What A1 stocks am I looking at right now?

Insightful Insights | Comments (78)

What A1 stocks am I looking at right now?

If you saw my post titled ‘Are you drowning in a sea of complexity‘, you will recognise the A1 businesses I shared with Peter’s viewers on Monday night. Whilst the list of A1s isn’t new, I did share some fresh insights into my Montgomery Quality Ratings, and my thoughts about Oroton CEO Sally Macdonald selling shares.

Part I: What is the secret of Roger Montgomery’s A1 Montgomery Quality Rating?

Part II: What are Roger Montgomery’s Top 20 A1 stocks?

Part III: What are Roger Montgomery’s cheapest A1 businesses?

Visit Roger Montgomery’s YouTube Channel to watch more of his TV appearances.

Posted by Roger Montgomery, 17 November 2010.

INVEST WITH MONTGOMERY

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.

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78 Comments

  1. Matt
    :

    Hi,

    SEK has taken some hammering over the last month, down 15% or so. A recent company presentation has a “more difficult” FY 2011 and additional investment costs but no real detail. Just wondering the valuation others have for SEK. My IVs for 2010 and 2011 @ 10% RR are $5.20 and $6.40.

    Regards,Matt

    • Pat Fitzgerald
      :

      Hi Matt

      My 2011 IV for SEK is $6.64. I do not have any ‘margin of safety’ yet, even though the price has dropped. I do not own shares in SEK.

    • Andrew
      :

      I have 2010 $3.82, 2011 $4.94 and 2012 $6.68. So at the moment only a small discount to my 2012 price which isn’t enough for me.

      i love the company though and this is one i have on my wishlist. Don’t own any though.

      • peter
        :

        g’day Roger

        just need your thoughts. You have OKN and DWS as A1s both have had recent poor announcements/ profit downgrades for various reasons -such as losing a recent client over christmas period – – does the above affect your view of these companies or do you still see them as a1s that have the occasional speed hump and therefore have even more reason to buy?

      • Roger Montgomery
        :

        Hi Peter,

        When I speak about A1 it is a reference to their chances of a ‘liquidity’ event. A liquidity event is a capital raising, a debt covenant breach or even administration or receivership. A1s have the lowest chance of this type of event. A1 DOES NOT mean the business can avoid the business cycle, a share price drop or a withstand a recession. IT spending is the first thing to return after an economic slowdown as companies rehire employees and the first thing to be cut upon the whiff of a slowdown. The announcements are important in the sense that they suggest the economy is not as strong as was perceived, say two or three montsh ago.

      • peter wallace
        :

        Thanks Roger

        I sort of expected your response just needed my thoughts clarified. DWS is now at $1.30 and although it’s lost some revenue I feel it’s worth another bite at the cherry. I just have a very good knack of buying companies before profit downgrades. LOL!

  3. Wayne
    :

    Thanks for the great comments from Roger et al!

    I was wondering if anyone out there had looked into a small infrastruture servicing stock called Seymour Whyte Ltd (SWL). They’ve only just listed however they have performed impressively over the last 3/4 years per the annual reports I have seen (High ROE, solid retained earnings, forecasting strong future growth). Doing the numbers they appear to be trading at a compelling discount.

    However, they seem heavily exposed to the story of continued QLD Gov infrastructure spending (and with QLD current deficits isn’t the most attractive investment proposition). In addition I struggle to find any clear competetive advantage’s they would have over their competition.

    Interested to hear people’s thoughts!

    • Ken Milhinch
      :

      Wayne,
      There has been considerable discussion about SWL on previous posts.
      (Happy to say i own quite a few of them.)

      Regards, Ken

  4. Matthew R
    :

    To everyone who contributes comments:

    I just realised there is a way to have your mug displayed next to posts that you make.

    Go to http://en.gravatar.com/site/signup/ and enter the email address that you regularly use for your posts

    Create the account and upload a picture

    Wholla – next to every post that you have EVER made with that email address will be your face (or pet)

    I wonder who the first person will be to choose as their picture a deep sea riser buoyancy module? Probably not Ken! :)

  5. Nicholas
    :

    I’ve very much enjoy reading the posts on this blog by Roger and others (and the book was excellent of course). I’ve appreciated learning about a number of businesses that I wouldn’t otherwise have sought out so I thought I’d add to the discussion….

    One business that interests me at the moment is RQL – Resource Equipment Limited. I’m still doing my DD on the fundamentals but on face value it seems appealing. They provide specialised pumping services and equipment to the mining industry. They’re only a small stock but hopefully they grow over time! What I’ve found interesting is that I can’t seem to find any competitiors of note. Coates obviously provide more generalised equipment but RQL are into specialised equipment. I guess there is always a chance that Coates, or someone else, will move into the space but the business does seem to require a degree of expertise (i.e. qualified employees) and that may present some barrier to entry.

    I note that there is some debt on the balance sheet but it seems to be financing equipment and expansion. I’m also not quite sure how to treat the goodwill on the balance sheet.

    The business founders continue to own a fair portion of stock which I think is good.

    As I said at the start of the post I have appreciated others putting stock ideas forward as food for thought and to gain any particular insights other posters might have, It is in that spirit that I submit this post.

      • Nick Mason
        :

        Hello Everyone,

        an interesting post Nicholas.

        Last Friday I emailed Roger to recommend again that he take a look at the RQL presentation from their AGM (with updated revenue data from the start of this FY)

        It is a company which has very exciting prospects. As you mentioned in your post and as RQL mentions in their presentation they have no competitors of size operating in their field either domestically or internationally, also debt is only through hire purchase agreements, not from the bank.

        Something which greatly impressed me about the company of late was that
        at the AGM the employee Performace Rights Plan was adopted overwhelmingly (I am not an employee) This Plan provides the opportunity to all staff to become Shareholders in the company that they work for and there has been a very positive response to the Plan, according to the MD James Cullen (former MD from PCH Holdings.)

        This impressed me for two reasons. First I believe it is right that employees should be given the chance (and not only through buying shares onmarket) to become part owners in the business they work for. Also, there are many barriers to entry into RQL’s field, one of which is lack of skilled personnel. By introducing this scheme RQL is offering an excellent incentive to all new and current employees.

      • Roger Montgomery
        :

        Hi Nick,

        I did have a look. It gets an A2 and its trading at its intrinsic value. The A2 rating needs to be checked because I haven’t yet reconciled the changes in equity and the 110 million shares issued – which go a long way to explain why it is not a “C4” which it was in 2009 and 2007.

      • Nick Mason
        :

        Hello Roger, I am not sure exactly what you mean when you say

        “– which go a long way to explain why it is not a “C4″ which it was in 2009 and 2007.”

        Resource Equipment Ltd, formerly RER Group, this year (2010) finished its first year as a publicly listed company.

        Resource Equipment Ltd, (formerly RER) had before acquired “Resource Equipment Rentals” although it also has other business units in hydromining and reverse osmosis and has set up new units to service the oil and gas sector and also provide power generation to remote mining sights.

        The company’s website is a good source for general information and learning more about what the company does.

      • Roger Montgomery
        :

        Hi Nick,

        Being publicly listed in 2010 does not mean it was the first year in business. My information goes back to 2002 but that was Repcol. I made a note to re-examine the data because, as I noted previously, there appeared to be a reconciliation problem that was unexplained in my framework. You beat me to it. Back to the future however, the key is identifying a sustainable competitive advantage and the issue for these types of business remains exposure to commodities and Operating leverage. Thanks for bringing the anomaly to my attention – it will help me improve my system and the delivery framework.

      • Nick Mason
        :

        No problems Roger. Even comparing RQL in its current form to the business it was last year does not take into account the company’s geographical growth and also its new addition of business units (in the oil and gas sector, hydroming and providing power to remote mine sites.)

        Although what also should be noted about RQL (when contributors speculate as to how changes in commodity prices in the future could possible affect RQL’s business) what a task! Is that RQL’s market are mines which are currently operating, not proposed new mines (investors should note that 75-80% of revenues are recurring through long term site presences.)

        So for future changes in commodity prices to affect RQL’s possible market the mines would have to close. (Note that during The Great Recession RQL’s operating subsidiary Resource Equipment Rentals grew its business and market share.)

        Now, if you were to speculate accurately about the timing of this immense crash which will result in mass closures it could only be by luck. I am not even going to try.

        If we are to talk about competitive advantages and barriers to entry into this specialised field, (specialist personal, capital, product knowledge, track record, technical understanding, design capabilities…) are barriers which immediately come to mind and management has shown foresight by addressing one of these concerns with their scheme for employees to become part owners in the business.

        Very high barriers exist.

        RQL’s competitive advantage lies in the fact that they are not a typical rental company and will see a process through in its entirety. It will not only be responsible for renting the equipment. This is what makes it different and this is one of the main reasons for its competitive advantage over typical rental businesses.

        I have written enough about RQL for now, I hope the little information I have offered has been of at least some small hope to a few of you.

      • Justin S
        :

        At a very quick glance, here are my thoughts:

        RQL provide rental equipment.

        Yes it is specialised, but that does not prevent anyone else from setting up shop in competition if RQL start making lots of cash. On that note, no long term competitive advantage, a competitor would push down industry margins and any superior returns on capital would return to a normal level.

        The intrinsic value of any rental business should probably never stray too far from its book value in the long term as such. A quick look at comsec says RQL is at 2x book and making above average returns on capital. I think this is expensive for this stock, with the reason being that it is in a sweet spot at the moment and the ROC will fall when the mining boom subsides. If the mining boom continues for a long time, it may do well over that period time however. Eventually though, it will come to an end, earnings would fall, and you are left with a bunch of equipment that is not needed.

        As such, its abilities to create value over time are limited and I would not be interested at this price. My opinion might be different if I could buy it for half book though.

        cheers

        Justin

    • Paul R
      :

      Hi Nicholas

      I had a quick look at it and noted a couple of things to look out for. It has a tax rate of 1% due to carry forward tax losses so we should apply a tax rate of 30% to NPBT of $8m to arrive at underlying NPAT. The carry forward tax losses reported in the 17 April 09 presentation was $25m (subject to ATO approval which I didn’t subsequently verify in later announcements). Also, slide 16 in that presentation mentions 147m ordinary shares and 44m of options. So maybe 191m should be used in your per share calculations.

      Paul

  7. Andrew
    :

    Anyone got any thoughts on whether the latest decision by the courts in regards to the fees charged by NSW racing to the corporate bookies and how that would affect Centrebet.

    I can see why NSW racing want to charge the fees based on turnover and i can see exaclty why the bookies would want it charged on profits. I would expect that many other state racing organisations will try and use the turnover model in the future which will no doubt compound the problem for the bookies. As NSW Racing i think are already using the turnover model i think that the real downside risk to this business would be if the other states bring it in as well. This would probably have a reasonable impact on their profit margins I would think.

    I have not had a look into detail, it is just some observations i came up with whilst reading about it yesterday.

    I haven’t spent much time looking at Centrebet as i don’t see enough of a competitive advantage or moat to make it appealing to me. But i have been a follower of gambling related companies and find it interesting.

    Anyone had a more in depth look into it and what sort of impact it will have on companies like centrebet?

  8. Arvin Kumar
    :

    Hi Rodger,

    What are your thoughts on ERA, it has ROE & ROC rising for the last 5 years, in 2010 it is 28% & 29%

  9. ben
    :

    I dont understand why they have to question the whole notion of value vs price over a long period of time. Its so intuitive and its been proven with credit rating agency’s statistics; the high risk companies they have tended to diminish over time because a) they go bankrupt or b) they become better businesses.

    The same logic can be compared with the stock market; weak companies will eventually capitulate as the underlying fundamentals and business quality are absent!

    • Andrew
      :

      I think some people think that everyone else who is selling or buying knows more or better than they do as well as a lot of people thinking that the price is the value, the market is efficient etc etc.

      This makes us value investors stand out as we have a tendency of going against the general consensus mentioning PE ratios and resistance points and parobolas etc. Also when we say a companies value is significantly lower than the price being offered some people might see it as a huge discrepency and there for find our reasoning strange. I know this has happened to me. Most recently with Transurban.

      I feel that despite the obvious success stories of people following these methods it will remain the kind of black sheep as it does require people to think quite differently from a lot of others.

      I guess you could say we are the punk rockers of the investment community going against the general consensus of efficient markets and all knowing PE Ratios and saying “stick your price Mr market” and then smashing a Ipad linked to commsec over a copy of The intelligent Investor.

      • ben
        :

        Its so true. Heres a little ‘full circle’ argument;

        Ironically, when applying the principles of value investing, it really does coincide with the notion of ‘efficient markets’, that is, we are the people who ‘trade’ away the mispricing of securities! we see the opportunity and we exploit it!

        In fact, we can be viewed as the ones who are economic rationalists, we are the ones who keep the markets efficient.

      • Matthew R
        :

        Hey Andrew,

        Couldn’t agree more.

        He isn’t quite a punk, but to quote Munger: “To succeed on wall street one not only has to think correctly, but also think independently”

        Great man

      • Roger Montgomery
        :

        Well done Ashely,

        Keep it up. They were very funny. Lest we all be accused of being biased, I would be delighted to have some references to other globally respected investors/managers.

  10. Scotty G
    :

    Looking at the list of A1’s that came out last week has anyone had a closer look at Infomedia (IFM) and GLG Corp (GLE)?

    IFM seems to have great competitive advantage with their parts ordering system but sales seem to be steadily falling. Can’t really get consensus forecasts but got a present IV of $0.55

    GLE is a rag trading concern but seems to be fairly profitable. The ROE is pretty good and I got a rough IV of $1.50-2.00

  11. Adam
    :

    I understand Buffett is greatly admired on this blog, and fair enough I s’pose. But his open letter to the Fed and US Governent made me a little ill.

    On a more pleasant note, congrats on the second edition, Roger.

    • Roger Montgomery
      :

      Hi Adam,

      Thanks for the heads up. I have read those letters myself and some of them do take the gloss off a little. I have edited your post to keep the blog independent – people can find those letters on Google. Thanks again for taking the time to contribute Adam.

      • Matt
        :

        A possible contributing factor..

        One of their main competitors Wattyl couldn’t reach price agreement with Bunnings and as a result Bunnings stores no longer stock most of their paints. This effectively gifted market share to the other competitors (Dulux). The replacement in Bunnings was Nippon paints but it has no brand awareness compared to Dulux despite a much hyped launch in commercial space on the AFP grand final a year ago.

        I am sure Wattyl will be desperate to secure shelf space in any WOW backed hardware chain but it has lost plenty of ground to Dulux in my opinion.

      • Scott
        :

        Nippon have left Australia with their tail between their legs. As far as I can see it is too hard to import most coatings to Australia due to the volume makers here being at highly economic manufacturing costs. Freight must be a killer. A few have tried and failed. Wattyl have been sold and perhaps will now pick up as they still have a good brand.

        Dulux plan to expand into Asia with the purchase of a woodcare business in Shanghai recently. Anyway it one to watch.

      • Scott
        :

        As my research into the business lead to me applying to work there I might be best to hold back on sources of info while the process runs it’s course Roger. I am sure you understand

    • Matthew R
      :

      Hey Scott,

      I was also interested by Dulux and I’ll be interested to hear Roger’s thoughts.

      I’m only speculating but I’m not sure they would be an A1 or A2 at the moment…

      They had a lot of debt and negative cash flow at FY2010 – to score an inclusion in my portfolio that isn’t a great starting point…and I haven’t researched very deeply but that interest expense also looks like it was only incurred over about 6 months at prevailing rates, I would double it for next year and therefore that doesn’t bode well for next year’s cash flow either

      Nice discount to IV but I’ll be holding off for the moment

      That is good stuff Matt about competitive issues

  13. Ashley Little
    :

    Hi Roger,

    I missed the show so thanks you the post.

    You mentioned RKN and said that is a good business and expensive. Which based on the Boffins data is very right.

    That said the new parental leave legislation passed by the government could have a very very big impact no RKN’s IV.

    A very large number of small businesses purchase their accounting package from RKN and try to avoid the cost of upgrading.

    However, the new parental leave payments will be paid to the parents employee who’ll have to administer the payments.

    The payments are taxed so payg has to be deducted but the payment will not be subject to super, payroll tax, workers comp and probably some other things that I can think of off the top of my head.

    Currently no accounting package with a wage add on can handle this and RKN are currently working on a solution.

    My view for what it’s worth is that many many more businesses than usually will need to upgrade their accounting package.

    I am predicting a very big calendar 2011 for RKN on the back of this new legislation. If you run the numbers they are quite amazing.

    No advice BTW so please do your own research

    • Roger Montgomery
      :

      Hi Ashley,

      I had the same conversation with someone this week – but there name wasn’t Ashley! I think you could be onto something. Even factoring in the possible upside, its not giving me a margin of safety.

      • Matthew R
        :

        Hey Ashley,

        RKN – a great business with (in my opinion) a good to great competitive advantage

        I’m impressed by their recurring earnings component of revenue, few businesses can boast something like that

        I’m watching with you, let’s hope for a decent MOS

      • Ashley Little
        :

        Yep Matt

        Our client use lots of Reckon products.

        We are resellers so the new legislation may help us a bit as well.

        Lots of clients who dont usually upgrade will need to by july next year.

        more paperwork for the poor old small business people though.

        20% of our clients who have reckon products dont upgrade. Not 100% sure if this is a good sample but suspect it is.

        Apart from the opportunity that the new kegislation may have it is largely a mature business with growth at GDP. Hence the requirement for a big MOS.

        Thanks for you tip on the photo BTW

      • Gavin
        :

        Not specifically in relation to RKN and at the risk of incurring the wrath of some I question the wisdom of never buying without a large Margin of Safety.

        Without a doubt, a quality company and a large Margin of safety is the ultimate and negates any need to make a judgement call, But what to do if you have only one. Either a wonderful company at a fair price or a fair company at a large margin of safety – which way do you go?

        If you insist on having both quality and MOS how long are you prepared to wait in cash for such an opportunity? What opportunity value should attribute to holding cash?

        I feel the answers to these questions are specific to individual tolerances and situations. For me – I generally apply about a 5% opportunity premium to cash. If equity market returns available are higher than this hurdle, then I want to be a buyer and if forced to choose I unequivocally favour quality over margin of safety.

        My preferred time frame is as long as possible. I feel that quality offers a truer margin of safety over an extended time frame than a once off discount.

        To test a principal it is useful to look at the extremes – What would have been the best course of action with Berkshire Hathaway? Pass because it didn’t offer a margin of safety or pay-up for the quality? What wealth creation was missed along the way if you waited in cash for a significant MOS?

        Thoughts anybody?

      • Roger Montgomery
        :

        I think you are right to question the logic Gavin,

        Experience tells me to have a margin of safety. The larger the better. Being fully invested is not my aim. When I don’t have both an extraordinary business and a large margin of safety, the safety of cash is just fine because I don’t know what “equity market returns” are. There have been many, many years in which Berkshire offered a discount. There have been many years of very low or even negative returns for those who paid up for the quality. What do others think? I think Gavin’s point about risk tolerances is a good one.

      • Ashley Little
        :

        Hi Gavin,

        My thoughts for what they are worth are below.

        Remember, the overall market has done exactly nothing this year.

        WOW is a fairly decent company and it is less than it was 12 months ago. I understand that does not fit into your long term strategy.

        That said if things are expensive best look for the things that are good quality and cheap. If none of these exist do nothing.

        I love this Buffet quote

        “You do things when the opportunities come along. I’ve had periods in my life when I’ve had a bundle of ideas come along, and I’ve had long dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn thing”

        I am not advocating 100% cash but weighting to cash (20% to 40%) let’s you take advantage to the extraordinary opportunities that the market will throw up in the future.

        How do I know the market will though up extraordinary opportunities in the future.

        Because it always has in the past.

        You need cash to take advantages Mr Market

        Buffet once said If I was running $1 million today. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”

        Buffet always has loads on cash to take advantage for opportunities
        .
        Look at Roger Eureka portfolio. 50% in cash and killed the ASX200 in finacial year 2010

        My thought anyway

  14. Graeme
    :

    Great last show Roger, very interesting. I like it how you refer to some of the discussions on the blog.

    Looking forward to getting your book in the next week or two, though it is going to be a Xmas pressy. I might have to sneak a few chapters in before :)

  15. Simon Reeves
    :

    any chance the stocks could be listed for those of us working at places which won’t let you watch youtube?

  16. MattB
    :

    Roger,

    Interested in your thoughts on DGX. I see it trading at a substantial discount to IV and although its relatively new its track record looks quite good to me. Improving ROE and IV also good signs.

    Kind regards

    Matt

      • Lloyd
        :

        Close on 100% debt to equity and leveraged to the state of property markets. No thanks. The ticker reads more like DUD to me.

    • Paul R
      :

      Hi Matt

      Some of the notes I have on DGX are:
      1. As at 14 Oct 2010, the property construction arm has $320m of work in hand and the property development arm has $500m+ which is a record for Diploma.
      2. DGX has shown it can make losses in the construction business but to date, its newer property development business has been profitable. The pre-tax losses on projects for 2008, 09 and 10 were $0.6m, $2.7m and $1.8m respectively (I think losses were listed separately from profits).
      3. DGX was founded by its chairman in 1976 with his son being the current CEO. It listed in Dec 2007.
      4. They recently announced a share buyback up to just under 10% of existing shares at a price no more than $0.45 but the appointed broker is buying small amounts of shares so it will probably take 6 months to purchase the 15.3m shares. During April/May 2010, $33.3m shares were issued at $0.45 so the buyback is at a lower price than the shares recently issued.
      5. NPAT dropped from $7.551 million in 2007-08 to $2.033 million in 08-09. This warranted some investigation as NPAT as a listed entity from the 2007FY to 2010 FY were $1.925m, $7.551m, $2.033m and $10.041m respectively. I didn’t like the volatility in NPAT as it seemed to indicate a volatile profit margin. However, digging further I found:

      “Diploma/Probuild Joint Venture – On 28 Sep 2007, Diploma Group and Probuild Constructions (Aust) Pty Ltd (Probuild) agreed to cease their joint venture agreement. From this date onwards, the projects subject to the JV agreement will be completed by Probuild. In exchange for this, Probuild paid the Company an amount of $7.6m plus GST, which represents the discounted amount of the Group’s forecast final profit on the Diploma/Probuild joint venture projects.”

      So I adjusted the 08FY profit as $7.551m – 70% x $7.6m = $2.231m. The issue I had with the $7.6m is it is a discounted profit and I don’t know over what period this profit should be amortised. I certainly didn’t think one financial year would be the right period.

      6. The gearing is high due to project specific financing but DGX claims it has strong support from its bank. At 30 June 2010, total debt / NPAT was 3 times. I noticed (total inventories – total loans) has been increasing in line with increasing net assets reflecting the high earnings that have been retained to grow the property development business.

      Normally, I wouldn’t touch a property investment due to the geared structure but my IV was higher than $0.45 and the combination of the buyback and a fever sucked me in. Could be a value trap. Don’t buy stocks when you have a fever.

      7. DGX is not in the All Ords (i.e. top 500 stocks) and its annual turnover has been very low but increasing (currently 18%).

      Paul R

      • Mattb
        :

        Paul/lloyd,
        Thanks for you comments re Dgx. While it still may prove to be a value trap, the bait has recently become more tempting due to a further drop in price. All signs in wa appear to be good for the moment and demand is high for minerals mined there. Diploma’s exposure to the wa property market doesn’t bother me that much.

        Lloyd if I’m not mistaken you were the one who worded up Roger on fge back when it was massively undervalued. Have you seen any other potential fge’s in your travels lately?

  17. John M
    :

    G’day everyone,

    Thanks Roger for a wonderful way to finish the year on Switzer. Found the MQR info very helpful.

    I have an IV for MIN of $10.67 using RR of 12. What IV’s does everyone come up with for MIN. I am waiting in hope that Mr. Market will offer them at a reasonable discount at some stage in the near future.

  18. ben
    :

    Hi Roger

    I was crunching the numbers for Thorn Group, and was wondering if you could give your valuation? I got an IV of $1.60 for this year rising to $1.80 next year.

    Thanks

      • Pat Fitzgerald
        :

        Hi Roger

        ‘$1.14’ implies a ROE of 17.5% or a RR higher than 12%. I have used a ROE of 22.5% and a RR of 12% and I get a IV above $1.70 for March 2011. Very good half year result announced today. Note: I own a small number of shares in TGA.

      • Jeff
        :

        HMMM thought I had this calc stuff down pat but maybe not:

        I have the following info for thorn

        equity per share 2010 0.63

        expected 2011 profit 0.16

        ROE 25.5

        payout ratio 49%

        IV $2.08 (using 12%)

        I have checked the spreadsheet I use with other company valuations and get very close to the valuations supplied by “the master” so I think the math is correct.

        Would appreciate your input Roger on where the variables used in my tga calcs differ to yours.

        Thanks in advance for your help

        jeff

      • Roger Montgomery
        :

        Happy to help Jeff, but what valuation are you comparing it to – $1.60(2010) or $1.79(2011)? My required return is higher than yours, my ROE is lower and my payout ratio higher.

      • jeff browne
        :

        Thanks Roger, the differnt inputs explain much!

        Could I ask?

        If I am using 2010 equity and 2011 expected profit (in dec 2010) what year am I valueing? I thought this would give me the 2010 or current valuation, but maybe this is not so.

        Thanks for the prompt reply

        jeff

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