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.
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Will the infrastructure stocks sold off in favour of QR National present any bargains? Roger Montgomery digs deep into the transport and infrastructure sector in search of a bargain. Read Roger’s article at www.eurekareport.com.au.
It seems that putting your feet up on a deserted island is becoming the standard accompaniment for Value.able graduates. Young Les was one of the first graduates to receive his copy of Value.able in early August, but until now has struggled to find a deserted island to go and read it…
Hi Roger,
Finally found that deserted island you often talk about. Some one thought it funny to take a picture of me with the pies hat. If only they had known – the real value was in the book. If only we had looked at the intrinsic value of Collingwood and St Kilda on the weekend we would have gone for the draw. At 50 to 1 it was the only value.
Best regards,
Young Les
PS – Going for the pies this weekend… the value is better!
Posted by Roger Montgomery, 29 September 2010
Author and stock analyst Roger Montgomery thinks more value is emerging among Australian stocks. Forge Group, JB Hi-Fi, ARB Corporation, Woolworths and Wotif.com are among the value investor’s preferred stocks. In his new book, Value.able, Montgomery argues against being guided by the price-to-earnings or price-to-book ratio and instead focuses on return on equity.
Pretty soon, the QR National prospectus will hit your mailboxes. Its the biggest float since Telstra’s 2006 offering and the second largest in Australia’s history, so the PR companies and the communication consultants will be out in force doing their job for the vendors. But who will represent the buyers? We will! Value.able Graduates, sharpen your pencils! If you have any thoughts to share right now, go ahead. We already have received a number of comments:
Lloyd says:
“Your summary of the pending QR National IPO at the start of Your Money Your Call and the parallel discussion in the Eureka Report are on target, with one exception, that of Business Leadership which is the dead elephant in the room that no one seems willing to discuss. So I’ll raise the topic here. Management at QR National are some of the same people that arguably ran BHP onto the rocks in 1998. The problem that led to the disaster was that of the arrogant culture of the “Big Australian”. The culture led to massive errors in capital allocation in a capital intensive industry with disastrous consequences for shareholders that continued for a long time. Fast forward to the QR National IPO advertising campaign. Notice the parallels in the advertising for the for the float with the “Big Australian” ethos of the nineties? And QR National is a very capital intensive business with massive structural and business cultural deficiencies that are the result of its existence to date as a Government owned sheltered workshop. The leadership ethos appears to be such that the “planets are aligned” for shareholder value destruction on yet another grand scale. Regards, Lloyd”
Lloyd’s observation that some people who ran “the big Australian” during arguably, its dark days, are those involved now with the campaign to “be involved in something BIG” at QR National is well worth thinking about and speaking to your advisor about before subscribing.
At a dinner party on the weekend the subject of QR National came up and what is interesting is that the campaign is leveraging the well-known ‘China-needs-our-coal’ theme. But outside of the financial markets sentiment towards coal is not inspiring. Many retail investors believe coal is dirty, the cause of global warming and on its way out. CEO Lance Hockridge has previously rejected invitations to discuss climate change and as Paddy Manning of The Sydney Morning Herald noted on Saturday: “In 2007 a NASA climate scientist, James Hansen, likened coal trains to ”death trains – no less gruesome than if they were boxcars headed to crematoria, loaded with uncountable irreplaceable species’‘.
While diesel trains may be better for the environment than trucks, the 200 million tonnes of coal QR National carries per annum (2/3rds of the nations export volume) is not. Perhaps the retail component of the offering may not be as easy as previously expected. Paddy Manning again:
“Last week Professor Ross Garnaut, author of Australia’s 2008 Climate Change Review, told ABC Radio he thought world coal demand would peak before 2020 unless carbon capture and storage (CCS) – or some other use for massive carbon dioxide emissions – succeeds.
Garnaut is not pessimistic about CCS being commercially viable at scale in the right locations. But the Chinese want their demand for coal to peak before 2020, and while he admits that’s ”not a certainty”, Garnaut thinks there are ”reasonable prospects of China achieving objectives along these lines”.
”China over recent years and in the years immediately ahead represents a large majority of the global growth in coal use, and with other developed countries seeking to reduce total emissions absolutely by substantial amounts, such a change in trajectory in China would be likely to be associated with a peaking over the next decade in global coal use.”
Investors want a growth story. If the idea gets about that coal demand might peak within a decade, it could seriously weaken demand for QR shares.”
On the other hand, it is noted by many that Australian coal tends to produce lower emissions per unit of energy and steel production in the case of coking coal (our coal is a higher quality). With climate change on the agenda, demand for Australian coal could increase even when coal demand globally is falling.
The marketing machine has its work cut out but if hype can get even the biggest floats over the line, our job here will be to cut through it and answer a simple question.
Should you invest in QR National long term?
Lets get the conversation going with a couple of simple bullet points:
Brokers have estimated an enterprise value of between six and a half and nine and half billion dollars. I am not sure however what debt figures they have used (whether it is the $500 million QR National will start with or the $2 billion its expected to draw down in the next couple of years). Assuming $500 million, the promoters therefore may be reckoning on a market cap of around $7 billion. Of course never ask a barber whether you need a haircut!
QR National expects to boost pre-tax profits from $204 million to $427 million this financial year, and by 35 per cent to $578 million in 2011-12. But this could at least partly be attributable to a reduction in interest from the repayment of loans. In any case, investors own post tax profits which would reasonably be estimated to be about $390 million – a 5.5% return on contributed equity?
You should ignore the comparisons of P/E that will inevitably be seen. Comparing the P/E of QR National to, for example, Asciano, may be as useful as comparing the P/E of Myer to the P/E of David Jones at the time of the float – both fell precipitously after the money was in the vendor’s pockets.
Another thing to be careful of looking at are the stats available on other large Australian Commonwealth privatisations. Bank West, CSL, CBA, GIO, SGIO, Tabcorp and Unitab were all outstandingly successful examples, generating double digit returns annually for investors and Bank West GIO, SGIO, NSW TAB and Unitab were all taken over. But Qants and Telstra have been duds and the annual return from NSW TAB was not so crash hot, despite its takeover. The message is that yes, there are profts to be made from privatisations but only from those where economic value has been added.
The prospectus for QR National will invariably focus on growth – growth in revenues, growth in profits, improvements in efficiencies.
The price to pay however will be determined by the equity and the return that equity can generate. That is something we’ll focus on here.
For now we all await your thoughts. When the prospectus is released we’ll have a good look.
In the meantime, please contribute your thoughts, valuation estimates and any other insights you have.
If you are considering an investment in QR National, be sure to seek and take personal professional advice and you can come here for insights that will generate the questions to ask your adviser.
Posted by Roger Montgomery, 27 September 2010.
UPDATE – The Sydney Morning Herald (Passengers sought for latest float) and The Sunday Age (Board QR National float with caution) have published my insights in the past week.
Some investors are scared to invest in businesses with low liquidity. In this appearance on Your Money Your Call Roger Montgomery explains that when you buy great businesses when they are cheap, they remain great businesses and their intrinsic value subsequently rises, they don’t remain thinly traded stocks for very long. Roger also shares his thoughts on coal and reveals his Value.able intrinsic valuations for bull bar and 4WD accessories manufacturer ARB, Oroton and Decmil. Watch the interview.
In this appearance on Your Money Your Call, Roger Montgomery shares his insights on the upcoming float of QR National and the future of QBE following the resignation of CEO Frank O’Halloran. Roger also reveals his Value.able intrinsic valuations for Austin Engineering (ANG) and Asciano (AIO). Watch the interview.
Leading BRW and respected Fairfax journalist Tony Featherstone says Roger Montgomery urges investors to ignore share market noise and focus instead on intrinsic value. Tony also reveals nine stocks that meet Roger’s exacting A1 criteria. Read article.
In a very special appearance on Switer TV, Peter Switzer combines his cautionary investing style for Self Managed Super Funds with Roger Montgomery’s Value.able intrinsic valuation technique to produce a portfolio of great businesses that generate high ROE, plenty of cash and whose intrinsic values is forecast to rise over the coming years. Peter Switzer insists they must have a high dividend yield. So what companies make it into the Switzer Montgomery portfolio? Watch the interview.
Through Value.able Roger Montgomery shares his common sense approach to investing in clear, easy-to-understand language, writes Kris Ashton in the latest issue of NRMA’s Open Road magazine. Read review.
