uec, more upside??, page-5

  1. 4,941 Posts.
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    Hi Blokes,

    I am not yet convinced of UEC's chances going forward.

    My concerns are considered below.

    EBITDA:

    A +ve EBITDA result is to be welcomed and demonstrates the turnaround efforts engaged in by McGrath and his team. This places the business to become profitable, but not until FY05, or later.

    The query, therefore, is whether a potential buyer of the busisness will be happy to pay a premium on prospective FY05 profitability.

    This reflects the old chestnut of future growth /profitability, vs current growth /profitability. In today's knockdown telco climate, most buyers are concentrating on current (as opposed to future) behaviour.

    This means that buyers are generally not prepared to pay a premium for future growth prospects unless the current profitability is already there.

    UEC, therefore, may be caught stranded at the crossroads (ie: close to demonstrating its future profitability, but not yet close enough to achieving this in a manner justifying a share price premium, on exit).

    NEW CONTRACTS:

    UEC is also to be applauded for securing the number of new sales' contracts over the past 15 months. But whilst this effort is to be welcomed, the average contract value is still languishing @<$200,000 (average of $191,000 on 450 contracts signed in FY02).

    To be attractive to a prospective buyer, UEC must demonstrate large-scale, large value contracts, as well as those of a smaller-scale, lower value.

    Some on this forum may well argue that UEC was successful last year in securing major contracts, particularly at a Government level in New South Wales. But, on this, UEC cannot have it both ways.

    The company cannot, on the one hand claim large value contracts (ie: NSW DET contract value of $20m - ASX R06/11/02), and then claim the signing of 450 separate contracts in FY02 (ie: ASX R23/04/03).

    Either the NSW DET contract includes a large proportion of the 450 individual sales' contracts signed last year, or it doesn't. If it doesn't, then the actual average value of the small-end contracts is <$150,000. If it does, then UEC signed <450 sales' contracts in FY02 (ie: signed a panel contract with DET, and individual sales' orders with separate schools, etc, under the umbrella of the DET arrangement).

    Companies such as Optus will be hot to trot on these issues, and will discount the puffery for what it is, talking up the market. Optus is already well versed in the Government sector and itself has a number of GITC (panel) contracts in place throughout Australia.

    ASSET VALUE:

    As the WA exit has demonstrated, the realisable (ie: secondary market) value of the installed base is not that strong (ie: at a discount of anything up to 75%, or more, or WDV). In this area, the overseas experience is even more severe, with discounts to asset value of 90% or more.

    It is, therefore, quite conceivable that UEC will still have to write-off a sizeable portion of its infrastructure investment to date, in order to position itself appropriately, for acquisition. Either that, or any prospective buyer will factor for this in their reasoning. But, if not, UEC's CAPEX and infrastructure investment remains such that it will retard UEC's ability to become profitable in the short, to medium, term.


    CAPEX COMMITMENTS IN FY03:

    Weighing upon the minds of any prospective buyers will be UEC's guidance (ASX R16/04/03) of FY03 CAPEX of $40m, vs Q1,03 CAPEX of $8.1m.

    Without the CAPEX commitment going forward, UEC risks losing sales, growth and earnings momentum. But, any prospective buyer of UEC in FY03 may well have to also pick up on $20 -32m in additional CAPEX commitments.

    Normally, this is not something that predators like to absorb. Accordingly, they tend to discount for this in setting their acquisition price.

    FACILITIES' GUIDANCE:

    Potential predators also will not like the current state of UEC's financing facility which, at 31/03/03 was drawn to $39.5m (out of a possible $80m).

    With an additional $32m in forward CAPEX for FY03, it is quite possible that the financing facility will approximate $60m (vs FY03 guidance of $55m+) by year end.

    There is doubt, however, as to how long the financing facility will remain in place. Media reports have suggested only until June, whereas at last week's AGM, UEC said that the facility would remain until 2007 and that the contract was watertight. If true, then the transmission of this facility to a new buyer will also weigh heavily on any potential predator (ie: weighing down on the acquisition price).

    OPEX:

    A further concern to a prospective acquirer is the extent to which UEC is now revising upwards' its OPEX guidance. This, I have argued long and hard on @HC (ie: that UEC was understating its forward OPEX risk).

    As recently as 21/11/02, CFO Dawson was quoted on Corporate File as saying (in relation to OPEX) that:

    "We estimate the $2.8 million cost base will increase by about 10 percent over the next 12 months as the company continues to grow its customer base".

    On 18/03/03, this was changed to a 10 -15% range.

    Then, on 23/04/03, this was changed to a 15% rate xof increase:

    "Our cost base, which is largely fixed and therefore grows at a rate less than revenue growth, is predicted to increase by no more than 15% this year and this increase is primarily due to increased staffing costs needed to support the growth of the business".

    In the space of 6 months, UEC has conceded that its OPEX run rate is increasing at a much faster rate than previously anticipated (ie: previously +10%, now ~15%). This means that additional FY03 OPEX (over that originally planned for) will be +1.7m (minimum).

    The forward risk to UEC, therefore, is that additional OPEX increases will need to be factored in for the remainder of FY03. In these circumstances, the danger is one of growing OPEX and CAPEX momentum, at a time when the economy could easily start softening. Again, this is something that is likely to weigh heavily on the minds of a prospectiave predator.


    CONCLUSION:

    Originally, I thought that UEC would become part of an eventual consolidation play. This would have brought about the greatest synergistic benefit for UEC (ie: improved shareholder value). Now, however, with ALN no longer considered a medium term holder, it is quite conceivable that UEC will be sold at a discounted value (rather than as part of a battle royale).

    Over the last 12 -18 months, UEL has sounded increasingly like a forced holder of UEC, whereas ALN is now being touted as a reluctant holder of UEC. On this basis, ALN is likely to exit at a much lower value than would otherwise have been the case for UEL.

    As to where this leaves UEC's shares, it is hard to say, but on the basis of discounting for ALN's presence on the share register, I would now argue a maximum bidding price of 21 -22c (vs 30c, previously).

    At the 21 -22c range, the share price (for all of McGrath's efforts) will only have increased by 2 -3c over the time since he was first appointed as COO (let alone, as CEO). That said, McGrath retains a tidy parcel of shares originally allocated to him in october 2001 at <12c.

    So, to answer your question - some upside, yes. But, likely to be limited.

 
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