the update.

Brief Extract:

"We have updated our forecasts to reflect FY’21 results; consequently the price target decreases to $6.50/sh. With strong tail winds in the resources sector and healthy studies pipeline we think LYL can trade strongly through FY’22 albeit from a low base."

Disclosure: I hold LYL shares and I purchased more during the past week in one of my RL portfolios.  I have written about them here and also in the "Gold as an Investment" forum.  [You'll have to scroll through that thread to find relevant posts on LYL - warning: it's a long thread!]  I have also discussed Lycopodium in relation to GNG (GR Engineering) who do similar work.  They both specialise in the design and construction of gold processing plants.

19-Apr-2021:  LPD: Lycopodium to complete EPCM for Lepidico 

15-Apr-2021:  Award Of Ahafo North EPM Contract for Newmont

26-Mar-2021:  Award Of Seguela Contract for Roxgold

06-Jan-2021:  Award of Bombore EPCM Contract for Orezone Gold Corporation

01-Dec-2021:  Award of EP Contract for Sandfire's Motheo Contract (T3 Copper-Silver Project), located in Botswana’s Kalahari Copper Belt

LYL is getting busy again.  GNG and LYL mostly design and build gold and copper processing plants, although they do other stuff also.  GNG mostly work in Australia.  LYL are also based here, but LYL mostly work in Africa and other places overseas, like the Middle East and South America, all of the higher risk places where they can charge more because of those risks and logistical difficulties.  However, with decades of experience and an excellent track record, they rarely stuff up, and they always seem to make money on their projects/contracts.  I hold both GNG & LYL, and both have had a pretty good 12 months.

March 2021:  Euroz Hartleys: Lycopodium Ltd (LYL): Half Year Results

Analyst: Harry Stevenson - Industrials Analyst, +61 8 9488 1429

Price Target: $6.62/sh, Recommendation: Buy

Half Year Results

Investment case

Lycopodium has recently released half year results which were inline with expectations. With completion of Yaoure in December margins remained strong with NPAT at 8.8%. With full year guidance of “approximately $160m in revenue and NPAT in the order of $12m” our focus is increasingly shifting towards FY’22. We are looking towards an emerging EPCM/EPC boom with the with roll out of covid-19 vaccines globally, we expect projects which were previously delayed to be greenlit. This outlook is supported by strong gold prices and record iron ore demand which we expect to continue through FY’22. In the background Lycopodium’s JV with Monodelphous – Mondium looks set for a further growth through FY’22 with completion of the Western Turner Syncline; which should drive stronger margins. Our price target reflects our growing confidence in the EPCM outlook.

Key points

Lycopodium recently reported half year results, key highlights were as follows

• Revenue of $71m, EBITDA of $10.6m and NPAT of $6.3m (EHSL $5.7m).
• Margins were heathy 8.9% at the NPAT level and towards the top end of historical rates between 5%-10%.
• Balance sheet remains strong; cash of $84.4m and net assets of $82.1m.
• Negative operating cash flows of $15.7m – expected given build-up of working capital at 30 June, we look for cash balance to normalise to ~$67m at full year.
• A fully franked Dividend of 10c per share declared (ESHL 9.3c); we now look for 20c full year distribution.
• Contribution from Mondium (LYL’s 40% JV with Monadelphous) up 15% HonH (half on half) and 155% on PCP, we expect this contribution to become more meaningful through FY’22 ($4.2m).
• Management have provided full year earnings guidance of “approximately $160m in revenue and NPAT in the order of $12m” – in line with our previous FY’21 forecasts of $160m Revenue and NPAT of $11.7m.

Outlook

• Demand for EPC/EPCM contractors through FY’21 and into FY’22 is expected to strengthen with the resources sector set to continue to benefit from both the Gold and Iron Ore prices.
• 12 month Price Target of $6.62 is a 9x multiple on FY’22 EBIT forecasts.

Lycopodium Ltd, Year End: 30 June

• Share Price: 5.20 A$/sh (5.21 on 1-Apr-2021)
• Price Target: 6.62 A$/sh
• Valuation (DCF): 6.62 A$/sh
• WACC: 9.0%
• Terminal Growth: 3.0%
• Shares on issue: 40 m, diluted
• Market Capitalisation: 206.6 A$m
• Enterprise Value: 137.6 A$m
• Cash: 84.5 A$m
• Debt: 15.5 A$m

Click on the link at the top for the full report, or open the attached file below.

Disclosure: I hold LYL shares.

24-Feb-2021:  1HFY2021 Half Year Results Announcement   plus   Interim Financial Report 31 December 2020

and:  1HFY2021 Investor Presentation

Lycopodium Records Solid Start for FY2021

Lycopodium Limited (ASX: LYL) has delivered a solid result for the first half of 2021, with net profit margin remaining strong, at 8.8%.

For the six-months ended 31 December 2020 (“1H FY2021”), the Company generated revenue of $71.0 million and net profit after tax (NPAT) of $6.3 million.

The company Directors have approved a fully franked interim dividend of 10 cents per share, payable on 8 April 2021.

Lycopodium’s Managing Director, Peter De Leo, said: “The first half of this financial year has been very positive, with the successful completion of Perseus’ Yaouré Gold Project in Côte d’Ivoire in December, ahead of schedule and under budget despite the challenges presented by COVID-19, and the recent award of two substantial African resource projects.”

In December, the Company was awarded the contract to provide Engineering and Procurement (EP) services for Sandfire Resources’ Motheo Project (T3 Copper-Silver Project), located in Botswana’s Kalahari Copper Belt, one of the world’s most exciting and emerging copper producing regions. This followed the earlier completion of the Definitive Feasibility Study (DFS) and Front End Engineering and Design (FEED) for the project.

In early January, Orezone Gold Corporation awarded the Company the contract to provide Engineering, Procurement and Construction Management (EPCM) services for the delivery of its Stage 1 Oxide Process Plant for the Bomboré Gold Project in Burkina Faso. Again, this award comes on the back of earlier works completed on the project, including the initial study work and FEED, undertaken out of Lycopodium’s Toronto office.

“Our ability to convert initial study and engineering works into project delivery is testament to the strong client relationships we have established and our clients’ confidence in us,” said Mr De Leo.

Having successfully completed its largest EP(C) contract to-date in 2020, being the Yaouré project, the Company has maintained its strong safety performance, with a Lost Time Injury Frequency Rate (LTIFR) of zero for the rolling 12 month period to January 2021, against 2.5 million manhours controlled.

“Delivering projects safely for our clients remains a fundamental metric of success and our excellent safety performance is a credit to our delivery teams on the ground,” said Mr De Leo.

While COVID-19 continues to influence economic confidence globally, impacting project commencements, the forward outlook is considered positive, with a strong pipeline of opportunities identified. Based on the anticipated timing of new projects commencing, the Company provides guidance for the full year of approximately $160 million in revenue and NPAT in the order of $12 million.

“Our focus will continue to be on working in partnership with our clients to enable them to progress their projects to completion, on time and budget,” Mr De Leo said.

--- end ---

[I hold LYL shares.  71% of their H1 revenue came from Africa, and particularly West Africa, and 24% from Australia.  In the pcp (prior corresponding period, being the 6 months to 31-Dec-2019) it was 79% from Africa and 16% from Australia.  They do the same stuff that GR Engineering Service (GNG) do, except usually on a larger scale and for larger companies, and mostly overseas.  Both GNG and LYL are WA companies based out of Perth and both specialise in designing and building gold processing plants, after doing the studies (PFSs, DFSs and BFSs, being Pre-Feasibility, Definitive Feasibility and Bankable Feasibility Studies).  Both also work for other industries, meaning other miners and in other industries outside of the resources industry, but with both LYL and GNG it is working for gold miners that provide their main source of revenue.  I like them both for a pick-and-shovel-play on gold.  When they are flying, as GNG are starting to again now, their dividends can also be quite good, market-beating in fact, i.e. above average, although revenue and therefore dividends can be quite lumpy at various times.]

30-Nov-2020:  Euroz Hartleys Securities: Lycopodium (LYL): Initiation of Coverage - Commercialising Science

Analyst: Harry Stevenson, Recommendation: Buy.

• Share Price: 4.87 A$/sh
• Price Target: 5.61 A$/sh
• Valuation (DCF): 6.00 A$/sh
• WACC: 9.2%
• Terminal Growth: 2.5%
• Shares on issue: 40 m, diluted
• Market Capitalisation: 193.5 A$m
• Enterprise Value: 94.3 A$m
• Cash: 102.9 A$m
• Debt: 0.5 A$m

Commercialising Science

Investment case

Lycopodium Limited (LYL) provides integrated engineering, construction and asset management solutions to global resource markets. Established in 1992 and listed on the ASX in 2004 the company has a 28-year track record of delivering EPCM/EPC contracting and engineering services to a diverse range of industries.

The company employs around 600 staff specialising in providing lifecycle services from concept and feasibility through to construction and plant optimisation. Recently the company has developed a reputation for providing services to the growing West African gold sector.

FY’20 Results

LYL provided a solid set of FY’20 results generating revenue of $211.1m and NPAT of $11.8m; in line with guidance of $200m and NPAT of $11.5m. Supported by staff the company was relatively unaffected by Covid-19 and all projects were completed on schedule. LYL benefited from favourable payment terms on the Yaouré Gold project for Perseus, generating operating cashflows of $62m for the year. LYL continued its strong track record of dividend payments, maintaining a fully franked 20CPS full year dividend or 68% of earnings.

Outlook

While FY’20 results were generally strong, the orderbook does not support the same level of activity, with two major projects now complete we look for a decrease in the level of EPC activity and consequently forecast revenue falls through FY’21; however, we forecast stronger margins as backend project profits are recognised. We expect activity in Mondium to continue to ramp through FY’21 picking up some of the slack in the LYL’s orderbook. With a number of major studies in the pipeline we expect EPC contract awards to occur in the back end of FY’21, positioning the company for a stronger FY’22.

Valuation

LYL continues to lag the wider resources led recovery and its industrial peers. Trading at $4.87 LYL continues to trade at a discount to preCovid high of $6.40. We expect LYL to retrace some of this lost ground as existing studies and EP contracts convert into new contracts through the second half of FY’21.

We initiate coverage with a 12-month price target of $5.61 based on a fairly basic, although somewhat undemanding, capitalisation of forecast 2021 and 2022 earnings. LYL has traded back given the general market conditions and a weaker orderbook outlook, we look to contract wins in the second half of FY’21 from a large pipeline of opportunities to re-rate the stock. In the meantime, LYL trades 6x EV/EBIT with $100m in the bank.

Other Matters

LYL’s capital light business model is cash generative; converting ~100% of EBITDA to free cashflows and over time enabling the business to pay ~60% of earnings as dividends, while continuing to fund internal growth. The stock remains firmly held by management and insiders, aligning management and shareholder interests; however, this does come at the expense of liquidity.

Summary

LYL has established a reputation for delivering projects on time and to client specification. While the current orderbook does not support the same level of activity through FY’21 the business is well positioned to capitalise on sustained gold values and ramp up on project activity as Covid-19 vaccines roll out through 2021. Guided by experienced management with track record of managing tendering risks, we expect LYL to continue to trade up from current levels as LYL converts a number of studies to EPC contracts. We initiate coverage with a Buy Recommendation and a 12 month $5.61/sh price target.

--- click on the link at the top for the full initiating coverage report on LYL by EH (Euroz Hartleys) ---

[I hold LYL shares, and I bought more LYL earlier this week.]

25-Mar-2020:  5:45:  FY2020 Guidance - COVID-19 Impact

Withdraws previous guidance, will pay the interim dividend as planned, has very strong balance sheet with no net debt.  Their SP is up, not down, after this announcement, suggesting the downside was already priced in.

26-Feb-2020:  Hartleys:  Lycopodium (LYL):  Solid as usual, though delays continue to impact

Lycopodium Limited (LYL) has delivered 1H20 NPAT of $9.0m, representing growth of 5% on 1H19 ($8.6m). An interim dividend of 15cps has been declared, in line with 1H19.

This was another solid result from LYL with management reporting that project execution continued to be strong.

Delays again impact guidance…

Unfortunately, a common theme for LYL, and indeed the broader sector, over the last 12-18 months has been continued delays to project commencements.

LYL has provided updated guidance for revenue of $220m and NPAT of $14.1m. Previous guidance was for revenue of $220m and NPAT “generally in line with FY19” ($16.5m).

LYL notes that guidance has been impacted by delays to new project commencement impacting on revenue. With project performance solid as expected, this implies that initial internal revenue expectations were likely higher than stated guidance. Our FY20 NPAT estimate reduces to be in line with updated guidance.

…though outlook remains strong

LYL advises that recent awards of several projects and studies will support revenue growth into FY21 as new projects ramp up later this year.

Additionally, LYL notes that tendering activity remains strong, as does the pipeline of identified prospects.

The outlook for gold remains strong, with current prices of US$1,640oz providing support for developments, though securing project financing continues to be a challenge for some.

Mondium (LYL 40%) has commenced work on its $400m contract with RIO at Western Turner Syncline, which is expected to complete in 1H22. Meanwhile LYL continues work on its key EPC project at Yaouré for Perseus (PRU).  PRU recently announced that the project remains on track to achieve its stretch target of first gold in December 2020.

Cash position very strong

LYL continues to maintain its focus on having a very strong balance sheet.  At 1H20 net cash stood at $111m, buoyed by receipt of material payments in advance during the period. We estimate that on a pro-forma basis LYL has net cash of ~$77m (see page 4).

Buy; Price Target $6.57

LYL is a very well-managed business. While project delays continue to impact, the outlook remains positive with LYL well-positioned to benefit.

We maintain our Buy recommendation. Our price target reduces to $6.57 / share from $6.76 / share previously.

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I do hold LYL shares.  They closed at $5.50 today (28-Feb-2020).