LLEN - Monster Cash Flow in an Abandoned Industry

NASDAQ:LLEN - LL Energy Inc.

Disclosures: As of 7/22, I do not have a position in LLEN. The information below builds a framework around a 1-3 year investment. As I have just left my job, any position I would take in LLEN would likely be a shorter term (weeks) trade. If you would like to know more about what im looking for in the short term, call me! 206-390-0375 


Q: If I offered to sell you a business for $20, with no debt, which makes $10/year in profit on contracted revenue, would you buy it? Would you pay more than $20? How much more?

Ive been pulling $ out of this stock for over a year with fast trades, but I think a longer term outlook (few years) could yield a triple or more

**7/29 earnings update

LLEN is a $100mm-ish coal company that has made my clients a LOT of money over the past 18 months  - This was my favorite pattern trading stock on technicals (look at 1.80 - 2.20 oscilation last year), but a breakout last May (scored me a double +) tells me fundamentals are starting to come into play

Business in a Nutshell:
Operates coal mines as well as washing/coking facilities in China along with wholesale and distribution networks. They are domiciled in Seattle, WA




The Good

• NO DEBT
• This is highly unusual for a coal miner - this is a capital intensive business (big expensive machines) and most companies in the space employ a high degree of leverage. This create much stronger cash flow with no interest payments to make.
• Strong Growth
• Revenue in the past 5 quarters has trippled from $20 to $60mm/qtr


• 2009 Revenue: $41mm →→→→ $143 in 2012 
• Margins
• LLEN had net income of $15mm last quarter on revenue of $60mm - 25% profit margins in coal... wowsa
• Cash Flow
• Part of LL's high margins come from their debt-free balance sheet and non-existent interest payments ..... Net income and EBITDA are important figures, but cash flow trumps all .... add back in depreciation from all their fancy machines ($5mm last quarter) and operating $ just went from $15mm net income to $20mm in cash flow ... keeps looking better and better!
• Contracts/Growth Plans
• From a PR on May 15th 2013
• "THE SPARK: The Seattle company said it will supply the coal to a power plant in Guangixi. L&L said it signed a contract in October that called for it to supply 360,000 tons of coal over a 10-month period. Those shipments started in January. On Wednesday, a deal was signed to expand the supply to a million tons over a year. "
• "THE BIG PICTURE: The company said it produced 675,000 tons over the last four fiscal quarters. In November it acquired two mines that are expected to produce 750,000 tons of coal per year. The purchase of the Luozhou and Lashu mines dramatically boosted its production, revenue and profits in the fiscal third quarter, which ended in January."
• China's consolidating Coal Industry
• China is making a big push to consolidate its highly fragmented coal industry in an effort to curtail pollution and improve safety records in the thousands of older coal mines.
• Consolidation and pressure for M&A creates both opportunities for LLEN to expand through acquisition as well as possibility for a buyout of LLEN's assets
• Give a google! Interesting reads
• http://www.worldsecuritynetwork.com/no_topic/MacDonald-Scott-B/China%E2%80%99s-Coal-Consolidating-Black-Gold

The Bad

• No Bad in my opinion, but some ugly

The Ugly

• This is still a coal company - Coal is getting crushed by cheap nat gas/regulatory pressures. Fortunately, coal is still booming in china, LLENs sole market.
• CHINA. This is one of the only Chinese companies I touch - they are actually domiciled out of my hometown, Seattle, but 100% of operations exist in China. I have a hard time trusting any numbers out of China, especially after the accounting scandals with the Big 4 last year, but sometimes you gotta take a gamble. 
• I am planning to meet with management when I go home to Seattle in August. Always a positive sign when your calls are consistently answered on the first ring - LLENs sfaff has been friendly and helpful.

I hope this summarizes the basics of LLEN - can always delve deeper, but time to answer the real question

..... so What's it Worth?!

IF LLEN can show a few more quarters of comparable performance, and execute expansion plans to combat margin pressures (primarily from declining coal prices), I can justify a price target of $30/share. Until coal/china sentiment improves, $30 is off the table, but $10 and a tripple on your $$ is not .... Here is why:

Last quarter, LLEN made $.42/share .... annualized that figure to $1.68/year and then back it off to $1.00 to be conservative ...... assuming LLEN will continue on its current path, I believe LLEN can make $1.00/year in profit.

All $1.00 goes to equity as there is no debt in the company .... LLEN has consistent double digit growth and should trade at a PE multiple equal to its growth rate (50%+) .... im going with 20 ..... $1.00 in earnings X 20 PE = $20 target

Now a PE Of 20 is overly optimistic for todays coal industry(although very conservative for LLEN's growth) .... but perceptions do change alongside valuations ....

This is purely based on earnings and completely ignores book value/tangible assets and a ripe M&A/takeover environment fueled by China's consolidation demands....

I like my valuations to be conservative, so lets lop that valuation by 1/2 and say $10 .... just $10! .... ignoring book value and now assuming a meager PE of 10 ish on a company with double digit growth ....

$10 is a triple from today's price

Thats all for now!

If you have any questions at all, please feel free to call:

Cheers,

Max

206-390-0375