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An upgrade amid the malaise!

An upgrade amid the malaise!

Reporting season has begun in ernest and a few companies we have been watching (and some of which we own in the Montgomery Private Fund) have reported. Today it was Credit Corp’s turn (ASX: CCP, SQR* A2). You can find the presentation here (be sure to read and agree to the ASX and our disclaimer).

Skaffold members are likely to have already seen CCP on the Aerial Viewer with an A2 rating and a discount to Skaffold’s estimate of Intrinsic Value.  In the Montgomery Private Fund, we have owned the stock for some time now and I have mentioned it as a stock to investigate on many TV and Radio programs.  Today’s 10 per cent gain is certainly a welcome boost to the gains already registered.

The highlights from the announcement of the half year results for us were 1) that earnings were at the top end of guidance, 2) a 12% increase in revenue translated to a 23% increase in NPAT, 3) a welcome reduction in debt to its lowest level since listing and 4) strong free cash flow after an increase in dividends and finally a conditional settlement of a “distracting” class action.  This final point is particularly important for many investors who will now feel vindicated that it was not the investor who erred.  The impact of the settlement on earnings will be immaterial thanks to insurances.  At current rates of cash flow generation, debt could be extinguished completely by the end of the financial year.

Grant Duggan – a regular blog poster here – was kind enough to make the following comments below:  “If i recall on YMYC a caller asked for one xmas stock to put under the tree for 2012, and much to your dislike [Roger] to only be able to pick one it was CCP, and i know two months don’t make a market but to me this is another indicator of value able investing starting to prove its worth. Thanks to Roger and all blog posts once again.”

I know I am harping on about it but if you have not joined as a member of Skaffold, how are you planning to find the best opportunities during reporting season?  Join Skaffold who have done all the hard valuation and quality assessments for every single listed company so you don’t have to.

Posted by Roger Montgomery, Value.able and Skaffold author and Fund Manager, 2 February 2012.


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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  1. Hi Roger I note the results and positive movement on CCP.Another one in this industray is FSA which baffles me in that it produces good results but the share price does not move.I wonder if FSA is a value trap?

      • They lend to the people the banks wont lend to!!!!!

        I would not own a Bank in the current climate so FSA ranks below that


    • FSA is not an investment-grade stock. It has high debts that cancel its reasonable-looking ROE, and it is a micro cap ($38 million) stock that is illiquid. Why bother with it, when in that field (poverty stocks) there are the likes of CCS, CCV and TGA that are better from the investment perspective. A gamble on FSA is another matter, put keep it down to a small flutter, and do not forget what it is – a flutter.

      I am not against the occasional flutter on an illiquid micro cap, as long as it is a minuscule percentage of one’s net wealth. In this regard I have a holding in FFI that hinges on a hope that something will fall from the sky – specifically, that FFI somehow or other realises the value of the industrial land it holds, which represents about half the value of the capitalisation. While I wait, I pocket the reasonable dividend, so it is a Claytons gamble in a way. I would not recommend FFI to anybody, although I personally am happy to hold it.

  2. There is some overlap between CCP, which I have liked but never held, and TGA, which I also like and have held for years. The core capability of both companies is managing cash-strapped folk who have committed to paying money. Had I the spare cash in 2011, I would have bought CCP, but I was not prepared to sell shares (mainly TGA and SGH) to raise the money, because I liked them as much as I liked CCP. With the benefit of hindsight, there were times when I should have sold both at prices well above today’s SPs.

  3. Roger,

    I see that ZGL and VOC are trading at half the price when you tipped them. Do you think they are a good buy now?


    • …and even a bigger decline from where we sold (after taking a profit on both). ZGL has had a downgrade so you will need to recast your valuations – ours change automatically as announcements are made. VOC is a company we really like and short term declines in share prices could represent an opportunity if you believe that a capital raising to fund an acquisition is not forthcoming. Once again, you will have to do your own homework as I won’t be telling you what or when to buy not what or when to sell. Be sure to seek and take personal financial advice. Thanks for the great question.

      • Hi Roger.

        Please help me with a little confusion I am experiencing here.

        As a cautious investor I’ve stated my case several times before. Buy and hold is past tense, yet buying for anything but short term gain makes one a speculator rather rthan an investor. I have bought and sold stocks like FGE, MCE, MIN, ORL, COH etc and been more than grateful for your blog insights, and glad of the gains I’ve made. Yet I have sensed a negative vibe in the comments of you and others on this blog who seem to espouse the “Don’t invest unless you would like to own the whole company for years and years with the market turned off”. approach. Yet recently you have acknowledged short term trades of your own, in and out like greased lightning, that suggest to me you and I are very similar in our approach. There’s been FWD, JBH, ZGL, VOC and I don’t know what else. Are we not all basically traders? Is there some kind of moral high ground claimable by “investors” over those of us who sense the need to get in and out of the market in order to stay ahead of the game? Surely the market is now so loaded in favour of the sophisticated with the best electronic gear, and so overloaded with companies headed by egocentric management, that we must all now use our wits as never before (probably with tools like Skaffold) to enter and leave segments of the market as quickly as we must to survive? It used to the quick and the dead. Semi traiulers and kangaroos. Now it seems we have the quick and the lighning fast. You’d better not be just quick any more.

      • Approach investing like marriage – until death do you part. But don’t stay married if your ‘partner’ is unfaithful. Only when when all the criteria are met. Stay investors for as long as the criteria continue to be met. Hope that helps.

      • I have just read (in the latest ‘The Week’ – Wit and Wisdom) a quote that appears to relate to investors who keep good company shares for the long term :

        “Don’t regret growing older, it’s a privilege denied to many”


  4. Hi Roger, I have been looking at M2 Telecommunications (MTU) to maybe add to my SMSF to diversify a bit more. Obviously a great company. Doing my sums using a 12% Required Return and their increasing ROE and Payout Ratio, I get them at $3.53 for 2012 and $4.43 for 2014. The main concern’s I have is the size of Intangible Assets and Goodwill in their reports relative to total equity – 2010 70mil v 77mil Equity, 2011 117mil v 94mil Equity. Does this concern you or is this normal for this type of company. Also with the NBN will this encourage a whole new set of competitors because of the low barrier to entry – the same reason I haven’t bought companies like Wotif etc.

    P.s I am a graduate from the first book but have not subscribed to Skaffold – no disrespect, its not the Cost, I want to always spend time working out each company myself – “my hobbie”. I also feel like I have a better understanding of what I’m investing in, doing it this way. I appreciate what you have taught me so far – Thank you.

    • Sounds like you have it all worked out…You need to develop and adopt your own rules about goodwill.
      One of the greatest benefits of Skaffold.com is that you can see every company so it will trigger ideas for you to investigate yourself. Its a fantastic time saver to help you narrow your search. I cannot think of a smarter way to get up to speed.

  5. Hi Roger

    I thoroughly enjoyed your webinar yesterday with Alan Kohler and thanks to this blog and my own research I do own CCP. One question I would appreciate an answer for is in regard to the Norfolk Group. You mentioned yesterday you own a small amount in the fund. The only reason I have held back buying a part of this business is that through time it does not appear the market ascribes to the company its intrinsic value more than most businesses I look at (I am a Skaffold user). My question is, does a busines that seems to consistently trade under its IV for a long period of time weight heavily on your purchasing decision, or do you have faith the market will in the long run reward shareholders? Thanks Jason

    • Hi Jason,

      It is possible that an individual company may never trade up to its intrinsic value. My experience has been that in aggregate they do. Of course past history is no guarantee that it will continue in the future either.

    • Hi Jason,

      I think that is a very good question. It is one of the big issues of being a value investor. How do we know that the gap between market price and intrinsic value will close?

      Firstly echoing Roger and ben Graham, we know that more often than not they do. How long it takes can vary but you will always need a long term time horizon for this to happen. As i always invest for a longish term time horizon 5 year+ than i am happy to trust the market especially as the value of the type of business i seek to own will have rising value over this preiod.

      Another i do however to try and answer this question is to try and think about what potential catalysts could occur that would make the price meet intrinsic value. Without going into the company in deep some general ones could be that it joins an index, takeover offer, buyback etc etc.

      There is always he odd case that as the company progresses through the life cycle it may start becoming less valuable and there for it may be a case of rather than the price risng to the value, the value may eventually drop to the price.

      The voting machine vs weighing machine phenomenon has been proved to a reasonable degree so i am happy to have faith in the market catching up. Still, keep a close eye on them and just make sure that your perceptions are still valid and consistent with the reality so that whilst you wait for this to occur you don’t get a bad shock.

      • One could also make the same observations in regard to LIC’s trading below Net Tangible Assets (NTA). It is frustrating to see an LIC that you own languishing with 30% discounts to held assets and you really start to question whether the value will be realised or the market conditions or management performance eventually take away the discount. Really starting to get very disappointed with Contango. Last quarterly report they took out DCG from the protfolio. Thinking of selling this one and putting it into an A1 LIC.

      • Hi Jason, Roger, Andrew. Good points all. I think NFK are slowly rebuilding the company and they’re doing a decent job. They were a B4 in 2009 with $63m debt (160% debt/equity) and were an A1 two years later with only $17m debt. However, by their own admission, in Nov-11 as part of their HY2012 results presentation, they said, “The recovery of Haden could be slower than anticipated and project delays could have an impact on the second half of the year”. Their other divisions were performing well, and they said that the group “remains on track to deliver full year NPAT growth of between 5 –10 per cent”. They have since announced some significant project wins and they’ve appointed a new COO (was President & COO of RIO’s Diavik Diamond Mine Inc, Canada). I’m not sure if their Haden division is going to hamper their growth and/or profitability in the short term, but I do think their long-term future is good. They seem to currently lack the profile / exposure to see their SP rise to meet their IV. Sometimes, all you need is a bit of public exposure. Take this past week’s mention on the “Today” show by Effie Zahos from “Money” magazine of their “Top 5” Standout Stocks for 2012 (based on Skaffold). I don’t think it’s coincidence that over this past week, SWL rose 9.4%, CDA rose 12.4%, and TSM rose 16.5%. ARP had already risen 6% in January and MTU had already risen 14% in January, and apart from that I think people piled into the other three based on their higher forecast 3yr growth numbers (all 23%+). I’m very happy to be a Skaffold subscriber and already be a holder of all 5 of those stocks. NFK’s time will come, but I can’t tell you when. Maybe if they are one of “Money” magazine’s “Top 5” for 2013?

    • Jason, I’ve heard it said about buying a stock as a value investor:
      The first year you buy it, it keeps going down and you look like a fool.
      The second year, it does nothing and you forget you own it.
      The third year, just when you think it’s time to cut your losses, finally it moves back up.
      As long as you have done your homework properly, patience is the friend of the value investor ;)

  6. If i recall on YMYC a caller asked for one xmas stock to put under the tree for 2012, and much to your dislike to only be able to pick one it was CCP, and i no two months don’t make a market but to me this is another indicator of value able investing starting to prove its worth. Thanks to Roger and all blog posts once again.

  7. A very nice announcement indeed. And even with today’s sharp rise in share price, there’s still some margin of safety left (according to my calculations at least).

  8. yeah i closed my position on CCP today and have started buying SGH. i think the expansion into the UK is golden so i am hoping for the share price to fall so i can accumulate

    • I hold SGH, and wanted to skip out at $2.40 in 2011, but I dithered, and lost that chance, with the SP slipping back to my original buy-in price of $1.68. Today a million-share transaction went through at $1.68, so you and I are not the only folk who like SGH. I have also liked CCP, but did not invest in it on the basis that I am in a process of slimming back the number of companies in which I hold shares.

      In my current cash-strapped position, I hope SGH can fund future acquisitions (probably in the UK) without raising capital from its existing shareholders, because I simply do not have the loose change.

  9. Hi Roger, I’ve owned CCP for a while now and am very happy with the performance. I am fortunate not to have the burden and ill-will of being invested in it pre-GFC like many people I hear talking about it on tv. I have also used Skaffold recently to get some new exposures to GNG and NWH, so I am very happy and hope this is one of the many upgrades for our A1s and A2s. I just had one question: on Your Money Your Call last night you mentioned Silver Lake was still cheap, yet in the current year it is trading above intrinsic value. My understanding is that we should not be looking for discounts to future IVs (normally >20%), but only in the current year – or can you bend the rules a bit to focus on the future estimates for a stock of this quality and promise? I was in it for a little while recently, but unfortunately got out just before subscribing to Skaffold. My dad goes prospecting for gold and on this one rare occasion he told me to seriously look at SLR back in 2008. Wish I could have held it all the way but alas I needed to buy a house. I am in NST though :)

    • Hi David,

      I cannot offer any advice however your research beyond Skaffold (that you must do to understand a company) should offer some guidance. As you know valuations can and do change and when a company upgrades or downgrades, it will have an impact on valuation. SLR is still cheap enough for us to hold it. We buy below intrinsic value and as long as the intrinsic value is rising and the price hasn’t got too ahead of itself (see Value.able), we are happy to own it. “cheap enough’ can also be inverted to mean not so expensive that we would sell it.

      • Hi Roger, makes sense now. I understand about the research required which I always do (read and analyse every announcement, websites, fin review etc) and I understand that you are not giving me personal advice. Please don’t be afraid to make more comments like this as we really appreciate it – its other people’s fault if they run off and do something stupid with it because they are too lazy to research. I understand now that your answer was now framed around already holding the stock as opposed to buying it at the current price.

    • Hi David,

      That is also something I was wondering about, but a part of the value is the solid production and reserves targets that a competent management team seem to be hitting. I have not investigated the recent buyout of acreage on how much of a good deal that was.

      Another point I was wondering is if it is possible to calculate or find out what gold price has been put into analyst estimates of company earnings? If the gold price starts to move down significantly again, at what point do you have to worry that earnings downgrades are on the way?

      Thoughts anyone?

      • Hi Matty, With regard to your last question, I have noticed that many analysts give a range of valuations for companies based on the varying possible future prices of the main commodities that they are producing, plus other factors such as the A$/US$ exchange rate and projected mine life.

        For instance, RCR (Resource Capital Research) in their 4-Aug-11 report on Kingsrose Mining (KRM), have conservative valuations ranging from $1.19 for US$900/oz and A$/US$=0.82 with a 10 year mine life, rising to $1.45 for a 15 yr mine life. They then value KRM at $1.61 if the gold price remains at US$1600/oz or above, with A$/US$=$1.08, for a 10 year mine life, or $2.08 for a 15 year mine life.

        That’s just one example. Such reports are usually linked from the websites of the company being analysed; there are usually a few of them (whose valuations vary), and they are useful in forming a view of the consensus value of a company under different commodity price scenarios.

        Many of the analysts have disclosed vested interests in the companies they are analysing (they may have acted for them to help facilitate a capital raising for instance), so I would not reply on these reports alone. However, that’s an example of some ranges of valuations (from one analyst) and how they use varying inputs to come up with them. Hope that helps.

  10. Did you instigate the “distracting” class action over management disclosures when you were at your old company? I have not been following CCP closely.

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