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SDM - Sedgman Limited


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They are in the coal cleaning and transporting business in australia. Market cap of 100m, but net cash of 75 million. They also did generate some nice free cash flow in the last 2 years. Looks like this one went down too deep on all the horror surrounding coal. Anybody looked deeper into this name?

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I think the situation with coal is this. There will probably no new coal plants in the US with the new regulations. So coal will slowly die over the next 10-20 years in the US. Still some of it will be used for steel production. But in the rest of the world coal consumption will continue to rise imo.

 

What is happening in the US, lobbyists are blocking export of natural gas, and to export LNG to china and the rest of the world you need those LNG terminals. This is only slowly happening. Countries like China and india will continue to rely on coal I think. They have no other choice. Nuclear will only be 15% by 2020, and they cannot rely on wind and solar. And demand for energy will only rise.  And reduction here has been very slow, central government in China has not been very succesfull to reduce coal consumption. It is almost certain it will continue to rise here in the next 10-20 years, making up for alot of lost demand in the US.

 

So once all the bad apples are filtered out of the coal industry I think there is a decent chance it will pick up in the future.

 

Coal will die in the end, but not within the next 10-20 years. Even people who are very pessimistic on coal dont think consumption will fall in the next 10 years. I think there has been oversupply and once that has filtered out, this stock will soar in at least one more coal upcycle. It's trading 2.5x 2011 earnings now.

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I have had a cursory look at Sedgman's but know a little bit from working in the area and industry.

 

Sedgman's basically build and operate wash plants for processing coal, predominantly on the east coast of Australia. They have gotten smashed along with every other coal exposed mining services business in Australia since coal prices began their free fall in in mid 2012.

 

Despite earnings being pretty ugly the cash flow position isn't bad. Things have to be pretty bleak to justify the current valuation given the significant cash on the balance sheet. The biggest impact has been a shift throughout Australia's coal industry from contractor-operator to owner-operator wash plants (and entire mines for that matter) in an effort to cut out a margin and reduce operating costs. Sedgman's have lost several juicy contracts operating wash plants over the last 18 months gutting their revenue base.

 

A lot of the marginal expansion and greenfield coal projects have been shelved as well, reducing the need for new wash plants or upgrades. The one main counterpoint to this however is that most of the coal companies in Australia are hostage to take-or-pay rail contracts. This means that many companies are still expanding output because its cheaper to produce more coal at a loss than shutdown operations and produce no coal and still pay for unused rail capacity commitments.

 

The obvious downside to this is that supply doesn't decrease in the face of lower demand, sending prices lower. We are seeing that at the moment with Australia's east coast thermal coal index dropping to new lows of $73 per tonne this month, a price at which the majority of the industry is bleeding money.

 

I work in the coal industry on the east coast and Sedgman are regarded as an industry leader in wash plant design and construction. They are making a concerted effort to diversify outside of coal and also outside of Australia which is a positive move, much of their expertise in materials handling plant design is readily applicable to any other mineral or commodity applications.

 

Another beneficial factor is that a wash plant is an enormous bit of infrastructure and cannot be easily replaced. For mobile plant, it is a buyers market in a big way at the moment. Instead of buying new equipment, mining companies can hire equipment cheaply because so many contractors have machines parked up doing nothing and are still incurring enormous fixed costs. A wash plant on the other hand is not something you can simply park up (without shutting the whole mine down), or hire from another company down the road.

 

Unlike most other mining services company Sedgman do not have a significant amount of property, plant, and equipment. Because they are so asset light i believe they can reduce costs (sack people, basically) to match a declining revenue base. They cut back staff in 2013 but i don't think they were as ruthless as most other companies and probably have room to move here if forced by further deterioration.

 

I have been a bit hesitant to pull the trigger on Sedgman because my employment is tied to the same drivers but i will probably have another look.

 

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  • 10 months later...

Cracking result from Sedgman.

 

Net cash up to $90m, $4.7m of NPAT for the half. CFFO of $16.6m, Capex of $0.5m giving a Free Cash Flow of $16.1m for the half.

 

3.5 cent interim dividend announced giving a yield of around 10%. Their pipeline is growing and they have successfully diversified it geographically and across commodities.

 

The biggest risk is a squandering of their enormous cash position, hopefully they continue to raise the dividend or initiate a buyback program.

 

This stock is incredibly cheap at a market cap of $146m.

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  • 2 weeks later...

There is a lot of value to this stock.

 

“Dividends henceforth will match the company's profit”. 100% payout ratio going forward. So the current 10% yield could be a lot higher.

 

A base case of ~30m FCF calender 2015 as their Order Book is ~60% higher than as reported a 1/2 year ago.

 

Priced at 2-4x Calender 2015 FCF ex-cash. .43 cash/share with current .75 share price.  Calender 2015 EBITDA valuation of 1.5x-3x EV/EBITDA.

 

The stock is worth at least double current price and the dividend should be a solid catalyst.  The company is more diversified than it ever has been, made it through the OZ mining downturn very safely, and its Order Book and Pipeline confirms that. The stock should timely rerate. There were no analysts on the last conference call.

 

I own Sedgman and Logicamms, and as to not be over exposed to AUS mining and O&G and infrastructure, I sold my position in Emeco to do so.

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  • 5 months later...

Great result from Sedgman.

 

Market Cap of $178m

 

$16.8m NPAT including a $2.3m write-down on physical assets.

$42m of Free Cash Flow.

Net Cash up to $109m.

 

Enterprise Value of $69m.

Levered FCF multiple of 1.6x, yield of 61%.

 

Boosted dividend up to 6 cents, paying more than 100% of NPAT moving forward thanks to a special dividend inclusion.

 

Dividend yield of around 15% at that rate.

 

Company operates in a highly technical area where they have established IP.

 

2016 order book up over $500m from $360m at the end of FY14. Would like to see them win another big project contract in the next 6 months to continue to grow.

 

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FY 2015

Great results. Happy owner.

 

They did 356m FY 14. 390m FY 15. One way of looking at a MOS could be say their revenue dropped to 300m and EBITDA margins fell 16% to 7%. An 8x multiple on their FCF and add in the .47c of net cash and the price is .86AUD vs .81AUD today. The 300m revenue is not based on maintenance revenue numbers, I'm just suggesting that numbers could fall a lot and they could still be undervalued.

 

I'm getting almost 18% dividend yield for next year as they are paying out 100% as policy and continuing their .022 AUD per half year on top of that. Impressive order book vs PYP.

 

Some things to note:

They state "underlying NPAT" as inclusive of "revenue from settlement of contractual claim of previously impaired debtors". I believe this was from a PYP so including in this statements in underlying NPAT seems misleading to me. AQZ did the same thing last statement so it may just be accounting policy.

 

123m revenue is from two customers in FY 15. Risk there.

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  • 4 weeks later...
  • 3 months later...

CIMIC offer to buy shares it doesn't own for 1.07.

 

http://sedgman.com/files/documents/CIM%20FINAL%20UNCONDITIONAL%20OFFER%20FOR%20SEDGMAN%20BY%20CIMIC.pdf

 

 

Board says don't do anything until we evaluate.

 

http://sedgman.com/files/documents/SDM%20Directors%20response%20to%20CIMIC%20offer.pdf

 

Offer is unconditional, which means CIMIC can go out in the market and buy shares right now for 1.07 - hence no arb spread in the stock right now.

 

I put this at ~5.7x FCF bid.  What's nice is they can self-fund most of it with the cash on the B/S

 

Holding for now to see if it gets raised or someone else comes along.  But that's subject to change at any time because it's nice to book a win these days (too few and far between)

 

Great idea and analysis, to the others on this board

 

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I'm also holding for now. The company looks very cheap still. But given it's likely CIMIC gets control and we're left in the dark as to their capital allocation plans and they have made clear that de-listing the company from the ASX is a strong consideration, I may sell.

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