Bradken Is Climbing Out Of The Hole It Dug For Itself, But It Will Go Slow

| About: Bradken Ltd. (BRKNF)


Bradken's board will probably regret it hasn't entertained at least two potential buyout offers.

Bradken is slowly working to regain its financial health by paying down debt with its free cash flow, but it will take a while.

It used its cash position to repay US$200M worth of debt, and this will reduce the interest expenses, providing an additional boost to the (free) cash flows.


I started writing about Bradken (OTCPK:BRKNF) almost eighteen months ago, and I was quite excited to learn the company had received a 'go private' proposal. Two private equity firm were offering the exact price I had calculated as Bradken's fair value, so I was expecting the deal to be completed, but Bradken rejected the offer and saw its share price fall by 90%. Time for an update on the situation!

As Bracken is an Australian company, I'd strongly recommend you to trade in the company's shares through the facilities of the Australian Stock Exchange where the company is listed with BKN as its ticker symbol. The average daily volume is approximately 750,000 shares, and the current enterprise value of Bradken is close to $325M.

The H1 financial results were encouraging, but I'm still angry

Yes, I'm still angry. I made some calculations to determine the fair value of Bradken at the end of 2014 and I was extremely happy to learn two private equity groups were agreeing with my valuation and offered the exact same consideration to purchase the entire company.

Unfortunately Bradken's board rejected the proposal, which was a very dumb move because it should at least have explored the offer and entered into a letter of intent to allow the PE partners to do their due diligence. Bradken and the private equity groups were unable to reach a deal, and everything fell apart, and based on the press releases issued in the aftermath of this potential deal, I had the impression Bradken wanted to continue to remain a standalone business. And look at it now, 14 months later with a share price that has been trading as much as 93% down compared to the offered price. How is that working out for you, Bradken-board?

Source: financial statements

Okay, rant over. What's done has been done and the past is less important than the future of Bradken. I wanted to find out if there's any value left in the rumbles after seeing the share price being crushed completely.

Fortunately the company's revenue remained relatively stable (well, a 18% fall isn't exactly 'stable' but it is as good as it gets in the current market circumstances). The gross profit fell by 30% to A$55M ($39M) but due to restructuring charges and impairment charges, the bottom line of Bradken was showing a net loss of A$168M ($120M) which is a much higher net loss compared to the A$93M ($66M) in H1 FY 2015.

Fortunately the majority of this loss has been caused by impairment charges, and without these non-recurring items, Bradken would actually have been profitable. This is being confirmed in the company's cash flow statements.

Source: financial statements

Bradken generated an operating cash flow of A$27M ($19M) and after spending A$8.2M ($6M) on capital expenditures, the free cash flow in the first half of the current financial year was approximately A$19M ($13.5M) and that's actually pretty decent (again, considering the market circumstances) thanks to Bradken only spending cash on the sustaining capex. Additionally, there was a nice additional incoming cash flow to the tune of A$6M ($4.2M) due to selling some assets. Sure, this won't move the needle, but every million will be helpful to turn the Bradken-ship around.

The net debt was worrisome, but is the situation now improving?

I'm glad Bradken has been focusing on reducing its net debt and not only did it use its entire free cash flow to reduce the net debt, it also tapped into its large cash position to settle some outstanding debt.

Indeed, the cash position decreased by A$218M ($155M), but so did the total debt on the balance sheet. The short-term debt fell by A$40M ($28.5M) whilst the longer-term borrowings were reduced by A$182M ($130M) for a total debt reduction of A$222M ($158M).

Source: company presentation

This means the total debt (defined as short-term debt + long term debt) has fallen from A$625M ($446M) to A$403M ($288M) as of at the end of the first semester of FY 2016.

And this, my dear readers, will be an important achievement. Bradken's total interest payments in the first half of the year were almost A$18M ($13M), and now the debt has been cut by A$222M ($158M), which means the interest expenses will fall accordingly. Bradken could now easily save A$8-10M per year (midpoint: $6.5M) on interest payments, and that's quite a big deal for a company with an annualized free cash flow of less than A$40M ($28.5M).

Source: annual report 2015

Bradken obviously won't pay a dividend in the foreseeable future, and I expect the majority (and hopefully all) of the free cash flow will be used to reduce the remaining net debt.

Investment thesis

Bradken did a stupid thing by rebuffing the buyout offers and the management clearly didn't see this severe downturn coming. Fine, these things happen, and I'm glad to see Bradken is now making the right decisions by prioritizing free cash flow and debt reduction above anything. I agree with this approach, but this doesn't mean Bradken is out of the woods yet.

After having repaid a large chunk of its total debt, Bradken's debt remains quite high as the net debt is still in excess of A$340M ($243M) (or approximately 8 times the annualized free cash flow). The debt position will have to be continuously monitored and I hope Bradken will be able to get a fair price for the European assets it intends to sell.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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