Forum Archive Index - October 2003
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[sharechat] LPC Revised Outlook
I've been running the numbers on this one, just to get a better idea
where things are going. The board and management are still working
on the 'strategic new direction', so I will have to do their homework for
First the debt position. For FY2002 if I take the net profit and divide it
into the long term debt I get a minimum payback period of:
$16.31m/$16.04m= 1.02 years
You can't get much more conservatively geared than that. For FY2003
the position is superficially much the same
LT Debt/ NPAT= $12.943m/$11.625m = 1.11 years.
However, I don't believe that this tells the whole picture. On closer
examination of the accounts there seems to be a heavy imbalance
between short term liabilities and current assets. Reading between
the lines I think this represents the LPC half share of funding the
automated coal unloading system, a project jointly undertaken with
Solid Energy. It seems that LPC is financing its half of the
construction cost with shot term debt. Because the coal facility has a
design life of 25 years, I don't believe it is reasonable to regard this as
'short term debt' regardless of what accounting conventions say you
can do. Adding $13m of short term debt, back into the long term debt
ledger will fix this indicator:
($12.943m+ $13m)/$11.625m = 2.23 years.
That means the company is still very conservatively geared in my
opinion, and should be able to fully fund further replacement and
enhancement projects without having to request more funds for
shareholders. I am sure the Christchurch City Council will be pleased
to hear that!. This is where LPC was on balance date (30th June).
Now we are in a position to take an educated guess at where they
want to be in FY2004. It looks like LPC are going to have to
capitalize $5m extra of cost overrun debt into their coal handling
assets. Now let's assume LPC management decide to push ahead
with a replacement fuel handing wharf and a brand new dedicated coal
ship wharf to be completed in FY2004 as well. Assuming all that
building will go ahead in one year is probably extravagant, but such
aggressive assumptions will be useful in estimating LPC's worst
possible financial position.
We were told at the AGM that each new wharf would cost around
$15m to construct. So let's say debt will balloon in FY2004 by:
($15m+$15m+$5m)= $25m. At an effective borrowing rate of 6.4%,
this means an extra annual interest bill of $1.6m. Construction of
these new assets will result in a higher depreciation bill too. For the
two new wharves, that LPC can depreciate away over forty years, this
amounts to ($15m+$15m)/40= $0.75m per year. Once the coal facility
is fully on the books and capitalized over its twenty five year life, the
extra depreciation is $31m/25=$1.24m per year. Adding the extra long
term interest to be paid to this higher depreciation we can expect LPC
profitability to deteriorate by:
$1.6m+$0.75m+$1.24m= $3.59m per year.
These are straight increases in cost that come off the underlying
bottom line profit. If we take the underlying profit to be $13.5m ( this is
FY2003s $11.6m with two thirds of a one off $2.9m employment
agreement settlement added back in) that gives an expected profit in
$13.5m- $3.59m= $9.91m
Divide that by the number of shares on issue (101,995,040) and we get
a net profit of 9.7c per share. I'll take that as the long term yield as
LPC have a history of paying out all of their 'long term profit' to
Based on today's savaged share price of $1.70, that means an
imputed yield of 8.7%. To me that seems a fair yield for a fair price.
I think Mr Market has got it right with this one. I'll be holding my shares
At this point some smart trader will produce a chart that shows LPC
broke it's uptrend last Friday and everyone should sell this morning. I
note that 80,000 shares were sold before 1pm today. If we take out
the 68% of shares in Christchurch and Ashburton council management
that are not for sale this means that
80,000/ 36,638,412= 0.24%
of free float shareholders were able to 'get out'.
By my reckoning 'getting out at $1.70' is simply selling at fair value
anyway. This shows a fallacy in the share trading argument when
applied to low liquidity shares. 'Getting out' on paper is not the same
as 'getting out' in practice. That is why I have always considered
LPC as one for the income investor. I hope none of you traders were
'caught out' holding this share.
discl: hold, and will continue to hold, LPC in my 'income' share
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