Is there any value around?
Two themes seem to be gaining traction amongst Value.able Graduates at the moment.
1. Value is becoming harder to find (yes, I agree), and
2. Questions related to share buybacks have increased remarkably
This afternoon I will address the growing problem of finding value (and save buybacks for another day).
As I scan the market for great quality businesses trading at large discounts to my estimate of their Value.able intrinsic value, I am finding fewer and fewer opportunities. And when it comes to ‘small caps’, the prospects are few and far between.
On Peter Switzer’s show last Thursday a caller asked me what was good value in the small cap space. I define ‘small cap’ as anything between $300 million and $2 billion (below that is micro caps and nano caps). The fact is, only four or five of my highest Montgomery Quality Rated (MQR) businesses (think A1, A2, etc) are cheap. And most of them you already know about.
Forge and Matrix Composite are still below rising intrinsic values (more on those soon), and Cabcharge and ARB Corporation are just below intrinsic value. The remaining value is in much smaller companies and of course, the risk when investing in this space can be much higher.
Many Value.able Graduates have commented that investing in these micro and nano cap stocks is akin to scraping the bottom of the barrel. Whilst I tend to agree, I also believe that when it comes to investing, little is more satisfying than discovering an extraordinary business beyond the reach of the managed funds that have self-imposed restraints and must only invest in the top 200 or 300 companies.
There is merit in the concept of investing in small businesses that have the potential to become large. And there are profits to accrue when they do. Before you dismiss this idea, keep in mind that many of the large companies dominating Australia’s competitive landscape today were once small. Admittedly, in many cases they were small while they were buried in private ownership or private equity ownership, but in some examples they were small and grew to be large whilst they were listed. Can you think of a few examples? The Value.able community has shared a few here at my blog.
Given Australia’s small population, the big businesses that dominate the investment landscape are mature and have to make smart decisions and continually reinvent themselves to continue to grow. Think about Harvey Norman. Its failing is not in the fact that the economy is slow or that consumers can buy cheaper goods overseas. Its failing is that it is a tired old concept that has lost its mojo. The company has failed to change and failed to reinvent itself. Its own failure has seen it fall victim to the JB Hi-Fi’s and the buy-online-from-overseas-cheaper.com merchants of the world.
So whilst scouring for smaller companies may seem like bottom-fishing, there is merit in catching the smaller fish. And for those investors who prefer to stay clear, patience, bank bills and term deposits are the solution.
Far better is it to be in the safety of cash than in inferior investments, such as companies trading at premiums to intrinsic value.
Forewarned is forearmed. And to be forewarned, don’t miss out on your copy of Value.able. As I told Peter last week, there aren’t too many Second Edition copies left.
Posted by Roger Montgomery, author and fund manager, 28 February 2011.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Andew M
:
Hi Roger,
One other company:
SWL SEYMOUR WHYTE
Shares on Issue: 77 million
Shareholders Equity: 28million
RR 15%
ROE 41%
Pay out 26%
EPS 15.4
DPS 4.0
I get an IV of $2.78 so a safety margin of about 10%
Again is this high and is this an A1/A2 company?
Thanks
Andew M
:
Hi Roger,
I am thinking about expanding my portfolio, this is what I have valued two companies at:
DWS ADVANCED BUSINESS SOLUTIONS
Shares on Issue: 132 million
Shareholders Equity: 56 million
RR 15%
ROE 33%
Pay out 78%
EPS 14.0
DPS 12.0
I get an IV of $1.63 so a safety margin of about 10%
PRO MEDICUS
Shares on Issue: 100 million
Shareholders Equity: 16 million
RR 15%
ROE 23%
Pay out 51%
EPS 3.9
DPS 2.0
I get an IV of $0.35 so a safety margin of about 12%
Do you think these IV are a little high?
What MQR would you give them?
Thanks
Matt R
:
BradJ/Manny/Craig B
Regarding ZGL
I did as someone suggested and calculated forecast 2011 NPAT using 1H2011 and 2H2010 figures (to avoid simply doubling 1H2011 NPAT), and got a forecast NPAT of AUD$12.75M (using yesterday’s exchange rate from Singapore dollars). This would likely underestimate actual NPAT?
My IV as below:
average Eq- 71.2M
no. shares 210.9
Eq/share-0.33
POR 32%
ROE 17.90% (use 17.50% on the tables in ValueAble)
RR 14%
IV of 47.8 cents
My questions are- has anyone done a cashflow analysis as per ValueAble (I’m still not good at this), and is the IV forecast to rise “at a good clip”?
Any genuine competitive advantage?
Thanks guys
Matt
Craig B
:
Matt,
Sorry for the delay.
I believe Roger calculated a growth rate of about 13%. There will be some conservative assumptions built into that.
Using a ROE of 25% and a payout ratio of 20%, you can get to a 20% growth rate, but that’s a pretty rough calc.
Nolesy
:
Roger,
NCK has your A1 rating, so you obviously feel it has a sustainable competitive advantage – it has cornered the market in high-end furntiture.
It has announced its plans to roll out a new brand: Sofas2Go. This is going to be a series of entry-level (cheap) sofa stores. It will be competing with the likes of Fantastic, Super A-Mart, Ikea, etc. I’d say there’s a fair argument that Sofas2Go won’t have a competitive advantage like Nick Scali does.
Let’s say it won’t. In the overall picture of the company, could introducing a brand without a competitive advantage detract from an assessment of the competitive advantage (and thus its MQR) of the company, despite the competitive advantage of the other?
Grant Duggan
:
I realise that commodities are not every ones cup of tea but it apppears that AGO are starting to show a reasonable MOS.Of course do your own research my opinion only.
RobertD
:
I’ve been watching this also but at the moment it doesn’t represent a significant discount to iv. I also have my RR at 11%-12% for this company making my iv lower than yours.
Brian Aitken
:
I’m having trouble submitting comments onto your website & will chat to you re this when you’re in Perth on March 19, if that’s alright.
Roger Montgomery
:
I will ask one of my team to email you Brian. If you would like to reply with your daytime contact number we may be able to provide help over the phone.
Will
:
Hi, just wondering if the current negative sentiment towards Thorn Group (TGA) from Mr. Market is an opportunity to purchase some more shares?
The price has dropped nearly 14% and is now lower than my calculated intrinsic value.
Shares on Issue: 129 million
Shareholders Equity: 88 million
Return On Equity: 23.8
EPS: 16.8
RR: 10
DPS: 8.5
Payout Ratio: 42%
IV: 2.22
Let me know if I’m on the right track with those figures.
Thanks
Ash Little
:
Hi Will,
Nice business IMHO but i would use a higher RR than 10%
I am using 13%
Hope this helps
Michael Leslie
:
Hi Roger and graduates
I have been looking at 1300Smiles (ONT) not that I am particularly keen about using their services for myself! It seems a bit overpriced but might be worth keeping it in view.
Is there an MQR on it? Has anyone had a look at it?
Michael
Roger Montgomery
:
A business to keep an eye on Michael.
Stephen
:
Hi Ken,
Thanks for your reply. I am happy to have received your comments on IV as it’s challenging to interpret the numbers going forward from an IPO.
I had them on my radar about a month ago and then purchased a tranche of their shares once I saw their profit guidance increase. I’m encouraged with the experience of their management team and the low cost nature of the business, in addition to their experience servicing the market they’re in. I see this as a business that can generate good cash flow going forward.
It’ll be interesting to view the full year accounts and if they perform as I expect them to, then my buy in price will seem like a bargain. Yours will seem like a dream come true!
We might compare notes come July.
Stephen
Stephen
:
Hi folks,
Has anyone out there had a look at Corporate Travel Management (CTD).
CTD is a travel agency used by business to coordinate and arrange corporate travel. It’s been around for about 10 years and has pursued a growth stratedgy that has seen it open in Brisbane, Sydney, Perth, Melbourne and Aukland.
It has achieved a number of industry awards over the past decade and has around 600 business clients on the books.
CTD floated in Nov 2010 after raising approx $20m to complete the acquisition of Travelcorp and enhance operating capital.
CTD is able to enter into long term contracts with business leaders and has an excelent retention rate. It is not capital intensive to operate and given the fact that most travel is booked and payed for instantly, it generates good quantities of cash for minimal business outlay.
As the IPO raised funds for the purchase of Travelcorp, it is of course hard to anticipate at this stage what the effect on ROE will be. However given the upgrade to profit announced last month, I’m comfortable that ROE will be maintained.
In terms of competative advantage, I can say with some experience that the larger players in the Corporate travel industry such as QBT offer a service that is ordinary at best. I am encouraged by the number of businesses CTD have on the books and the awards for excellence it has received.
As for IV, I’ve used the following figures in my calculations. I am of course open to criticism (polite):
$34,154,500 (2011 est). Based on last years equity I’m working off an average of:
$22,951,000 Equity
70370000 shares on issue = Eq/share 48.5 cents
NPAT $7,750,000 (est)
Divs $3,875,000 (POR 50%)
ROE 33%
RR 12%
IV $2.12 (2011)
I’d be happy if any others would like to share their thoughts, but I think this business may just tick enough boxes to deserve a bit of attention.
Ken G
:
Hi Stephen
I have mentioned CTD a couple of times and have come up with a simular IV. It is hard to get meaningful numbers from an IPO. They also appear to be very good at corporate travel with a high reputation, as i know of others who use them. I am a holder of CTD at the IPO also have added more since. The full year financials will give us better picture.
Peter
:
Hi Stephen,
When I calculate $22,951,000 (Equity) / 7037000 (shares on issue), I get Equity / share = 0.326 cents.
If you take the higher equity number ($34,154,500 – 2011 estimate), then I get an Eq/share of 48.5 cents, but of course the ROE is much lower (more like 22.7%)
On that basis, my IV is lower than your $2.12 and on that basis, I don’t see a margin of safety to justify purchase at current prices.
Peter
Stephen
:
Hi Peter,
Thanks for your comments. You’ve raised an interesting point re the equity. I used the mid point to calculate equity and ROE because the current NPAT was earned on equity prior to the capital raising thus the higher ROE.
The capital raising was used to fund the Travelcorp acquisition and at the time of the last report the new aquisition had yet to contribute to earnings.
If the new acquisition adds to NPAT as I believe it will, then the ROE should remain at the upper end of 30%. If I’m wrong then your lower ROE will be correct and the IV will be toward what yours most likely is.
The next 6 months will be the kicker and will give a cleaerr direction of profits.
Having said all that it may sound as if I’ve speculated but I’ve conducted what I believe is a fair analysis of the business. It may also be that I’ve misinterpreted the lessons of ValuAble. So comments are always welcome.
Stephen
Brian
:
I have to agree that the market seems to be fair-to-over valued presently. The thing is, everyone seems to agree. In fact, I’ve not seen so many “Hold” recommendations before from so many brokerages. It reminds of something I read somewhere by Philip Fisher. “I remember one representative after another of the larger stock brokerage firms saying he expected much lower prices and under prevailing conditions would buy nothing. Seldom have I seen the investment community so unanimous. Here was a psychological background that was almost ideal for acquiring any stock that was intrinsically a good long-range investment.” Food for thought.
Ash Little
:
Hi Brian,
Very Very Correct,
I think someone in the USA has actualy developed an contarian index based on this.
Can’t remember who though
Tony C
:
Hi Ash/room/ Roger
The hindenburg Omen
when the market has lots of stocks hitting 52-week highs and 52-week lows at the same time, that kind of confusion portends trouble
Hope that helps
Tony C
:
And i am so happy i could help out for once
Thanks for all your great posts Ash.
Ash Little
:
Thanks for you help Tony
Irek
:
What about Patties Foods Limited (PFL) (200 mln cap)? Fundamentals are good and earnings growing.
Scotty G
:
I got the following:
EQPS – $0.88
EPS – $0.135 (FY11 Estimate from Etrade)
DPS – $0.08 (FY11 Estimate from Etrade)
ROE – 15%
POR – 60%
RR – 12%
IV – $1.18
Wayne P
:
Hi guys,
A nano cap up for debate, Allmine Grp AZG. A new listing which per the perspectus has an interesting growth profile in FY11 compared to pre listing result of FY10. Trading well below my calculated IV!
The only downside from my perspective is I can’t think of any competitive advantages as it’s such a tiny player.
Would love to hear the grads thoughts!
Wayne P
Scotty G
:
I got some roughie figures out of the HY reports leading to an ROE of about 15-17% for the full year (estimate). Not all that flash but not terrible either.
The concern for me though would be the last paragraph in the auditors report where they point out that the company has assets of $20.9m versus current liabilities of $25.9m. They rightly say that the company’s ability to continue as a going concern is dependant on continuing finance, Never a fantastic position to be in!
With better companies out there I’d let this one slide unless the situation somehow improved dramatically.
ian
:
Just wondering, if there are so few companies that are priced below IV does that mean that the market is largely over-priced? And if so, would it be possible that a correction is looming? There does seem to be some potential triggers out there (ie. Chinese ghost-cities, middle-east revolutions). How confident do people feel about investing more money in to the market at the moment?
Andrew
:
The market levels doesn’t overly concern me, if their is a correction coming than so be it, i have my list of companies and their valuations to take advantage of it. It sure means that most companies are expensive.
In this regard where the companies are trading at a price far higher than i estimate they are worth than i would not want and will not put any money into them.
If their is a correction looming than that could potentially be a great opportunity for us value investors to get in and buy. The GFC sure offered a lot of bargains.
Ashl
:
Hi Ian,
Just my view but I think we should turn the market and the associated noise off and invest in great businesses at good discounts.
If you find any be sure to let us all know.
Kent Bermingham
:
ANZ is starting to look like an opportunity again
Chris B
:
Hi guys,
The first example of a company that had a small market cap and grew to be large whilst they were listed that came to my mind is PALADIN ENERGY (PDN).
I sadly owned shares in PDN when they were less than 1 cent and I was happy to sell at a 40 or 50% profit…I say sadly because now PDN trades around $4.70 (not sure if there were restructurings etc).
Most explorers that have managed to become producers will share similar growth profiles – the hard thing is knowing which few (out of hundres listed) will be successful.
Value investing is a lot easier – and safer – for my liking,
Cheers,
Chris
Ashl
:
Hi Chris,
Talk to the FMG shareholders who were in early and got out,
They are probably worse off
Roger Gibson
:
Roger, have you looked at WPG? They are an iron ore miner in South Australia soon to go into production stage. On 2011/2012 year figures they are below IV and should they achieve anything like the predicted 2012/2013 earnings there would be a huge safety margin at the current price.
On the general question of is there value around then I can find very little. Using the Advanced Search Tool on the Comsec site for for market cap > $300M, Debt/Equity 20% then 37 companies are returned. Calculating the IV’s for these results in about half a dozen that would meet a reasonable Value-able buy criteria and all have appeared on your blog.
peter
:
How about ASZ everyone- Roger have you ever rated this one- seems to have slipped quite a bit but is forecasting i think revenue increase of 40%
ron shamgar
:
current share price will catch up to intrinsic value in fy12. ROE of 15% is not amazing!
ron shamgar
:
this is why i love this company:
check it out
http://www.youtube.com/watch?v=_bEO8ZUWGog
by the way i hope everyone watched aaron begley interviewed on switzer tonight. sounds like a smart guy! future looks bright…
Ashl
:
Hi Ron,
Anyone who names their company after one of the best movies ever made is one cool dude in my humble opinion.
Keep the divy Max.
You will have a much better use for it than me
Andrew
:
What is the ASX code for Gnomeo and Juliet PTY LTD? Whats their ROE like? :P
Sorry couldn’t help it.
Scott T
:
Thanks for the link Ron, I hadn’t seen this.
All the best
Scott T
Mike Hall
:
Watch it here.
http://www.switzer.com.au/video/aaron-begley
John
:
The futures so bright ….. we’ve gotta wear shades
:)
If we could only uncover one MCE per year I would be very, very happy.
Ash Little
:
Hi John,
LOL very funny,
If we can uncover one stock like MCE every 5 years we will do well.
As WB says you don’t have to do too many things right in your life as long as you don’t do too many things wrong
Matt
:
Hi,
Just wondering if anyone follows US stocks. In particular MSFT and AAPL. For MSFT I have an estimate of $55 for FY 2011. My inputs are start eq $46175m, end eq 62884, ROE 40.5, shares 8668, eps 255c, dps 62c and 12% RR.
MSFT has a great track record; 40% roe for the last 5 years, $55 is a +50% MOS. I also have AAPL at about 35% MOS.
Or are tech stocks that out of favour?
Matt
Pat Fitzgerald
:
Hi Matt
Roger did a post on Apple last year. The IV would have changed a lot since then.
http://rogermontgomery.com/is-apple-an-a1/
My opinion is that Apple will grow faster than Microsoft.
Microsoft does a lot of share buybacks so you should allow for that in your estimates. Both are trading at a discount to my 2011 IV, but I am not overly confident in my valuations. MSFT above $45 and Apple above $450.
Pat Fitzgerald
:
Hi Matt
MSFT above $45 is for June 2012 (below $41 for June 2011) and Apple above $450 is for Sep 2011 (above $520 for Sep 2012) but my estimates may be poor.
Matt
:
Thanks for the heads-up Pat. The eps of 255c was pulled from yahoo finance estimate of Jun 11 and 276c for Jun 12. I’ll re-check my numbers for the calculation though.
Thanks too for the AAPL link, I use the 2 year avg equity which might also account for the difference. If I use a ROE based on end equity I get the same number (for 2010) as that article.
Maybe in a year or two’s time, the $USD will be happier than it is now against the $AUD and a gain could be had on two fronts.
Paul
:
Hi guys
I had a look at msft about 4 months ago and whilst the share price was at a big discount to IV the figures I had were that the ROE and IV were dropping over the next 2 years. Something to check?
They have been undertaking a share buyback (of the discounted shares over the last few years) but hard to see where the growth will come from given their size.
Would be interested in your figures on Accenture ACN and IBM (i do own both). I get reasonable discounts on each.
Frank Bildos
:
Today Swl (Seymour Whyte) a company I am keep a close eye on release 59 million shares from escrow. What does that mean? At the moment they have about 80 million shares trading do these 59 million get added to the 80 million? Can someone share their thoughts on this. Thank.
Ashl
:
Hi Frank
escrow shares are shares that are held that can’t be sold for a period of time.
Usually by the former owners.
Releasing them from escrow means that they can now be sold.
It does not change the number of shares on issue just the number that can be traded on the market.
Hope this helps
Frank B
:
Thanks for the reply Ashl
So it will have no effect on their IV? Why wouldn’t the whole 80 million not be traded from the start? Surely this means with more shares being traded (higher supply) it will effect the share price (same demand).
Ash Little
:
Hi Frank,
Escrow shares are very common for newly listed companies.
The people listing the business want to send a message to the market that they are not just flogging the business for what ever they can get for it and are still interested in the long term well being for the company.
When shares come out of escrow and they are being sold down then you should reconsider your position in the company.
That said you have to consider the old adage that management sell for a variety of reasons but there is only one reason for them buying.
Greg Mc
:
Correct, Frank. Management putting their shares into escrow gives other shareholders comfort that:
a) they have skin in the game, and
b) they are not going to dump a heap of shares on the market in the short term and crush the share price.
Ultimately though, it doesn’t affect the value of the company, and other than the factors mentioned, doesn’t affect the share price.
Brad J
:
Worth also mentioning ZGL have 83.2million in current confirmed orders with 53million to be delivered in the second half. If you have a look at the previous year their second half equated to 39million so this is a 35% increase on the previous period assuming they don’t get any further orders this financial year. It seems like their second half is traditionally slower than the first half if you compare their figures to last year but still it would be a really good result. Thoughts!!!
Manny_Sorbello
:
ZGL -Hi Brad J
My understanding is that the reported numbers are generally compared to the PCP (prior corresponding period). Doubling of the Income statement figures on the HY report isn’t the best way to estimate the FY results either due to seasonal factors that you touched on (and so has Roger). Someone else on the Blog suggested adding the current HY numbers to 2nd Half Figures of the previous FY report. I tend to agree with that method, you would be using the reported numbers for the previous 12 months. All said I am comfortable with my estimate of IV to hold this stock. Rogers IV method in his book is far superior to looking at P/E ratios to decide if a stock is cheap or not. In the past I used to think a P/E of say 6 was very cheap, but when the ROE is less than the P/E, say ROE of 5, than a P/E of 6 is not as cheap as one would think. I totally agree with Roger, P/E ratios are twadle. In this case for zgl the P/E is less than the ROE, so thats another tick. Never heard of HOG but i will take a look. Cheers Manny
Brad J
:
Good points there Manny, I agree totally. I am holding ZGL as a very small part of my portfolio so it will be interesting to see how it goes.
Craig B
:
Manny,
Some companies seem to seem to do a greater percentage of sales in one half year after year, such as retailers who cash in on Christmas, so we can probably do better still in getting an idea of how a second half result will stack up to the first.
I did it today with JBH, trying to figure out the full year result. Last year’s profit came weighted roughly 65% toward the first half.
Not sure if ZGL follow a pattern though.
Cement Mixer for Christmas anyone?
Brad J
:
Great work Manny,
I have also been looking at ZGL like others on this blog. It ticks all the boxes and they are as follows –
– H1 revenues up 48% and net profit up 140%
– huge exposure to marine oil and gas sector and I believe this is the right space to be in like Roger.
– hardly any Debt good cashflow
– I rang the company to ask what their competitive advantage is and they have said it is their quality and economies of scale reducing manufacturing costs.
– a company share buy back due to management believing that the share price doesn’t reflect the companies value.
– a significant margin of safety of at least 30% based on the current share price and conservative inputs.
Of course if you used average equity your intrinsic valuation would be much much higher but it is good to be conservative. In my opinion while this is higher risk being in the small cap space it looks to be a really good opportunity and one that the market has let go under the radar.
I would love to get your intrinsic value and thoughts on HOG and anyone elses. This is a hard one to value as it is just going into production but a good story.
Cheers
David
:
Hi Roger / Bloggers,
I was wondering if anyone has seen any forecast EPS & DPS for Thinksmart (TSM) for 2011 (and beyond)? Comsec only lists the 2010 actuals. If anyone has seen any forecasts I would appreciate if they could share these or at least point me in the right direction.
Best Regards
David
Pat Fitzgerald
:
Hi David
Yahoo finance
http://au.finance.yahoo.com/q/ae?s=TSM.AX
Note: Analysts can be slow to update their forecasts for small businesses so have a look at the half yearly or yearly presentations and they might have some company guidance for NPAT.
Ash Little
:
Hi David
Yahoo Finance has EPS estimates
This website is very slow to update forecasts so these may not be the current one
John
:
Normalised EPS (c) 2011- 8.83 2012- 9.90 2013-12.70
EPS (c) 2011-7.8 2012- 8.8 2013-11.6
Dividend per share (c) 2011-4.60 2012-5.00 2013-6.50
Manny_Sorbello
:
Hi Roger,
A nano cap mentioned previously by a few bloggers is ZGL.
I ran the ruler over their latest HY Report. Assumptions below are that the 2nd half performance continues on the 1H Report.
Data has been converted from SGD to $AUD dated 31/12/2010
Shares on issue:210,996,608
Share Price 31/12/2010:$0.22
Dividend:$0.02
EPS:$0.06
Operating CPS:$0.02
Net Debt Per Share:$0.01
Book Value:$0.27
NTA Per Share:$0.23
HY Report data doubled for FY:
Revenue:$107,148,871
EBITDA:$19,864,716
Deprec & Amort:$3,261,947
EBIT:$16,602,768
Net Finance costs:$756,373
Income Tax:$2,673,618
Profit Before Tax:$15,846,395
NOPAT:$13,172,778
Cash on hand:$17,773,617
Current Assets:$70,068,423
Total Assets:$108,720,565
Intangible Assets:$8,436,841
Current Liabilities:$39,909,311
Total Liabilities:$51,136,692
Total Debt:$19,925,459
Net Debt:$2,151,842
Total Equity:$57,583,873
Key Financial Metrics
P/E:3.53
ROE:22%
ROA:12%
Net Profit Margin:12%
Net Debt/Equity:4%
EBIT Interest Cover:21.95
Earnings Payout ratio:32%
Retained Earnings Ratio:68%
Intrinsic Value: $0.47 using 32% payout ratio and 14% RR.
Another one previously mentioned that looked interesting was LYL, I will post their numbers later.
Cheers
ron shamgar
:
if u read their HY report they say they have 53million order book for 2nd half. which is less than their first half.
Manny_Sorbello
:
Yes, good point, the report says the order book currently stands at 83million but only 53.7million is scheduled for delivery in the 2nd half.
Horea
:
Hi Roger, Guys,
My first valuation exercise is on MMS. I have a value for 2010 of $9.7 !!!!.
But Roger has recently valued them at around $2.64 and given them a B3 if I recall…
The numbers I am using are picked up from their 2010 annual report:
A Current Equity(2010) 89,417,000
A Current Shares 67,680,000
A EQPS 1.32
B Reported NPAT 44,960,000
B Reported Dividends 13,855,000
B PayoutRatio 30.82%
C Prev Equity (2009) 57,403,000
C ROE 61.25%
C ROE Selected 38.00%
D RR 11.00%
Step 1,3,4 Table 11.1 3.409
Step 1,3,4 x EQPS 4.50
Step 1,3,4 x POR 1.39
Step 2,3,4 Table 11.2 9.094
Step 2,3,4 x EQPS 12.01
Step 2,3,4 X 1 – POR 8.31
IV 9.70
Would greatly appreciate if someone could help me find my error.
I own MMS since 2009 when I got them at $3.80 and now considering selling, but not sure if I am doing the right thing.
Gavin
:
Hi Horea
My indicative valuation for MMS is 9.67 for 2011. I believe MMS long-term payout ratio is more like 60%. MMS is one of my largest holdings and I regard it as an excellent business with good management. Although like all businesses it has risks and exposures.
Not sure if Roger still has the same MQR and Valuations as you state but do recall participating in some debate when he first published them (following 2010 results). If you do a search there is some good information in those discussions.
MMS is still likely to cause differences of opinion, it’s imperative that you form your OWN opinion to guide your actions.
Kev Sep
:
Hello Horea re your MMS valuation
Have not read annual report but agreed with your basic data and calculations on that data. Data basically agreed with my historical data.
Roger has commented on MMS presiously and may be worth following up or searching his blog.
see: http://rogermontgomery.com/what-do-i-think-of-mcmillan-shakespeare-now-2/
cheers kev sep
Wayne P
:
Hi Horea,
I can’t recall the exact details of the 2010 annual report for MMS, however the Interlease acquisition they recently made may not be reflected. If you check out their 1H11 report it clearly shows significant declines in margin and increases in debt. With debt to equity above 100%!
AndyC
:
There appears to be a lot of talk about mining companies and them being below intrinsic value.
This makes me wonder how, all of a sudden, as a community, we have all become so much better at predicting future profits for commodity producers?
Maybe I’m a simple kind of investor, but it seems to me that many aspiring investors are projecting profitability of smaller commodity producers when this would require a good understanding of what prices are going to be over the next few years.
BHP and Rio appear to be somewhat different in that their competitive advantage stems from both diversity and relatively ‘low’ cost of producing materials.
Isn’t value investing about finding companies so simple and profitable, that they can be operated successfully by average managers? Isn’t it about not losing money by that unexpected drop in prices you have no control over?
Pricing power! Easy to run! Keep it simple.
Matt
:
“All we need is just a little patience” – Axl Rose.
(Was Axl really a closet value investor? we’ll never know!)
Andrew
:
Agree entirely Andy. I stay away from them as they too much of a hassle with som many external factors affecting its profitability. Plus, i don’t know anything about mining other than it involves digging stuff out of the ground and then selling them to someone. I could not tell you why gold mining company A is better than B, they are still just digging up yellow bits of metal in my mind. The word commodity makes sense to me in regards to these companies.
I stick with companies that i find so much simpler that i can buy and hold for an extremley long time. I don’t think mining fits this.
That said we are a resource country where the ASX is dominated by resource companies of all sizes and shapes and metals. These companies will always be talked about, especially for those only concerned in finding companies below their guess of value and don’t worry about analysing the market environment and competitive position.
For those investing in these companies, good luck to you and i wish you all the best, but i will stay away from them.
Gavin
:
Andrew/Andy
I’m with you guys.
I see three risks to be controlled.
1) Solvency risk.
2) Valuation Risk
3) Earnings Risk.
Risks 1 and particularly 2 are getting all the focus, yet if you don’t have regard to risk 3 then you may just find that your models for risks 1 & 2 suffer from GIGO (Garbage In, Garbage Out) as the cycles unfold and earnings are impacted.
Wayne G
:
Agree totally Andy, well said.
Wayne
Ben
:
I believe that red 5 a gold mining company is trading below its intrinsic value. I have been researching recently small cap mining stocks that have either just begun production or are about to start. This one ticked the bill and they have no debt and also will be mining at an avg cost of about $350 an ounce.
Paul Rehill
:
Hi Roger.
You have been a fan of Decmil Group for a while which looks to be undervalued, do you have a view on the rapidly rising “guarantees given to various clients for satisfactory contract performance”? The guarantees were:
– $38m at 6/09.
– $57m at 6/10
– $70m at 12/10
The guarantees are a substantial proportion of net assets. If Decmil doesn’t deliver, these guarantees could substantially reduce NPAT (e.g. like Downer EDI). Forge Group on the other hand, doesn’t seem to offer its customers such guarantees.
Ash Little
:
Hi All,
MCE and FGE are very likely canditates to enter the 200 or 300 index when the next reweighting comes along.
john
:
Hi Ash,
You have been a tremendous help to me so thanks again…
What do you think of SGH?
Ash Little
:
Hi John,
on my watch list but I haven’t as yet got to looking at the half yearly accounts.
Sorry
Jeff
:
Regarding FGE. Do any other grads have the iv falling in 2012 and 2013 from the 2011 number.
I do (based on Southern cross equities forecast EPS) but would like to check with the community to see if my calcs are correct
thanks
in advance
jeff
Christopher
:
Good call Ash,
300 it is. The S&P reweightings had totally slipped my mind til I saw your post!
Matt
:
Hi,
Just wondering if anyone follows US stocks. In particular I have a FY11 value of MSFT at $55 which is nowhere near price. My inputs are shares of 8668m, start equity of 46175m, EPS 255c, DPS 62.3c, ROE 40.5 (avg eq.) with a 12% RR.
From what I can see it’s been trending away (down) from IV since the end of 09. AAPL is at a similar discount. Are tech stocks that out of favour?
Any thoughts would be appreciated, thanks Matt
ron shamgar
:
if you’re looking for value, these are my picks for the moment in the microcap section with their MOS for FY11 IV:
vocus VOC 20% – high profit margins business
zicom ZGL 50% – oil & gas sector strong order pipeline
fsa group FSA 50% – improving cash flows with strong management
jumbo interactive JIN 80% – online lotteries website, international growth potential.
credit corp CCP 5% – improving earnings growth
decmil DCG 10% – we all know this one by now. a small cap by now.
hope that helps.
ron shamgar
:
obviously i wont mention matrix and forge as everyone here owns them already…..
ron shamgar
:
and i forgot :
structural systems STS 30% – improving cash flows will reduce debt. mining division will help earnings growth.
that’s it for now!
Ashl
:
Hi Ron
I have researched this one and the loss from discontinued operations is a regular occurrence from current management so just be careful.
As Adam Schwab say in his book.
“If a gain is a one off, assume it won’t be repeated – If a loss is due to management assume it will be”
No shock to me to seen another loss from discontinued operations in the last set of account.
Just my view and I could be very very wrong
Andrew
:
I do not know if their is value their or not as i haven’t calculated it, nor have i looked at the financial, but what are your thoughts about Jumbo? What do you think is its advantage over say the local newsagent? What does its profit margins look like?
I know there is the arguement of convenience, they can buy a ticket from their computer rather than go to the shops and purchase but i think this will be a luxury for some rather than a sustainable competitive advantage. I’m not sure how hard it is to get a license to sell lotto tickets, my thoughts are it would not be that hard for others to get one as well.
I can see a time where online purchasing for lotto tickets could be popular, especially with Gen X and Y becoming more technology savvy so this is why i am asking.
Correct me if i am wrong but lotto ticket selling is a commission business, people buy the tickets and the vendor (jumbo/newsagent) clips a portion of the sale as revenue. There for high volumes is key.
I think most of the margin would go to the company that runs the lottories (tattersalls for some).
Lotto tickets are a commodity style product, i don’t think there is much power the vendors have in regards to pricing so there is little scope to raise prices to improve profit and i don’t think they have much power to negotiate better terms with the supplier. I could be wrong but i think barriers to entry would be quite low and there is the potential that the existing competitors who have a higher brand awareness could jump into the market.
They are the first movers and if can make themselves more visable to customers than that could help lock people into their service but i am not so sure.
Rici Rici
:
my understanding is that Jumbo Interactive (JIN) has exclusive rights to operate the online lottery business. This contract needs to be renewed every 5 years or so (so there is a risk that it will not be renewed at some point in the future).
I spoke to management and they said this is a risk. However in the whole scheme of things the net profit is quite small (around $2m p.a). For a microcap like JIN this is very satisfactory. But for the lotto companies themselves, they are large cap, and this profit is immaterial.
Craig B
:
Ron,
I’m all over Zicom and FSA Group. I’ve seen on this blog that Roger’s given them ratings of B2 and B5 respectively, so he obviously sees substantial cat risk in FSA.
For what its worth, here are my valuations:
ZGL (calcs in Singapore Dollars, converted to AUD using $1.30 exchange rate)
Beginning Equity – 66.7M
No of Shares – 211M
Equity Per Share – 0.316 c
ROE – 25% (based on Half Yr figures)
Payout Ratio – 20%
RR – 14%
IV – $0.64 AUD
FSA Group
Beginning Equity – 44.7M
No of Shares – 138M
Equity Per Share – 0.325 c
ROE – 17.5% (based on Half Yr figures)
Payout Ratio – 0%
RR – 14%
IV – $0.49 AUD
cheers
ron shamgar
:
thats pretty close to my IVs. zicom will benefit from the oil & gas boom. but ROE needs to be more consistent.
FSA has improving cash flows and should thrive in high interest rate environment. i think the market is waiting for an inaugural dividend to kick start the share price…..
Brent
:
Zicom’s ROE has not been inconsistent when you strip away the exchange rate movements. Since 2007, ROE has been between 15.8% & 22.6% with a 4 year average of 18.6%.
This is in spite of being in an industry which is heavily affected by the GFC. It’s a pretty good financial performance in light of this. Figures pre-2007 aren’t representative of the current business, as it was in 2006 when the reverse takeover occured.
john f
:
Hi Roger,
The company which I believe is still below intrinsic value is Focus mining (FML). This small cap gold mining company seems to be ticking the right boxes. Its about to start an open pit mining campaign next month on top of it current positive production and recent constructed and fully funded infrastructure facilities. The open cut mining, will reduce the cost of production and with the current escalating price in gold there is no other way but up for this company.
Today, further positive results from an exploration campaign provide further expansion and possibilities to reduce costs further. As long as the gold price stays firm, we should see positive value
John F
Scott T
:
Hi John, thanks for your suggestion.
Please correct me if I am wrong, as I would love to see the parameters you have used, however I get an IV closer to $0.02.
With an ROE of only 10% and billions and billions of shares on issue I am not convinced FML will be a real winner for investors any time soon.
All the best
Scott T
Steve I
:
I own Focus. The IV I have for 2012 is $0.35 (14% RR). It ticks all the boxes for me.
RobertD
:
Hi Chris,
I have also recently been taking an interest in commodities after reading Jim Roger’s book. I am not at the stage yet to invest any real money as I seek to further my knowledge and dry-test my strategies.
It appear a lot of people with small amounts of capital to invest use CFD’s as a way getting exposure to commodities. But the problem I see here is the contract lengths are short. If you are a long term buy and hold investor CFD’s don’t look like an appealing instrument. I would be interested in how others invest in the commodities market and what instruments they use.
Cheers
Robert
Ash Little
:
Hi Robert,
Give your provider a call as some roll the contract upon expiration to the next contract.
Worth a call I think.
If you want to hold CFD’s long term you will need a big float so just be careful.
I have seen CFD’s do terrible things to people how have the trend right but the short term movement against them wipes them out due to the lack of a float.
This is a very risky area even if you know what you are doing
Chris B
:
Thanks Paul and RobertD for the replies.
Yes Paul I understand the leverage of futures – I have traded futures for a while now. My question is more about how investors (not traders) can use futures (very often used as a short term trading tool) for investing for the LONGER TERM. So the question still stands…
If you want to gain LONG TERM exposure to a commodity, which month(s) do you buy/sell (keeping in mind that short term positions need to be rolled over)?
To answer your question Robert, if you wanted to use non-leveraged products to gain exposure to a particular commodity or a group of commodities then ETCs (exchange traded commodities) are worth considering. Unfortunately there are not many ETCs listed on the ASX, however there are a truck load listed on the American markets – covering all sorts of products and commodities.
So, for example, if you want exposure to oil you could buy the ETF with code USO and this will reflect the price action of oil. Or for exposure to uranium there is URA. For exposure to agriculture there is MOO, and the list goes on, and on, and on. A quick google search will help you find the ETC required.
Obviously if you wish to trade these ETCs you will need a broker who allows you to trade these markets. As mentioned in my previous post I use interactive brokers who have very competitive brokerage rates (eg – the minimum brokerage to buy any of the ETCs mentioned above is $1). Anyway, I’ve also had a look at IG markets and they seem to offer access to commodities as well as many other products with or without the use of leverage.
Enough from me,
Chris B
Chris B
:
Oh I forgot to mention that if you do trade these ETCs listed on American exchanges then you have to consider the effects of currency (as you will be holding the ETC in USD, not AUD). And given the inverse relationship between commodity prices and the USD – generally as commodity prices rise the USD falls – this becomes even more of a consideration as you might make $$$$ on the commodity, but you might give some $$$$ back on the probable currency loss.
Chris B
:
Hi Roger,
Sorry this post has nothing to do with finding value in the markets. I have a question that I was hoping someone might be able to help me with.
the question is targeted at those of you who use futures markets to invest in commodities…
If you want to gain LONG TERM exposure to a commodity, which month(s) do you buy/sell?
My question comes about because although the front months are more liquid, you are then presented with the problem of having to roll the positions over every month or two.
Would Roger or anyone else like to comment on the way they use futures to gain exposure to commodities?
Also, which brokers could you recommend? I have an account with Interactive brokers who i have found fine, but i would be curious to see who others might recommend?
Thanks in advance,
Chris B
Paul Rehill
:
Hi Chris
Since you need to ask, I would avoid futures derivatives at all cost. It is a highly risky speculative activity as you do not own the underlying commodity and your holding period return will be dependent on the price at contract maturity or the price on closing out your contract position. If it doesn’t work out, the negative return may significantly hurt your long-term portfolio return and be difficult to claw back. Better off investing in companies with low cost, long life mining operations like BHP or RIO that reinvest capital at an incremental rate of return exceeding 20% if you can purchase them at a discount to IV.
If there is another GFC shock this decade, all bets are off on commodity prices. They can fall significantly and are priced in USD, and the USD may depreciate significantly against the AUD such that the net gains over a long-term holding period are average at best.
wes smith
:
Hi Roger,
A small company listed this week & whilst I know it is very early days, they may have potential & are probably in the right spot at the moment. They provide maintenance to plants at mining companies from top to bottom & are MOBILE. Some of their clients include Rio & BHP.They are looking to grow organically as well as bolt on they say. Their asx code is AZG (ALLMINE GROUP LTD.) Who knows they may become the FGE of the mine plant maintenance area. (first time contribution)
David H
:
There has been a bit of discussion about Finbar (FRI) Little debt but recently undertook capital raising to accelerate projects. Will have a dilutional effect on shares but will also increase their profits as projects are completed sooner. They are not quantifying the profit increase other than to say they should increase profits in 2013. Recently thier share price has been falling. Are they worth a look? Would be nice if they would give some profit forecasts.
john Watson
:
Finbar (FRI), hmmmm a capital raising, no profit forecasts and share-price falling from a high a $1.51 in the December 2010 quarter to $1.00 today – I wonder why!
Mike
:
You only have to look at Finbar’s free cash flow (Operating cash flow – Capital expenditure) for the last 10 years. Total free cash flow is a negative 51m, compared to reported profits totalling 80m, so profits only tell half the story.
They’ve also raised 54m from capital raisings over the last 6 years. Looks like a fairly ordinary company to me.
David H
:
John,
That is certainly how the market is looking at it, but valuable tells us that the market can be wrong. Unless there is information they are not releasing then they look quite good. Low debt, capital raising to accelerate projects and profit which will be realised from 2013. Profit forecast for 2011 of $23.5M and growing. They don’t give a quantitive forecast past 2011 which is the problem. WA is the growth state. I would love to see better guidance. Are they a dog or a bargain? Is the market right or reacting to the short term dilution without looking at the longer term outlook?
At $1 yielding 7% with a payout ration of 50%. Recent A1 rating by Roger.
Nic Arena
:
Roger,
I have noticed the great increase in the SP of Maca these past few months. Unfortunately I didn’t purchase any. The reason I didn’t purchase is that the debt/equity is about 110%. I read that you look at companies under 30%. So did Maca make your A1 rating and is it investment worthy? Or is it just one of those stocks that you just have to accept is close to investing in (but just not there) and miss the rise and wait for other opportunities?
Lina
:
Nic,
MACA’s debt to equity is 8%. Not sure how you arrive at the 110% figure.
Lina
Nic Arena
:
I have a total of 38.4 million in debt (page 55 of their prospectus under the 2 headings of Financial Liabilities – 15.2 million + 23.2 million) and a total Equity of 35.7 million (page 56 of the prospectus) giving me a total of 108% Debt/equity.
Can anyone clear up why mine and Lina totals are totally different?
Thanks
Ash Little
:
As Per the latest set of accounts
Current Financial Liabilities 18,157,870
Non Current Fin Liabilities 26,442,174
Equals 44,600,044
less cash 54,189,918
Equals ( 9,589,874)
divided by equity 79,483,136
Debt to Equity Negative 12%
They plan on spend alot of this cash so things will change
Lina
:
Nic,
You need to deduct the $33.3M in cash held at bank from the debt figure and the Equity figure is $62.5.
Lina
Mike
:
Hi Nic,
MLD – MACA’s Debt/Equity ratio is 90.9%. When calculating Debt/Equity ratio, you need to exclude cash so the ratio is actually “Net Debt”/Equity.
You are right that MLD has 38.44m of debt, but also they have 6m in cash.
so Net Debt is 32.4m.
Cheers
Mike
Nic Arena
:
Hi Guys,
Thanks for the reply. I am very cautious about deducting cash from the debt. I believe that if the company doesn’t need the money then they themselves would reduce their own debt, instead of me doing it from the comfort of my home. Every company and every person needs instant cash to do transactions. Although the company can use this cash to pay down debt in troubled times if that cash is absolutely necessary for them to operate (may for inventory for example) then really that cash can never be used to pay down debt otherwise they won’t be able to operate or at least operate at the level I need them to to create a high ROE. In regards to using some of the money to deduct debt (say I deduct 50%) I really don’t know how much that company actually needs to run day to day operations. Again the company would themselves pay down debt if the money wasn’t needed. I don’t know who is right with the cash figures by the way (Ash says 54 Million, Lina 33 Million and Mike says 6 million). Again guys thanks for the reply (always count on Ash to help. Thanks)
Ash Little
:
Hi Nic,
I would think that a fairly high proportion of the debt would be equipment finace which is relatively cheap at the moment and the establishment costs are minimal.
This type of finance can’t be paid out early without penalty.
To be honest I only purchased MLD because it was cheap but the 31 december balance sheet was an improvement
Hope this helps.
Matt
:
Speaking of MACA, from the recent HY report I have them valued at just over $4. Using a 14% RR and a $23.1M NPAT that “assuming no significant changes…will be comfortably exceeded”.
Matt
:
35% MOS ain’t bad.
Andrew
:
Jb Hifi are an example of a small business that grew to be big. I remember when there used to be only one store in NSW.
I am one of those that tend to shy away of going smaller and smaller to try and find value. I agree that finding a small business and jumping on board it to watch it become the next big australian company would be great.
For me, its not the size of the company and instead the market positions and competitive advantages on offer. If I find one that has a good market position and strong sustainable competitive advantage then I will get on board. If not, I have a list of 13 other companies that I like and will wait for those companies to become affordable. Some of which are smallish companies.
I don’t have any real problem with people going smaller and smaller in search of value but it just doesn’t fit me. I have always been told I am very picky but it has lead me to good fortune. I think being picky in regards to investing is likely to be quite rewarding as well.
Kim Jordan
:
Dear disciples,
I would be very interested to learn of other’s philosophies regarding setting stop-loss triggers for their holdings. Do they have them in place for all holdings? How tight to the current price to you set (and reset) them – and why? – what thought processes have you gone through that have settled you on a certain way of operating.
If it’ll help, take three examples if you like: FGE, MCE, WOW
Would your stop-loss setting philosophy for each of these be any different, one to the other, and if so why?
Would be grateful for any and all input.
John M
:
“Value.able” Chapter 13 “Getting Out”. Roger dedicates 9 pages in his most excellent book to explaining his exit strategy process in detail. Be careful of setting a stop loss that can exit you from a wonderful stock just because the market is having a short term hissy fit or fluctuating sideways. Much care is necessary here is you are following the Value.able process.
Adam
:
In my humble opinion Stop-loss’s should be known as “Loss Locker-inners”, and have no use to an investor. (Maybe a trader though.)
Why sell just because the market price has dropped? Unless the company fundamentals have changed, this is the time to buy.
Ash Little
:
Great Stuff Adam,
I remember Roger one night on YMYC when a caller rang in and said what had happened to MCE as she has purchased at $5 and the price had fallen to $4.80.
Not exact quotes but Roger replied
Probably noting has happened except people are willing to buy and sell the shares they own lower prices. The business is the same and I (Roger) continue to think that this is a fantastic business.
Unless you have made a mistake there is no need to sell when the price drops. If Heinz Baked Beans drop in price at the woolies I buy more instead of trying to offload my current stash at lower prices.
Companies should be viewed the same
Scotty G
:
Good luck rocking up to Woolies and trying to offload some baked beans! Be good for a laugh though!
Ash Little
:
Money back guarantee Scotty
LOL
Scott T
:
Hi Kim,
Good question, and Johns answer is dead right. If you are buying quality companies, like the 3 you mentioned, you don’t need a stop loss. A trader as opposed to an investor wants to make a couple of percentage points on a stock and get out, they need a stop loss because the quality of company they trade means there are swings up and down in price, quickly and erratically.
Mr Market can have a very bad day at the office for reasons irrelevant to your holdings and everything goes down, for value investors in quality companies, this is an opportunity, not something to guard against. Indeed if you set a stop loss on stocks like MCE, FGE, WOW, you may unintentionally sell on exactly the day you should be buying more.
I hope this helps.
All the best
Scott T
Kim Jordan
:
Thanks all for the comments – but I’m more concerned about philosophy for us disciples re protection if anything like GFC MkII (or worse) would hit i.e. how to exit the market with your shirt half-intact, and gather your ‘nuts'(of all types) and regroup for the buying opportunity. There have been ‘crashes’ where it all happened too suddenly haven’t there? And so should we have sell orders in place to facilitate such an exit in such an emergency?
I’ve just finished reading a book that talks about the utter foolishness of purposely staying in the market through such a slump (or a worse, or more prolonged slump).
Paul Rehill
:
As a value investor, I have no need for a stop-loss as I am ignoring short-term price movements and instead, thinking about what the intrinsic value of a security is using the information I have at hand. As more information arrives (e.g. annual and half-year financial reports and management commentary), I may adjust my original assumptions used to determine IV and update it.
Taking DGX as an example, my 2010 IV was $0.58, rising to $0.66 in 2011. My projections implied EPS for 2010/11 of 6.5 cents or NPAT of $9.97 million. Management reported a loss of $0.6 million for 2011H1 which was a significant departure from its past track record as I mentioned in a previous blog post. Clearly, my assumptions were incorrect and the IV has now dropped and is much harder to estimate. On that basis, the disciplined approach is to sell which is based on what I now know.
Of more interest generally, is determining what is happening with the incremental return on equity based on changes to NPAT compared with prior changes in shareholders’ funds both annually and taken as an average over a number of years (3, 5, 10 etc). After thinking about the reasons for any changes in incremental return on equity, I’ll decide whether I should update the assumptions used to calculate current and projected intrinsic values. A comparison of current and projected IV against current price helps determine whether I should adjust my portfolio.
On the last point, I generally use a 15% required rate of return to determine the IV of a security. However, if the price rises significantly in the short-term and future earnings tend to fall in line with my original assumptions, the stock may be trading above its IV using a 15% discount rate in the future (if the original margin of safety was small). However, I should only sell if Mr. Market pushes the price far above my current or projected IVs, perhaps measured at a 10% required rate of return. Under this scenario, the original 15% return will be achieved over the holding period but an extra return boost arrives thanks to Mr. Market so the overall return over the holding period will significantly exceed 15%.
If the business proves to be a wonderful business, adopting Charlie Munger’s “sit on your ass investing principle” will provide wonderful returns through the power of compounding, lower taxes and transaction costs. I think all investors should think about what compounding means for them using their target required rate of return and investment horizon. For example, for every $10,000 you have and can invest over a 30 year period, if you achieve a:
– 10% return (after tax and fees), $10,000 becomes $174,000.
– 15%, $10K becomes $662,000.
– 17.5%, $10K becomes $1,262,000.
– 20%, $10K becomes $2,373,000.
It will pay to memorise these numbers and figure out where you want to sit. Mr. Market will help you achieve a little more than your original required rate of return. Where do you sit?
I hope this helps.
Paul
Roger Montgomery
:
You are on the right path Paul. Well done and thanks for sharing your ideas.
Stephen Walker
:
Roger,
I have been reading over the w/end about the choke price of oil & am wondering about the effect on companies such as FGE, MDL, MCE etc. Are you able to explain this for me please? I hold a reasonable amount of FGE in the portfolio, this was bought very early (average $1.87). On another note I am in agreement with BJP regarding HOG, I have been buying these over the last 4 months (average .24) & have just stopped buying.
kind regards,
Steve
BJP
:
Steve, it is good to see that I am not the only one who has found HOG, unfortunately a little later than you (average .33). Have you calculated a future IV? It’s a difficult stock to value. Hartley’s value it at around 70c but my IV is north of that…
fred
:
Hi Roger,
CMI Limited ( cmi ) seemed interesting but the announcements about its dividends seems to over shadow its return to profit.
Thank’s Roger
Peter Kruckow
:
Hi Fred
Not to mention ASIC been called in to do a bit of butt kicking if I understand the announcements correctly
Cheers
Pete
Mikael
:
Royalco (RCO) is trading at a discount of about 20% at the moment. Extremely illiquid stock but with good fundamentals. Easily the best value of the gold companies on ASX as measured by their money-making-machine abilities. Not too many gold companies have a fully franked 10% dividend yield. I have the IV at $0.50 (RR13%, average equity $0.279/share, ROE 19.9%, NPAT $0.0554/share, dividend pay out ratio of 60%. No debt.
Steve
:
Roger – you mentioned on YMYC that there were a number of small cap stocks that you have found to be trading below IV. You said that you would reveal them soon once you have taken up positions in them. Are these small cap stocks which haven’t been discussed on these forums before? Or are they nano/micro caps? Just wondering if there are some stocks out there which the value.able community have missed
Mark
:
Hi Roger,
What about international markets? I assume Valuable works internationally?
Any thoughts from the community??
Scott
:
Mark I am doing my best to try to apply it to the HK market. So far it is tough to get the metrics.
Ash Little
:
Hi Roger,
I may be wrong but I think MLD was a minnow when they listed
Ash L
:
Sorry Room
I Mean MND
Greg Mc
:
They were indeed. My old man got in at the ground floor when they were floated and bought a few other parcels here and there and went for the DRP every time. Not sure what they floated at but if it was a dollar, then he’s claimed a 60 bagger or thereabouts.
Fluked it of course.
Ash Little
:
LOL Greg Mc
I bet your Dad doesn’t think so
Greg Mc
:
Nah, he reckons it was a stroke of genius.
He’s a bit quieter about TLS and QAN, both of which he still holds. He says “Yeah, but QAN was over $2.80 not that long ago, I’ll hold until they get a bit higher”. So whenever he tells me how well MND is going (he knows I know perfectly well) I ask about TLS and QAN.
My prediction: He’ll never sell TLS and QAN.
Ash
:
LOL,
Your Dad and my Dad should get together and trade war stories
Change GMG for QNA and arrow energy for MND and the stories will be identical.
They will be able to talk for hours about the great TLS divy
Shayne
:
Roger
What do you think of OKN. Looks to have similar fundamentals to SMX but trading at a significant discount? I think you had it as an A2?
Shayne
Clint
:
Pesonally I think SMX and DWS are better companies… however, SMX is at a premium to its IV and DWS is currently priced at a small discount to its IV…
as for what the future holds for SMX, DWS & OKN? only time will tell.
BJP
:
Roger, an example of an A1 company that started small and grew into a large cap stock is Reece (REH). Have been listed since the 80’s and started as what you class as a ‘micro-cap’. Are now in the ASX 100…
I usually set aside a small portion of my portfolio for nano stocks and have recently broken my no-resources rule and invested in Hawkley Oil and Gas (HOG). They have just begun production (de-risked) and are still significantly under-valued compared to my future IV, even taking into account geography risk. DYOR – and don’t forget to take into account the shares in escrow when calculating equity per share.
ron shamgar
:
Novarise Renewable Resources International seems to be interesting…
Christopher
:
Hi BJP,
Those who lost the battle for control of Woodside back in the day would probably still be kicking themselves. Minnow to major, in a very major way.
Geoff Morris
:
Hi All
The only alternative investment which I have well below IV is the S&P500? Using Prospective ROE 16.8%, Divi Payout 25% and RR of 8% (As there is no risk of S&P 500 going broke) the IV is approx 1900. Maybe RR is too low but also uncertain about best way to take advantage (dont trust ETFs). Otherwise apart from FGE & MCE cant identify any investments well below IV.
Thanks
Geoff
Matthew R
:
is it likely that a payout ratio of 25% on an ROE of 16.8% is likely to continue forever?
Scott T
:
Hi Roger,
A great piece, and just a little bit tantalizing, “there are a few out there”.
I completely agree with your comment on YMYC last Thursday that there are few things more satisfying than buying a company and watching it grow to join the ASX 300 or 200 and have the fund managers put the cherry on top of your desert, as they pile in and buy up.
On that theme I like TSM at the moment, I know they are currently an A3, however even after the well deserved rally generated by last weeks results they still have a MOS of 27% on my numbers, plus their IV is increasing at a nice clip for the next 3 years.
Thanks again Roger for keeping us on our toes and giving us ideas to work with.
All the best
Scott T
Raymond
:
Hi Scott, Yes I agree with your comments. TSM ticks all the boxes for me and seems ideally placed for growth both at home and abroad. The feedback I received researching TSM at WOW and JBH stores was outstanding. I was surprised by the strength of these comments and the amount of business being put through TSM platforms. To my mind, TSM has a bright future when A1 companies like JBH and WOW commit to using their products!
Cheers, Raymond
ron shamgar
:
with 15% ROE and lots more shares on issue, i dont get excited at all!
sorry.
David
:
Hi Scott
I also am interested in TSM. Where did you get your forecast EPS & DPS for Thinksmart (TSM) for 2011 (and beyond)? Comsec only lists the 2010 actuals. I would appreciate if you could share these or at least point me in the right direction.
Best Regards
David
costas
:
Nice article once again Roger.All Valuable readers need to meet one day and make our own lobby.By the way Roger i think you need to fix your blog.Sometimes we can’t see the latest posts.
Roger Montgomery
:
Thanks Costas,
I believe you just need to clear your cache or refresh the page.