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An important milestone for us.

Value.able | Comments (40)

An important milestone for us.

We are pleased to make the following Announcement. Chris Mackay, Hamish Douglass and I worked patiently to bring this together. I am delighted to see it announced. By way of background, in addition to their roles at Magellan Financial Group, Hamish Douglass is a member of the Foreign Investment Review Board and a member of the Takeovers Panel.  Chris Mackay sits on the Financial Sector Advisory Council that is one of the main conduits of industry insights to the Treasurer and is on the board of James Packer’s Consolidated Media. Thank you.

Posted by Roger Montgomery, Value.able author, Skaffold Chairman and Fund Manager, 29 February 2012.

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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40 Comments

  1. William A
    :

    Hi Roger, just wondering why there is no more update on the “Which A1 twin is outperforming?” blog post

    Thanks

    • Roger Montgomery
      :

      Hi William,

      We have the results and I am just trying to get the time to put the post together. We don’t have a large bank’s 2013 Preferred portfolio to compare against though…

  2. Gabe
    :

    Hi Roger and Others
    Just came back from a road trip holiday around the southern highlands of NSW. Stopped in at a new K.F.Chicken place on the way back My wife and I wanted a late morning snack and a nice cup of coffee and tea. We were horrified when we were told they do not serve hot coffee and tea – so we left and went to a cafe next door.
    I just sold my Collins foods shares.Can you believe it!!

  3. William A
    :

    Congratulations Roger!

    I have not subscribed to Skaffold yet because I think it’s too expensive given my portfolio size is only about 40K, however I gave it a try the other day. I put in 5 stocks, 2 of them are SKI and ENV both in utilities sector. I am shock that they are not investment grade and intrinsic value is way below current SP.

    I have been holding SKI since it was around $1 and ENV since it was around 59 cents and very happy with the gain I have plus the distribution.

    I read somewhere that valuing utility companies is different compared to valuing ordinary everyday business and my question, is Skaffold built for valuing this type of businesses?

    Thanks Roger, keep it up

  4. Boon
    :

    Hi Roger,

    I understand you have discussed CKF previously in relation to its high float price in Oct where you did not recommend back then. The price has since come down to 1.2 today. You recently made another discussion in noting CKF as one of your REJECTED stocks. On the other hand, I also comprehend the truth that KFC in Malaysia and KFC (a subset of YUM group) are both having a demonstrated strong track record in maintaining high ROE.

    I also do a bit of research where I estimated their intrinsic value to be around 2.5 based on their average declared pro forma ROE as well as the ROEs recorded from KFC(MY) and YUM. CKF has manageable debt/equity ratio of 65%. The only drawback is probably the minimal possession from the management. Other than that, CKF looks very promising to me.

    Could you please provide some advice why you think it is not a quality stock for you? Thanks.

  5. Andrew
    :

    Thought i would post this here seeing how Magellan gets a mention.

    Would anyone like to share their thoughts on investing and valuing LIC’s?

    I have been looking at this and see it as a good way to diversify. For example the Magellan Flagship fund holds some quality US stocks etc so would seem like a logical way to diversify into international equities, there are others that focus on small cap stocks so that interests me as well.

    I have been having a look and most refer the discount to NTA and analysing the fee structure. Discount to NTA makes sense as it is the net value of all the assets (essentially stocks and cash). The articles i have been reading mention that the higher the fee’s the bigger the discount to NTA you should seek. All of this makes sense to me but i was wondering if anyone had other thoughts to share.

    No doubt in researching these you need to look at what type of mandate they have, what markets they operate in and what is the background of the people running the fund.

    • Matthew R
      :

      NTA is a good guide but the management expense ratio (MER) if it is too large can really eat in to returns because it is a compounding expense

      Short term it doesn’t make much difference but given you would probably invest in LICs as a long term investment it can make a big difference.

      Over a 30yr period if the portfolio return is 9% and the MER is 1% (and assuming share price tracks NTA) your return will be 25% less than the underlying portfolio.

      • Matthew R
        :

        I did a few quick numbers which I thought are worth sharing.

        The All Ords (non-accumulation) index from July 2002 to June 2011 returned 4.36%pa (3164 to 4647)

        In the same period AFIs NTA grew at 4.48%pa from $3.23 to $4.79 (AFI do annual capital raisings, my experience when I was a shareholder was they raised at the full share price when price NTA. Therefore the difference between the AllOrds and the AFI NTA growth may be partly explained by this (nearly all earnings are paid out))

        Over the same period AFI have paid $1.80 in dividends, this has provided approximately 3.77% of the total 8.25% compound return (NTA + divs) from AFI.

        It is interesting to see that their returns on their portfolio appear to be almost the same as the All Ords. Although not unexpected if you are managing $4.7 billion in the Australian domestic market.

  6. Boon
    :

    Hi Roger,

    Couple months ago, you brought up the reason of not recommending CKF due to its high float price where you suggested its pro forma intrinsic value to be 2.55.

    You recently posted a “Rejected” thread to discuss a number of shares, one of them is CKF. Several months after its float, the price declines to 1.2. I have used your model to estimate the intrinsic value to be 2.5 based on their average declared 3 years ROEs from their pro forma report. They have manageable debt of 65%. The only downside of this group is the minimal possession from the management. In addition, you also mentioned that KFC (US), a subset of YUM, has a successful history of retaining of high ROE. Apart from minimal possession, it looks all good to me.

    Could you give me some ideas why you would not recommend this share?

    Many thanks for your advice.

  7. Thomas
    :

    Roger,

    On your next blog you should write your thoughts about the new “_ _ _ daily housing index”. How Value.able will it be?

  8. DFB
    :

    Is Nestle a good investment?

    When I was living in Asia 10 years ago I noticed how the popularity of dairy products, chocolate, etc was increasingly very quickly. One company that got my attention was Nestle with Milo and many other products being very popular.
    Recently I have noticed the growth of the Nespresso brand and popularity of machines and coffee capsules. I would assume these Nespresso capsules have a very high profit margin compared with a jar of Nescafe instant coffee.
    There is a new Nespresso boutique in Perth and the level of interest is similar to an Apple store.
    Just some thoughts.

    DFB

    • Peter
      :

      DFB

      Nestle is the world’s largest food company. Nothing more needs to be said.

      Peter

    • Andrew
      :

      The Nespresso boutiques you mention are very popular here in Sydney as well, with a huge store open in the new Westfield city centre. I have used them and the Apple stores as an example of what bricks and mortar retail should be. They are very much brand experiences rather than a simple store. I have heard that Starbucks might get involved but i doubt that will have much of an impact as in my opinion they would be two completley different markets as i see Nespresso as being marketed as close to a luxury brand as you can have for coffee while Starbucks is more everyday market.

      there is no doubt that the brands that Nestle have underneath them are great brands. They apepar to have decent margins (10%+ Net margin), net debt seems fine and manageable at around 30% of equity with more than adequate interest coverage. ROE is around 16% so that might mean some people will discount it as not investment worthy and some others will so it depends on what you want. Their latest free cash was negative but this cannot be just used alne and would need to go back over previous years to see what the true story is.

      Another in a similar space i like is Hersheys on the NYSE.

  11. Tom
    :

    I am trying to figure out why RHG isn’t going anywhere and It’s rated highly in skaffold. Am I missing something? Can anyone offer some views?

    • Roger Montgomery
      :

      Hi Tom,

      Neither the quality rating nor the intrinsic value are a predictor of short term price direction. Skaffold is about investing in businesses not predicting the daily or even weekly ups and downs of stocks.

    • Ash Little
      :

      Hi Tom,

      It’s Important that you understand what you are investing in.

      I have cut the below direct from the half year report.

      Principal activities

      During the half-year the principal continuing activities for the Group involved funding and servicing of residential home loans in Australia. The Group ceased originating new mortgage loans on its own behalf on 16 November 2007.

      I can’t bold or underline on the blog but the last sentence is the key.

      The business has basically ceased. They are just collecting old loans.

      In no way does this business have bright prospects. It will ceased to exist when all loans are paid out.

      In addition the profits are meaningless.

      Let’s assume that all remaining debts are paid off over 15 years and they all pay. In this case then higher interest is received earlier and the latter years are all capital repayments. Cash flow will be the same every year but all the profits will be reported early and all the capital repayments reported later.This is weird as cashflow does not change.

      Actually you can value this to the penny. Just go get management figures on cashflow and suspected bad debts in the future and discount them back to your required return.

      I have not done the maths but I suspect it won’t be terrible different to the current share price.

      I hope this helps

      Cheers

  12. Michael
    :

    Hi Roger,

    Congratulations on your achievement. Can you say who will be eligible for the retail fund at this stage?

    Michael

  13. Andrew
    :

    Just having a look at the presentation for Woolworths. You can see the effects of the price and advertising war by coles currently under way when they admitted they need to focus on clearer messaging. I think this is where Coles has really pressed ahead. their ads are terrible but they are effective with many people i know now thinking that Coles offers the lowest price on anything.

    Good to see them being a bit proactive in admitting that Woolies need to improve rather than just saying that everything is fine.

    Does anyone remember seeing a reason for the big drop off in like for like sales during the 2nd quarter of 2011 against the PCP. It dropped from 2.5% in 2011 to 1.1% in 2012. For a division that sells consumer staples and there for less impacted by macro elements i found such a sudden drop off a bit surprising and would like to try and find a reason for it whether it is loss of market share to coles or some other element.

    • Ash Little
      :

      Hi Andrew,

      I am not a WOW follower as they are probably too big for Australia, but that said I think they put that down to food deflation during those periods you mention,

      I could be wrong so please check this out more

      • Andrew
        :

        Yep, you appear to be right there Ash. Found it in the detail of the results. Thanks for your help.

        Good to see it is definitley not a market share thing, they actually say they gained market share.

        I see your point about them being too big for Australia, although i don’t necessarily agree. Another line i saw said they serve on average of 19.3 million customers a week. So they in affect on average serve the equivalent of the entire population of Australia.

  14. Jo Smith
    :

    Quoting from the Magellan business strategy:

    “In appropriate circumstances Magellan Financial Group will also consider investing in a small number of external fund management businesses across the various fund management disciplines………
    …. With any investment, MFG is committed to developing a reputation as an excellent and supportive partner for talented fund managers in the market.”

    Congratulations on the peer recognition.

    New investor question: what are institutional mandates? Google didn’t help.

    • Roger Montgomery
      :

      Hi Jo,

      Thanks for that. Institutional Mandates are allocated large pools of funds that we manage on behalf of larger insto’s and super funds. We are excited about offering something stable, attractive and up until now unavailable in Australia.

    • Ash Little
      :

      Hi Jo,

      It;s a bit more complicated than this but it;s basically the money that the big super funds give you to invest on their behalf,

      Cheers

  15. Argi
    :

    Hi Roger, I have followed you in the media for a number of years and have sadly only paper traded your suggestions! Wonderful news about joining forces with Magellan but just as I wanted to become a member of your private fund, I notice that it is currently closed to new members. Is this going to change in light of your joining forces with Magellan? Thanks Argi

  17. Scott T
    :

    Wow, roger you never cease to amaze and impress with your continual growth and unending progress on the path forward to success.

    Congratulations to you and to Russell on building a business that was so attractive so quickly, something the vast majority of people only ever dream about.

    I am sure the fund will continue to kick goals as you guys remain focused, unfazed by the market noise.

    All the best

    Scott T

  18. Andrew
    :

    Congrats Roger, this is no doubt a very positive outcome and a show of support of how your organisation is performing. Also the line about recruitment is very different to a lot of other financial related companies, i am sure you will have no problem trying to find some experienced people who have recently been let go.

    All the best to all at montgomery HQ.

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