Tempo Australia: from 12 to 26 cents and the P/E nobody sees

Tempo Australia: the P/E of 5 stock up 150% that nobody wants to see

There is an Australian engineering company trading at 0.26 Australian dollars, with a P/E of 5, little debt and cash in the bank. A year ago it was worth 0.12. A 150% return that, according to the numbers used by those who trinc it, still leaves room up to 0.40. The thesis is simple: it provides services to mining companies in a country where lithium and iron pull the cart, and the market has not looked at it for years because it came back from hell. In 2016, when it started being discussed in investor circles, it traded at 0.18 and earnings had grown 390% from the previous year. The P/E was 5. The stock had been rising for months. Nobody paid attention.

What Tempo Australia does and why the market ignored it

Tempo Australia is not a mining company. It is an engineering and services firm that works for mining, oil and construction companies. Its clients include names such as Chevron, Nokia, Woolworths and the Port of Melbourne. In 2017 it had 22.2 million Australian dollars in net cash and minimal debt. The Australian mining sector was booming on Chinese demand for lithium and other raw materials, and Tempo benefited in its wake. But the market was slow to react. For months, the stock moved between 0.19 and 0.20 dollars, with a P/E of around 6. Those trinc the company insisted it was undervalued and that the market would eventually catch on.

The problem was the track record. Years earlier, the stock had traded at several dollars and had collapsed to pennies. That descent into hell weighed like a millstone. Anyone looking at the long-term chart saw a company that had destroyed value for years. The question was whether the change in trend was real or a mirage.

The contracts that changed the story

The turning point came with the contracts. In January 2018, Tempo announced the award of contracts worth more than 6 million Australian dollars in sectors ranging from industry to telecommunications and natural resources. In September of that year, it won a 15 million dollar solar project in Victoria for Enel Group. A month earlier, in July 2017, it had acquired KP Electric, a national electrical contractor. And at some point in that period, it secured a subcontract for Chevron's Gorgon LNG project on Barrow Island, with the potential to create more than 100 local jobs.

Each announcement moved the stock a little further. Those already in saw their thesis confirmed. Those on the sidelines started to look. The stock surpassed 0.26 dollars and approached annual highs. The P/E remained low. Debt remained minimal. The cash was still there.

The earnings stumble and the investor's patience

But it was not all a straight line. In May 2017, the half-year results disappointed. The stock fell more than 30% from the 0.27 dollars at which some had bought in. Bewilderment set in among those who had bought relying on the P/E of 5 and the 390% growth. Hold on or run for the exit?

The answer from those who had been in longer was always the same: patience. The company had financial strength, the sector was heading up and the market would take time to recognize it. It was not a crystal ball, it was a calculation. The ratios were still good. So were the previous results. And the second-half figures would be published in February. The stock, meanwhile, kept moving sideways. Months of nothing. Until in January 2018 the contracts arrived and the stock proge up.

What the numbers say and what they leave out

The appeal of Tempo Australia boils down to three figures: a P/E of 5, 390% growth in a year and 22.2 million dollars in net cash. With those credentials, anyone would say the stock should soar. But the market does not always work that way. Some argue the low P/E reflects the market pricing in that earnings are not sustainable. Others contend the company is too small and illiquid to attract institutional investors. And some simply do not trust a company that once traded in dollars and ended up in pennies.

The debate, at its core, is the usual one: is the market wrong, or are we? Those defending the thesis point to the contracts, the cash and the sector. Skeptics look at the long-term chart and recall that there was already one time it seemed cheap. The difference is that now there are numbers. In 2016, the company improved its earnings by 390%. In 2017, it acquired KP Electric. In 2018, it won contracts worth 6 million and a 15 million solar project. The facts are there. What is missing is any certainty that the market will recognize them soon.

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The stock trades at 0.26 Australian dollars. A year ago it was worth 0.12. The P/E is 5. Net cash, 22.2 million. The contracts, on the table. And yet the question remains unanswered: why is a company with these numbers still ignored by most of the market? Maybe the answer is that the market is not ignoring it, but pricing it in. Or maybe it is simply waiting for February's results to confirm what the numbers already suggest. Until then, the stock will stay there, in no man's land, with its P/E of 5 and its redemption story hanging by a thread.