FGE - Forge Group

[notting]

It was an interesting whatching many analysts flip from talking up the merits of owning the contracted diggers rather than the mine owners because the work would, I donno, go on regardless of gyrations in resource prices. Seem to be singing a different tune now as all these little hard working things have been spanked as much lately.
China's still looking pretty scary if you ask me.
I reckon they are still very nervous about inflation and the Arab springs. Hence no broad brush stimulus.
May they live in interesting times!

 

[tinhat]

I got out of FGE at a good time - a rare good timing for me. I haven't looked over FGE numbers recently, I haven't looked over any annual reports recently - too busy trying to make money by conventional means. Yet, DCG and BOL - I made some comments recently about those companies in their respective threads. I find it strange that anyone looking at FGE is not also looking at DCG and BOL which both have merits.

 

[yoelowen]

I admit to being only a beginner investor but there was a few red flags that the report brought up for me:

The extra cash appears to just be them not having paid there payables.......if compared to last year

The acquisition seems to be a great one (diversification etc), but I cant figure out whether they have paid that 16-18m already they owe on the acquisition (this year and next) or not and if not how it will show up on the HY12 statement. It appears if you take out CTEC then growth is quite modest, and there is also a -10mil loss under the name of forge group holdings...that could of been used to hide operating costs of the other divisions?

Capex in the cashflow statement was also unusably high? (cant seem to figure out why)

overall it appears to be a solid company but I start to question the future when the books look like they have been cooked a little. That and the fact that China seems like its slowing down is enough for me to stay out at the moment. I would love to get other opinions.

I got out of FGE at $4.50 but i rode it allthe way up (and down) from $3.90 or thereabouts. Cant seem to get my timing right at all.

 

[tinhat]

I'm not much of a reader of financial reports. While the CTEC acquisition has diluted return on assets substantially, return on equity is holding up nicely. I bough back in today at 4.18 based on the announcement of the latest RIO contract for a power station at Cape Lambert. The CTEC acquisition has turned out to be the great deal it looked like it had the potential to be at the time and should provide good synergies (flow on business) for the rest of the group.

Anyway, back in with a much smaller holding this time but strapped in for $7 target price.

 

[notting]

I bough back in today at 4.18 based on the announcement of the latest RIO contract for a power station at Cape Lambert.
Anyway, back in with a much smaller holding this time but strapped in for $7 target price.

You baught in on an announcement. Bit dangerous. I'd have a stop just below 4 and be looking to take some off at 5.

 

[Intrinsic Value]

I'm not much of a reader of financial reports. While the CTEC acquisition has diluted return on assets substantially, return on equity is holding up nicely. I bough back in today at 4.18 based on the announcement of the latest RIO contract for a power station at Cape Lambert. The CTEC acquisition has turned out to be the great deal it looked like it had the potential to be at the time and should provide good synergies (flow on business) for the rest of the group.

Anyway, back in with a much smaller holding this time but strapped in for $7 target price.

I bought some more on Friday before I heard the announcement today.

Still well undervalued IMHO.

The fundamentals of this company are not currently being reflected in the share price.

But things will turn around I am sure.

I am holding medium term so not worried about short term flucuations as long as they are continue to deliver strong results.

 

[So_Cynical]

• IMD - IMDEX
• NFK - NORFOLK
• SDM - SEDGMAN
• EHL - EMECO
• AJL - AJ LUCAS

All closed at a new 52 week low today...The sector has the serious wobbles, one thing i do like about Value investors is their willingness to back their judgement. i must admit to being a little afraid myself.

 

[So_Cynical]

Forge got to $3.75 today somehow impressive, well the recovery back to the 3.95 close was.

Any of the value brigade jumping in???

 

[Ves]

Any of the value brigade jumping in???

I had a think about this.

Here's an exercise: pick some of the popular mining services companies. Make a list of their EBIT / EBITDA and EBIT / EBITDA margins in about 2005-2007 period.

Now have a look at them in the current set of figures. Most of them, if not all of them, even the serially poor performing companies before this period, are much higher in the last financial reports for 2012.

Most of them are substantially higher. Some of these companies have grown EBITDA by as much as 5-8 times in only 5 or 6 years. Then you realise that very few of these businesses are truly scalable. To get this far they relied on massive amounts of capex, or large acquisition binges (or worse mountains of debt) to grow. Expanding margins in the super-cycle helped this.

The scary thing is this, 2012 could be the peak of this part of the cycle, or in fact the whole super cycle, yet analysts predictions for most mining services companies show further margin expansion for 2013. For those that have changed, the margins are only slightly less than 2012. Compare these to the bottom of the cycle. The gap is astonishing.

Most of these companies, except those with scalable business models that can still produce hearty cash flow under the stresses of the cycle and maintain fairly good margins are going to get hit with the ugly stick many times yet. For instance, Forge's equity has gone up almost 11 times from the 2007 base, and revenues have increased about 10. It doesn't look scalable to me! What I really mean by this is that there is very little variable costs in these types of businesses... they're smoke if things slow down.

Forge's EBITDA margin was 6.4% in 2007.

It peaked at about 18% in 2010. It was about 11% in 2012. I don't think there is any competitive advantage in its business model, and I don't think the current margins are sustainable. I would expect a lot of mean reversion if the cycle continues to cool.

P/E ratio is useless for cyclical companies, because there is always a large question over the robustness of the 'E.'

Value investing isn't about buying companies just because they have fallen 50%.

 

[So_Cynical]

P/E ratio is useless for cyclical companies, because there is always a large question over the robustness of the 'E.'

Value investing isn't about buying companies just because they have fallen 50%.

Good post, well summed up...yes i know value investing isn't about buying companies just because they have fallen x% however i do know that FGE is a darling of the value brigade as was MCE before the robustness of there 'E.' was proven to be dodgy.

Its just that i can see that there will be good money to be made in this sector if investors can get the timing right, but i have to admit that im very uneasy with how one goes about choosing that time etc.

 

[craft]

however i do know that FGE is a darling of the value brigade as was MCE before the robustness of there 'E.' was proven to be dodgy.

Not all value investors - just one particular strand that are armed with a secret formula for valuation and a fondness for extrapolating recent results. (and just quietly – that’s not really value investing)


It’s an interesting read to go back through these threads.

 

[McLovin]

I had a think about this.

Nice post V.

 

[craft]

Nice post V.

Yes

Almost reads like it should be be signed off with

Prudent Investing.

 

[Intrinsic Value]

Not all value investors - just one particular strand that are armed with a secret formula for valuation and a fondness for extrapolating recent results. (and just quietly – that’s not really value investing)


It’s an interesting read to go back through these threads.

You cant compare FGE to MCE.

FGE has far superior management and balance sheet to MCE. FGE also has a nice cash reserve and no debt.

There is huge paranoia going around at the moment about the mining boom being over and the sky falling in.

For quality mining service companies this could be a bonus as some others go by the wayside.

The iron ore price is down at the moment but I dont see it being a long term thing.

China stockpiles are dwindling and sooner or later they will get active again.

Of course mining services companies are more risky than many other sectors because of the nature of the business itself. But the rewards are also greater.

I bought into FGE when it was just over 2 dollars a few years back and then sold half then bought more then sold more and just recently bought more. And if it goes a bit lower i might buy more again.

 

[Ves]

Nice post V.

I think between craft, yourself and a few others, and even a post I made late last year in one of these threads, the talk has always been about margin reversion. Well spotted perhaps craft, Cam at HC is a good guy.

 

[Ves]

Not all value investors - just one particular strand that are armed with a secret formula for valuation and a fondness for extrapolating recent results. (and just quietly – that’s not really value investing)

I actually have a "nostalgia" for this company because I did use one of those secret formulas to value it when I first started. I am fairly certain it was the first one I ever did! I think I posted about it amongst my first posts, the result was something like $8.50 a share.

I never made a purchase because it didn't seem logical...

The problem is, as you discussed in the TGA thread, and we discussed also about PMV, is that past ROE and current ROE do not always belie what the future will be!

In a boom the returns in a competitive industry (and I believe this one mostly is) can be magnified by many degrees. My opinion, and I am sure many others share it is that once the super-cycle recedes and margins / profitability starts to regress back to the mean (there's a few mining services stock that have been listed for a long time to compare) most of these companies will have ROE much, much closer to the weighted average cost of capital of the market.

Therefore, my assumption would be you cannot and should not put their ROE in a secret formula that includes a "perpetuity" calculation. You shouldn't assume infinite life of a company, especially in a competitive industry! Refer to the TGA thread of how to value a company with cost of capital that signifies a competitive industry..

I think this will occur in a combination of two ways with companies like FGE:

a) they will continue to expand (because no one likes stagnant revenues / profits) and they will either make dilutive acquisitions or receive diminishing returns on their capex / retained earnings / and possibly capital raisings to fund these. If revenues are growing at the same pace as equity in a boom, then surely it would be far less in the future...

b) Margins and profitability indicators will regress back to historical mean levels

IV - I am not sure where you are reading that China's iron ore stock piles are dwindling... I am reading the opposite. I don't trust much of what I read about China... especially from their government sources.

 

[Ves]

I will also say that high margins in any industry invite more competition... so, in essence it could be a double whammy. These things can take a while to be felt, of course, so be careful when making assumptions in any valuation!

 

[tinhat]

Well I've not let the trend be my friend in buying back into this one at this time and I've marked notting's words about buying on an announcement. I don't have a stop loss in place at the moment. I've missed the bottom on this stock by a few days.

I think revenue and profit forecasts are looking pretty good for FY13 and FY14.

I don't know how long I will hold FGE for, I might consider selling if it gets to $5 in the short term. I also think that MIO, MND and DCG might be better long term buys in the mining services sector. I hold DCG and if I take profit on my BOL shares (got within a wisker of my ask price earlier this week) I will buy some MND if the price stays around or below $20.

 

[skc]

I think revenue and profit forecasts are looking pretty good for FY13 and FY14.

Every analyst report I've read seem to suggest the same thing for most mining service stocks. But it didn't stop the share price plunging...

Anyway, say FGE in FY15 half its earning (it can happen easily if revenue falls 25% and margin also falls by 25% - which are still no where near cycle lows) to 30cps. Apply a PE of say 10 and discount it back to today using 10% the share price would be $2.50.

This is not my estimate of what happens in FY15, it is just how I'd frame my thinking. i.e. If I buy them below $2.50 I am reasonably well placed even if the revenue and margin are each down 25%. You can then tune your buy price to align with your own expectation of the future...

 

[McLovin]

The iron ore price is down at the moment but I dont see it being a long term thing.

China stockpiles are dwindling and sooner or later they will get active again.

I read about Chinese demand all the time. For some reason I never read about supply. It's almost as though iron ore markets exist with static supply but continously expanding demand. What happens when those new iron ores mines in Africa and Mongolia come online? You can buy a lot of miners at "less than $2 per day".