Excellent post. Thanks for surfacing! A comment on the logistics component. If you listen to Buffett talk about their BNSF railroad there are many times he discusses how much he dislikes and fears transporting chemicals. He then discusses how all the railroads are required by law to transport chemicals. The environmental and damage potential of a chemical spill or accident is high and the rates to transport them are capped to a level that does not make it worth it for them to do the work, but they are legally required to do so. This is a different country however, I’d have to imagine the liability of transporting chemicals is asymmetric. Accidents absolutely happen and it’s a matter of when not if. Ideally they have excellent insurance and it covers such liabilities, though that might not be enough. In any event this looks very interesting but will have to dig in more on the logistics arm.
Keep in mind we're taking here about basic logistics, ic warehousing, a few trucks, etc. Not at all to compare with a trainload of dangerous chemicals. Also, its not solely dangerous chems. But sure, accidents happen.
Redox reported "volume growth well above historical average in Q1 FY25" and expects revenue & volume growth at or above historical average. I understand that they sell different chemicals but I'm hopeful that DGL will report the same next month.
I took a slightly closer look at this as it has some very interesting characteristics - one of the main ones for me being the founder Simon Henry (CEO) who's been in the industry a long time and holds a very sizable exposure. I don't have a great feel for the industry but I've read your excellent and detailed research and it certainly doesn't sound like a bad industry. In terms of a back of the envelope valuation starting from the balance sheet backwards it's net assets are about $340m of which intangibles are $146m leaving $194m and market cap is $168m. So even if you assume they overpaid it looks okay from a balance sheet view. Earning wise I'm interested in free cash flow, that $15m in depreciation you probably are going to have to spend in a business like this? I'm sort of plucking a number but even if nothing goes right the business should be able to produce $30m in FCF all day long? $30m/$168m = 17%. Not too bad either. What I don't like is that investors won't get any dividends as Mr Henry is planning on using all the spare cash plus some to grow his empire. Acquisition/roll up growth models have a chequered history. Borrowing costs might increase. You'll never know what's really going on with the financials with continuing acquisitions.
- DGL is *relatively* asset heavy, as in compared to the other asset light(er) players in the industry
- We used ev/ebitda because it's THE metric used in the industry; all bolt-on and platform acquisitions by industry participants are primariliy measured by this metric.
- In our writings we always assume our readers are capable and willing to do their own (valuation) work
(Lastly, nothing wrong with using ev/ebitda on asset heavy businesess - it's always just a matter of knowing what you're doing)
Hi DK. Yes we own. Though not at liberty to discuss position sizing. Keep in mind that while the market will grow over the long term and there are signs that organic growth is coming back, the near term is uncertain.
i dont get what you mean at that particular point ... 130mil of ebitda x 7,5 plus (?) 2x net leverage? what for? can you break down how you arrive at 40% annually pls. thanks a lot
It's a very simplified calculation to show the potential (don't need more than that in DGL's case). If you assume they'll grow organically and via m&a at a similar pace as in the recent past, and assume a similar leverage, you get roughly $130m. This is pretty conservative, as leverage would actually be lower in this case and they're paying now 2-3x ev/ebitda for bolt on acquisitions. Also I believe organic growth could be much higher if demand returns given a decent operating leverage potential.
Excellent post. Thanks for surfacing! A comment on the logistics component. If you listen to Buffett talk about their BNSF railroad there are many times he discusses how much he dislikes and fears transporting chemicals. He then discusses how all the railroads are required by law to transport chemicals. The environmental and damage potential of a chemical spill or accident is high and the rates to transport them are capped to a level that does not make it worth it for them to do the work, but they are legally required to do so. This is a different country however, I’d have to imagine the liability of transporting chemicals is asymmetric. Accidents absolutely happen and it’s a matter of when not if. Ideally they have excellent insurance and it covers such liabilities, though that might not be enough. In any event this looks very interesting but will have to dig in more on the logistics arm.
Keep in mind we're taking here about basic logistics, ic warehousing, a few trucks, etc. Not at all to compare with a trainload of dangerous chemicals. Also, its not solely dangerous chems. But sure, accidents happen.
Redox reported "volume growth well above historical average in Q1 FY25" and expects revenue & volume growth at or above historical average. I understand that they sell different chemicals but I'm hopeful that DGL will report the same next month.
I took a slightly closer look at this as it has some very interesting characteristics - one of the main ones for me being the founder Simon Henry (CEO) who's been in the industry a long time and holds a very sizable exposure. I don't have a great feel for the industry but I've read your excellent and detailed research and it certainly doesn't sound like a bad industry. In terms of a back of the envelope valuation starting from the balance sheet backwards it's net assets are about $340m of which intangibles are $146m leaving $194m and market cap is $168m. So even if you assume they overpaid it looks okay from a balance sheet view. Earning wise I'm interested in free cash flow, that $15m in depreciation you probably are going to have to spend in a business like this? I'm sort of plucking a number but even if nothing goes right the business should be able to produce $30m in FCF all day long? $30m/$168m = 17%. Not too bad either. What I don't like is that investors won't get any dividends as Mr Henry is planning on using all the spare cash plus some to grow his empire. Acquisition/roll up growth models have a chequered history. Borrowing costs might increase. You'll never know what's really going on with the financials with continuing acquisitions.
Trading update next wednesday
acknowledges DGL is asset-heavy business
then proceeds to use EBITDA on valuation calcs ???
There's a question in here (I guess)?
- DGL is *relatively* asset heavy, as in compared to the other asset light(er) players in the industry
- We used ev/ebitda because it's THE metric used in the industry; all bolt-on and platform acquisitions by industry participants are primariliy measured by this metric.
- In our writings we always assume our readers are capable and willing to do their own (valuation) work
(Lastly, nothing wrong with using ev/ebitda on asset heavy businesess - it's always just a matter of knowing what you're doing)
Thanks for clarifying! Sorry my comment came across rude
Thank you. Do you own? If so, how did you size this in your portfolio? Could you please share?
Hi DK. Yes we own. Though not at liberty to discuss position sizing. Keep in mind that while the market will grow over the long term and there are signs that organic growth is coming back, the near term is uncertain.
Thank you.
what do you mean by "two turns of net leverage"?
thanks
2x net leverage
i dont get what you mean at that particular point ... 130mil of ebitda x 7,5 plus (?) 2x net leverage? what for? can you break down how you arrive at 40% annually pls. thanks a lot
EBITDA 130mln
EV= 7,5 x EBITDA= 975mln
Net debt= 2 x EBITDA=260mln
MC=EV-ND=975-260=715
MC 148mln today, forward 5yrs MC 715 = 37% CAGR
It's a very simplified calculation to show the potential (don't need more than that in DGL's case). If you assume they'll grow organically and via m&a at a similar pace as in the recent past, and assume a similar leverage, you get roughly $130m. This is pretty conservative, as leverage would actually be lower in this case and they're paying now 2-3x ev/ebitda for bolt on acquisitions. Also I believe organic growth could be much higher if demand returns given a decent operating leverage potential.