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Poor DGL Group (ASX:DGL). It was a company that ran hard for several months in 2021, but has substantially retreated as inflation has eroded its margins. Is there hope for investors in this company?
DGL (ASX:DGL) is an end-to-end chemicals business operating across Australia and New Zealand.
The company operates through three segments: chemical manufacturing, logistics (which is essentially the storage and handling of hazardous chemicals) and waste management. DGL stands for Dangerous Good Logistics and it was founded in 1999 by Kiwi Rich Lister Simon Henry who owns over 50% of the business.
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A rollercoaster ride
This company listed in May 2021 and its share price rose from its IPO price of $1.00 to a high of $4.50 in less than a year due to the company’s successful acquisitions and constant earnings upgrades. It was a good time to be in this business as customers sought to onshore their chemical supply chain.
Soon after DGL’s share price peaked in late April 2022, Mr Henry’s negative comments on a New Zealand public figure went viral on social media and triggered scrutiny on DGL. Some analysts argued this company might just be a classic example of a high P/E-multiple listed company roll-up of low P/E-multiple private companies where the growth only continues so long as the rolling wheel keeps going.
In FY22, it made $369.8m in revenue (up 88%) and a $33.6m NPAT (up 197%). It was able to pass through cost increases without worries. But investors did not receive it well because the company admitted the same earnings growth was unlikely to be replicated to the same extent, and in fact anticipated to flatten.
Investors also began to be concerned about the cost of all these acquisitions. Its net bank debt position grew from $1.1m to $66.2m and that’s even with a significant proportion of it being paid in equity. Equity is out of the question with the share price at the levels it is now.
DGL hasn’t done that bad in FY23. In the first half, it made $217.2m in revenue (up 52%), $29.7m in EBITDA (up 30%) and a $10.4m NPAT (up 22%). It made 6 acquisitions, but 70% of the growth was organic (i.e. without the acquisitions). The company claimed to have a strong balance sheet with ~1.1x Net Debt/EBITDA and to have a 108% cash flow conversion.
Well, it wasn’t going too bad until a trading update in mid-June in which it downgraded its EBITDA guidance from $71.5-73.5m to $64-66m. Ouch. Although its revenue forecast was met, cost increases eroded margins. At the current share price it is only 5.3x EV/EBITDA and 8.8x P/E for FY24.
For FY24, it is expected to record $492.9m in revenue and $67.8m in EBITDA, both up 7% from FY23 consensus estimates. But FY23 consensus estimates, while calling for 24% revenue growth to $461.1m, also call for a 3% retreat in EBITDA to $63.6m. Not much of a decline, we admit, yet it is a far cry from the high-growth business it was made out to be.
Our strategy with DGL
We think if DGL is to rebound, it won’t be until later this year or perhaps early next when it provides guidance for FY24 (either the full year of just the first half) or perhaps its results. Investors need to see that it can grow organically and that it can maintain margins by passing on increases to customers.
Our internal models illustrate that this could be worth over $2 a share if it meets future consensus estimates. But of course, the market is a strange machine – swinging upward in recent weeks over views that a ‘soft landing’ was now a fait accompli when it isn’t, all the while not giving DGL any of the credit.
We believe DGL is a quality business with a long-term track record, but it has some work to do in order to improve its reputation with investors.
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