Given it is the Value Fund’s largest position, it should come as no surprise that I think Photon Group is cheap. My conservative estimate of value was $0.15 and the shares are trading at a price half that. With $200m or so of debt still hanging over the company’s head, however, it also had its fair share of risk.
That’s why Salmat’s purchase of four Photon businesses is the perfect Christmas present. (I did have to chuckle, the Salmat announcement said they are buying $50m of revenue and the Photon announcement said they are giving up $30m.)
Firstly, it increases my estimate of the value. I was valuing the overall Photon business at seven times a conservative estimate of EBITDA. Salmat has paid nine times for the portion it purchased.
Most importantly, however, it substantially reduces the risk profile and will enable the company to get back to paying dividends relatively soon. Photon will use the $75m proceeds to reduce its debt to $122m. The interest bill will be covered more than six times by earnings before interest and tax and the debt-to-EBITDA ratio will be down to less than two times. Photon is now highly unlikely to go broke.
Even if EBITDA falls 10% from last year’s number (they were level pegging for the first four months of the year), I expect Photon to make $30m in post-tax, pre-amortisation profit. It’s going to take something dramatic for the current $115m market cap to look expensive.
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