Evolution Mining Limited (ASX:EVN): Strong Health, Poor Growth

Evolution Mining Limited (ASX:EVN) has been on my radar for a while, and my main concern is around the sustainability of the business going forward. EVN seems like a robust company at first glance - strong financials, meaningfully undervalued. However, the company doesn't check all the boxes for me. EVN doesn't seem to be an outstanding business, and here's why.

Firstly, a quick intro on the company - Evolution Mining Limited engages in identifying, developing, and operating gold related mining projects in Australia and New Zealand. Since starting in in Australia, the company has now grown to a market cap of AU$5.60B.

The first thing that struck me was the pessimistic outlook for EVN. A consensus of 11 AU metals and mining analysts covering the stock indicates that its revenue level is expected to decline by -1.23% in the upcoming year, however, future earnings are expected to grow. On average, EVN's bottom-line should see an annual growth rate of 15.57% going forward, leading to an unsustainable margin expansion driven by a mix of falling sales from core activities and possibly cost-cutting. Moreover, at its current level of earnings generated, EVN produces worse returns to shareholders (9.23%) compared to its industry peers (11.89%), which isn't a good sign. If a company were going through a reinvestment period, it may produce lower returns during that time period, and gains will be factored into the future outlook. Though this is not the case for EVN, which makes me wonder about the sustainability of its business.

EVN's financial status is a key element to determine whether or not it is a risky investment - a key aspect most investors overlook when they focus too much on growth. Evolution Mining's balance sheet is robust, with high levels of cash generated from its core operating activities (1.72x debt) able to service its borrowings. Furthermore, EVN's debt level is at an appropriate 17.88% of equity, though it has been increasing over the past five years from 7.75%. EVN also generates a sufficient level of earnings which amply covers its annual interest payment 11.25x. The company shows the ability to manage its capital requirements well, reducing my concerns around the sustainability of the business going forward. EVN has high near term liquidity, with short term assets (cash and other liquid assets) amply covering upcoming one-year liabilities, as well as long-term commitments. EVN has managed its cash well at a current level of AU$163.50M. However, more than a fifth of its total assets are physical assets and inventory, which means that in the worst case scenario, such as a downturn or bankruptcy, a significant portion of assets will be hard to liquidate and redistribute back to investors.

The current share price for EVN is AU$3.32. With 1.69 billion shares, that's a AU$5.60B market cap - quite low for a business that has has a 5-year free cash flow cumulative average growth rate (CAGR) of 25.35% (source: analyst consensus). With an upcoming 2018 free cash flow figure of AU$455.00M, the target price for EVN is AU$5.88. This indicates that the stock is currently priced at a large discount. However, comparing EVN's current share price to its peers based on its industry and earnings level, it's overvalued by 99.49%, with a PE ratio of 27.5x vs. the industry average of 13.79x.

EVN checks a few boxes for me - it has strong capital management and it seems to be undervalued intrinsically. But I'm not a fan of its future outlook. Like above, I would rather invest in a company that checks all the boxes - an outstanding business - than a mediocre one. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I've taken my data from.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.