This is a tricky one, because there are a number of quirks of...

This is a tricky one, because there are a number of quirks of which to be aware.

Starting with the Gross Margin, which behaves a bit differently to most cases in that, being a manufacturing business, Cost of Goods includes a significant labour component, meaning GP Margin is not constant, rather it is proportional to the level of Sales, due to the fractionisation of the labour component.

So, at Sales levels of <$30m (FY2020, FY2021) the GP Margin is negative, at $40m it breaks-even (FY2019, FY2022), and at $50m it is in the low-teens (FY2023).   

The question is what does it look like at $80m Revenue?  

More than 20%, I'd imagine, and possibly as high as 25% perhaps.  Splitting the difference results in Gross Profit of  $18m ($80m Revenue x GPMargin of 22.5%).

There is ~$6.0m of CoDB and D&A runs at around $4.0m, so that results in EBIT of $8m.

Assuming another $10m or so working capital investment to support the increased Revenue, the company will end the year with Net Cash of around $10m, so after today's share price rise the EV will be around $60m.

i.e., EV/EBIT = 7.2x  (corresponds to EV/EBITDA of <5x, but I don't think that is a reliable measure of valuation given the significant D&A).

Which might sound like fair and reasonable valuation metric for this kind of business, but that overlooks the second important valuation quirk, namely the massive working capital investment that is currently underway: At the FY2022 Y/E balance date, the company had $7.5m in working capital; by the end of this year that figure is likely to be well over $30m, so a $25m increase.

That's a very material number in the context of a company with an EV of $60m (i.e., if you add the projected $10m of net cash to the working capital then almost 60% of the EV is backed by cash and working capital.

Once the Revenue stabilises (FY2025~), there will be a significant working capital unwind, probably to the tune of $15m, and possibly even close to $20m.  At that point the company's market value will be around 40% backed by cash.  The market becoming aware of that will, I suspect, be a catalyst for the share price.

Of course, year-end of FY2025 is still a long way away and anything can happen between now and then, but I think that what is more likely than not to happen is for the company to continue to secure orders, albeit not as large as the one announced today.

But I think it is safe to say that each of the next few upcoming results will look better than the preceding one, which will at least underwrite the share price.

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