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  • Diploma Group MD Backs Earnings Guidance, Aligned With Growth 0 comments
    Nov 21, 2013 11:05 PM

    Diploma Group's (ASX: DGX) managing director Nick Di Latte has backed himself and also the company to attain earnings guidance by agreeing to a lower salary and staged issuance of shares in the company as the company hits benchmarks.

    The Board reduced his cash salary package to $295,000 per annum from $475,000, thereby aligning the success of the company to his performance through incentives and share based package.

    The revised remuneration package shows confidence in his belief for earnings guidance for the property development and construction company.

    As part of the new package, there will be an introduction of a short term, cash based incentive package linked to key performance criteria linked to current year earnings targets.

    Also included is the issuance of 10 million shares (subject to shareholder approval at upcoming 2013 AGM) as part of a loan-funded share scheme on the terms set out below; and 6 months termination payment at either party's election.

    Background

    Diploma is a long established company - commenced operations in 1976 as a construction business and listed on the ASX in 2007 and it has a core expertise in medium to large innercity development and construction projects in Perth. It has won multiple industry awards for excellence and is a recognised industry leader in sustainable design. Two core divisions are:

    Diploma Properties

    - Focus on inner‐city residential apartments
    - Priced apartments $300,000 ‐ $700,000, which in Perth is highly affordable.
    - Each project has separate financing with draw down and debt retirement based on sales of apartments

    Diploma Construction

    - Specialises in residential medium‐rise, mixed use, retail and commercial property with typical projects values of $20‐$100 million
    - Provides Diploma Group with a strong and consistent cash flow and working capital

    - Repeat contract work from a core group of clients

    Key factors drive growth for Diploma:

    - A WA economy with low unemployment and positive net migration into WA
    - Low interest rates driving investment in affordable property market
    - An underlying shortage of affordable accommodation in WA due to lack of commencement of medium density
    apartment projects over past three years
    - Competition in WA construction market is limited in the $20m to $100m bracket with competitors leaving market
    - Has a core group of repeat clients which have secured extensive future pipeline projects over next 24 to 36 months.
    - A recapitalised balance sheet will enable Diploma to execute internal pipeline of projects over coming 12 months
    - Has lowered overheads significantly after execution of the Group's strategic review which has improved profitability

    Re-focus on growth in 2013/14

    Over the past 12 months, under Di Latte has seen a return to profitability for Diploma, with a focus on execution of current order book. Costs and debt have been reduced and increased cash levels from a re-capitalisation.

    In addition, it has cleared unsold development stock. It has a construction forward order book of $200 million to complete over the coming 18 months.

    A tendering/negotiating pipeline is in excess of $315 million in new work.

    Diploma has now completed a $9.1 million capital raising at $0.03 per share via the placement of 22.9 million new shares ($687,000) in conjunction with an underwritten rights issue of 281.07 million new shares ($8.4 million).

    Net tangible assets to increase to circa $13 million after recapitalisation. It has reduced total debt from $18.1 million to $7.2 million.

    Earnings Guidance is for Net Profit $4.55 million. The focus is now on earnings stability and growth in FY 14 and FY 15.

    Diploma poised to benefit

    Diploma is set to continue benefiting from low interest rates which will fuel purchases in and around major Perth city locations, as well as limited stock in the low to medium price bracket.

    Analysis

    In 2012/13, Diploma Group's managing director Nick Di Latte set out to return the company to profits by FY 2013 - which was achieved.

    In fact, there is an earnings guidance for net profit after tax for FY 14 of $4.5 million. Which even on new issued capital indicates the extreme undervalued nature of the shares relative to its peers at current market cap.

    The other objectives were to reduce corporate debt, pare the cost base and secure new construction opportunities - these were accomplished.

    With the Top 20 holding around 80% of issued shares, the stock is leveraged to earnings growth.

    Today's re-alignment of the MD's salary structure to the building shareholder value is a strong step forward. The staged equity to be issued provides a benchmark based package that clearly aligns earnings success.

    Di Latte also earlier this year acquired $1,000,000 worth of shares in Diploma, this should ring a bell. Di Latte bought 33,333,333 shares in Diploma Group in September at a price of $0.033 per share.

    Which is also interesting as this would all seem to show that Diploma is, based on profits, more likely to pay a dividend in FY14, lifting the share price growth prospects even more.

    Net tangible assets increased to circa $13 million after recapitalisation, while market cap. is just $17.8 million providing scope for re-rating of the share price of $0.039.

    Proactive Investors retains its short to medium term share price target of $0.047 - $0.054 based on our estimates of EPS growth.

    Proactive Investors Australia is the market leader in producing news, articles and research reports on ASX "Small and Mid-cap" stocks with distribution in Australia, UK, North America and Hong Kong / China.

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