Thread by @SeanPeche

1/
Can I tell you about a company that grew Adjusted EBITDA 8x in H1 & is below 3x earnings?

Grew? I thought you were a Value guy

I am

And we want growth

we just don’t want to pay too much for it

What’s with the EBITDA reference, I thought you don’t like that metric?

2/
I don’t really

Because companies with a huge & unaffordable interest bill can look great with Earnings BEFORE Interest…

They just look shoddy afterwards

But I look at EBITDA because it shows me a different angle

Like looking at yourself in the mirror at various angles

3/
although I do that less these days..

I just don’t STOP at EBITDA

Because it's like stopping at a good looking Cash Flow number

but not noticing it’s due to lower inventory – you can’t cut inventory forever

Or stopping at the Cash on the Balance Sheet

but not spotting

4/
the huge accounts payable balance that needs payment the day after the quarter-end

Now convention says to use Enterprise Value when using EBITDA

Mkt cap + debt and - the cash

The theorists think it’s harsh to penalise the valuation with the debt AND the interest bill

5/
which is why you add the debt but ignore the interest - EBITDA

But I think high debt deserves harsh treatment

Because I don’t want to lose my shirt on any stock

especially if I’m not looking good at various angles

Now you deduct cash in the EV calc

while remembering

6/
my point about inflated cash & high payables

Net current assets is R4.5bn and cash is R3bn so I'm safe in this case

Now for the debt, you normally use long term, interest-bearing debt but let’s be conservative and use all non-current liabilities of R7bn (deferred tax,

7/
environmental provisions) because if you acquired the entire company, they’d be yours

So EV = mkt cap of R8bn + R7bn – R3bn = R 12bn

A conservative number

They made R2bn in H1 so shall we go with R4bn for the year?

= 3x EV/EBITDA

Except H2 should be FAR more profitable

8/
because the Rand Coal price is currently 50% higher than H1’s average

And operating leverage doesn’t get better than with coal companies

Sorry, did I not tell you this was Thungela Coal (TGA LN, TGA SJ)

Oh, you want Green energy?

Like Siemens Gamesa the massive wind

9/
turbine guys?

that made R11bn of EBITDA in H1

only 5.7x TGA’s (lower if I use my H2 guess)

but has an EV of R400bn

nearly 50x TGA’s

yes, 50x

oh and they dropped R8.3bn of negative cash flow in H1

and in Q3 complained of:

“a very difficult environment…the impact on

10/
backlog profitability of rising commodity prices … higher-than-expected ramp-up costs …resulted in a provision for onerous contracts”

with a share down 35% since Jan

You’d rather own that?

Be my guest

I just think if you really want to make a difference & help

11/
the planet, buy solar panels, energy-efficient appliances/cars, bikes, drink oat milk lattes, eat plants & watch #seaspiracy

Buying a “green” stock / ETF might make you feel good

But it won’t help your returns

Nor your angles