AYSI - I've posted some updated thoughts on AYSI's valuation on the AYSI board. There are definitely some warts with this one that are well known to those on this board (suspension of quarterly communication, lackluster PR's, etc...). But I thought I'd share my thoughts with the group in case anyone is interested...
I've spent a good amount of time the last few days trying to triangulate what the fair value of Alloy is given the company's latest financial results.
During that process, I put together some additional tables that I plan on sharing here later this evening that show the value of AYSI's shares based on a variety of multiples.
Specifically, I have a table that looks at what AYSI's share price would be if you value the company at 1x EBITDA, 2x EBITDA, 3x EBITDA, etc... I also put together a table that looks at what AYSI's share price would be if you valued the company at a variety of revenue multiples and P/E multiples.
In terms of valuing companies, I tend to focus on Enterprise value, and in particular, Enterprise Value to EBITDA multiples. This is typically what Wall Street investment banks use when valuing companies, especially in the industrial sector. By using Enterprise Value to EBITDA multiples, you’re essentially looking at earnings that exclude any non-operating items (EBITDA) that are available to all stakeholders in the business (debt holders and equity holders) to value the entire business (enterprise value).
To get from the enterprise value to the company’s share price, you need to adjust for items such as debt, cash, and other non-operating items which have value, but are not producing earnings that would be included in EBITDA.
So one would subtract debt from enterprise value, because it is the debtholder’s claim on the business. You would add cash on the company’s balance sheet, because it is a non-operating asset and is not generating earnings that are included in EBITDA.
In the case of Alloy, you would also add in the value of the Indonesian land and investment, which is value that AYSI could realize if it decided to sell the asset. The Indonesian land is not currently generating earnings that are included in EBITDA.
So what multiple would you apply to AYSI’s EBITDA? Similar to a P/E approach, the best way is to look at similar companies in the industry and space and see what multiples they trade at. The companies that I’ve looked at are mostly Australian based: Austin Engineering Ltd. (ASX:ANG), Bisalloy Steel (ASX: BIS), Bradken Limited (ASX: BKN), and Joy Global (NYSE: JOY). Joy Global and Bradken are much more diversified and are significantly larger than Alloy. They trade at 7.2x EBITDA (Bradken) and 6.0x EBITDA (Joy). The other two comps are smaller like Alloy. Austin Engineering is a provider of off-highway dump truck bodies; hydraulic excavator and shovel buckets; wheel loaders; water tanks; lubrication service and fuel modules; tire handling equipment; and various materials handling products. They have a market capitalization of $250 million. Austin Engineering trades at an EBITDA multiple of 6.8x.
The most comparable company in terms of business and size is Bisalloy. Bisalloy sells quenched and tempered steel plates under the BISPLATE brand name. That is all they do, similar to Alloy. Bisalloy has $80 million of revenue and $8 million of EBITDA. Alloy has $28 million of revenue and $8 million of EBITDA. Alloy has always enjoyed higher margins due to its high quality, proprietary product. So if both companies are earning the same amount, then shouldn’t the value of the businesses be similar?
Well there are a few differences. Bisalloy trades on a national exchange. They also report earnings semi-annually, versus Alloy’s current annual release. One would expect Alloy to potentially be valued at a lower multiple due to those factors.
However, in reality, based on current prices of both companies, there is a huge disconnect between the two valuations. Bisalloy trades at 5.9x EBITDA, or approximately a $50 million enterprise value. This multiple is similar to the multiples of the other companies in the industry mentioned previously.
Alloy on the other hand, based on a $0.83 per share price, is valued at an enterprise value of just $2.7 million, or a multiple of 0.4x EBITDA!
If you think it should be valued at half the multiple of Bisalloy, due to the past communication issues, than Alloy would be valued at $25 million, or 3x EBITDA, implying a share price of $2.09, a 152% increase from current prices.
I plan on posting the tables showing the various Alloy share prices based on multiples later this evening…
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