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Date : 09/08/2023

Why did DGL Group (ASX: DGL) take Investors on a Roller Coaster Ride, and What Lies Ahead?

DGL Group (ASX: DGL), an end-to-end chemicals business across Australia and New Zealand, has seen a year filled with contradictions and uncertainties. After going public in May 2021, the company’s share price experienced a meteoric rise, reaching $4.50 from its IPO price of $1.00 in less than a year. This surge was driven by successful acquisitions and a favourable market environment that supported onshoring chemical supply chains. The company’s revenue and NPAT also grew significantly, reflecting robust operations.

However, this success was soon overshadowed by challenges. Mr Henry’s controversial comments triggered public scrutiny, and concerns emerged regarding the sustainability of DGL’s growth through acquisitions. Despite strong revenue growth in FY22 and positive performance in the first half of FY23, rising debt and downgraded EBITDA guidance have eroded investor confidence. The once high-flying share price has retreated, leaving investors and analysts questioning the future of DGL (ASX: DGL). The following analysis delves into the financial details, explores the reasons behind the dramatic fluctuations in DGL’s share price, and offers insights into the company’s prospects.

DGL Financial Highlights

DGL shares are trading at $0.80, and its current market cap is 232.20 Million AUD.

ASX DGL Shares News

  1. Revenue Growth:An impressive revenue growth of 88%, reaching $369.8m, driven by acquisitions and organic growth.
  2. NPAT Growth:A massive 197% increase in NPAT to $33.6m, reflecting efficient operations.
  3. Debt Position:A concerning increase in net bank debt from $1.1m to $66.2m, even with payments made in equity.
  4. FY23 (first half):$217.2m in revenue (up 52%), $29.7m in EBITDA (up 30%), $10.4m in NPAT (up 22%).
  5. Future Growth Prospects:Growth is anticipated to flatten, as indicated by the FY24 estimates of a 7% increase in revenue and EBITDA. Revenue of $492.9m, EBITDA of $67.8m (up 7% from FY23 consensus estimates) is expected in FY24.

Why DGL shares were on a roller coaster ride?

Upward Movement

Acquisition Strategy: The rise from $1.00 to $4.50 in less than a year was driven by acquisitions that fit well within DGL’s core business. An in-depth analysis of these acquisitions would reveal how well they were integrated and whether the expected synergies were achieved.

Market Dynamics: The trend toward onshoring chemical supply chains benefited DGL. However, it would be prudent to assess whether this trend is likely to continue or if it is a short-term reaction to specific global events.

Earnings Upgrades: The consistent upward revisions of earnings forecasts significantly built investor confidence. A closer look at what drove these upgrades and whether they were justified would be valuable.

Downward Movement

Owner’s Controversial Comments: The founder’s negative comments on a public figure triggered public scrutiny. This incident emphasises the importance of leadership behaviour and corporate governance, and its potential impact on share price must be evaluated.

Acquisition Concerns: Doubts regarding DGL’s roll-up strategy (acquiring lower P/E companies to sustain growth) surfaced during this time. Examining the merits of these concerns requires carefully analysing DGL’s acquisition history, the value created, and the associated risks.

Earnings Growth Plateau and Rising Debt: The admission of unlikely repeat earnings growth and rising debt created an uncertain environment. It is essential to analyse the sustainability of DGL’s growth strategy and its capacity to manage debt.

DGL Financials

Key Metrics

An analysis of valuation, debt profile, and cash conversion reveals a mixed picture. The current valuation seems reasonable but may hide underlying risks, such as dependence on further acquisitions for growth. It is crucial to thoroughly examine the debt, its terms, and DGL’s ability to service it.

Concerns and Risks

Concerns about the financial burden of acquisitions, EBITDA guidance downgrade, and margin erosion require a detailed investigation. Understanding what led to the downgrade, and analysing the long-term impact of rising costs on margins, will shed light on DGL’s ability to maintain profitability.

Let’s have a look at its Key Financials:

  1. Valuation:3x EV/EBITDA and 8.8x P/E for FY24.
  2. Net Debt/EBITDA:Approximately 1.1x.
  3. Cash Flow Conversion:108%.
  4. Concerns:Growing debt and inability to sustain previous earnings growth levels. The downgrading of EBITDA guidance has also eroded investor confidence.

How Do We See DGL Shares?

Current Position

DGL Shares might be undervalued if DGL can grow organically and maintain margins. However, the existing debt and potential shocks may still impact the price. A detailed risk analysis and a comparison to industry peers could provide a more nuanced view.

Future Outlook

The recovery potential and investor strategy must be framed within the broader context of industry trends, economic conditions, and DGL’s specific strengths and weaknesses. Considering various economic and industry factors, scenario analysis could provide more comprehensive insights.

Conclusion

DGL Group’s journey in the stock market has been tumultuous, with impressive growth followed by significant setbacks. The company’s ambitious acquisition strategy and external factors such as inflation have contributed to its current challenges. However, DGL’s strong balance sheet and potential for organic growth provide hope for a recovery. Investors must exercise caution and pay close attention to the company’s future guidance and strategic moves to assess its potential for rebounding. Monitoring developments and the company’s ability to maintain margins will be key factors in evaluating DGL’s future prospects.

 

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