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CHINA’S IMPACT ON VALUATIONS JUST BEGINNING. 14/8/12

CHINA’S IMPACT ON VALUATIONS JUST BEGINNING. 14/8/12

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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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50 Comments

  1. Hi Roger,

    I was wondering what is your opinion about Blackmores( BKL). Is is traded on a discount on its intrinsic value ?

  2. Roger, given all the speculation regarding FMG and falling IO prices, and whispers here in WA that they are halting exploration to cut costs, how do you read FMG’s fundamentals? Is it overvalued given its high P/E in relation to say Atlas or BCI?

  3. Michael Mennell
    :

    Hi Roger
    I know you have rated Imdex (IMD) highly in the past. What do you think re its FY12 result?
    I know Swick (SWK) is too small for your private investment fund but i feel it has turned around and about to release a strong result for FY12 coupled with a positive forecast. Yes, it is part of the gloomy mining service sector… but its UG Diamond drills enjoy far stronger margins than surface drill rigs and only work on brownfield projects. My guesstimate is Skaffold will re-rate SWK significantly post the result on 27/08/12.
    cheers
    Mike Mennell.

  4. Ron Coldebella
    :

    Hi Roger,
    The MND result was quite stunning today, as was their outlook. Do you think they are overly optimistic on the future of mining services? I am and have been a happy holder of this wonderful company for a number of years and their management have never failed to deliver what they forecast.
    How will they do this as the bottom falls out of the Iron Ore market and China returns to the basket case it was in the 70’s?

    • Thank you Ron. My sentiments as well re resources in general and therefore the companies that service them. Maybe work in hand contracted will insulate them for a year or two. I just don’t know.
      IMD also had good report card and I like their new product lines for 2013. Also am awaiting ANG’s results.
      Some non resource companies have had great growth like DMP, MMS, AMM, BGL, but I think they are expensive right now. For me, its make a list… and wait.

      Whatever the reports,I only hold 6 stock right now, none of which are resource stock.

  5. Hi Roger,

    I would like to hear your advice on SWL. All the factors seemed to be stable, and it was still an A1, but at some point in time a few weeks ago the market sold off and halved its market price.

    Regards,

    • A1 businesses aren’t immune to downgrades and share price falls. They simply have the lowest probability – in our estimation – of going bust. And don’t forget, “lowest probability” doesn’t mean ‘no probability’.

  6. HI Roger
    I would like to hear your comments os ORL. The loss of the Ralph Lauren brand is obviously a major.

    Rainsford

    • OK. Basic thought is that Sally M will now be able to focus. Sure the company would have liked to be bigger before losing the brand but a focus on the Oroton Label will mean faster and more focused growth. We reckon good value is a bit lower than here. Share price support reflects market seems to be voting in favour of Sally’s ability.

  7. Cellar dweller MXI hit a 5 year high today on promising results and sustained dividend

    • ashley.little.581
      :

      Funny you mention this one John,

      I looked at this one awhile ago and did not swing (buggar)

      It was a straight pitch right in the swing zone but I let it go.

      The pitches have now got faster in my view.

      Cheers

  8. Graeme Mitchell
    :

    The companies I would like your view on is CMI and

    EAX which Ashley mentioned sounds interesting

    • ashley.little.581
      :

      Hi Graeme,

      This is just my personal view but I have for a long time felt that this company is being run for the benefit of management not shareholders.

      Cheers

      • ashley.little.581
        :

        Graeme,

        Start with the ASX announcement on 22 Feb 2011,

        I am sure that Roger’s portfolio manager Russ Muldoon would find it way less smelly changing his new bubs nappy than reading this type of announcement.

        Cheers

  9. I’ve just looked through FGE’s preliminary results and recommend reading the last page’s last paragraph first. Page 25, section 10.6 regarding the CTEC acquisition. If the acquisition was effective on 1 July 2011 instead of Jan 2012, NPAT would have been $46.1m instead of $49.3m.

    “The directors of the Group consider these “pro-forma” amounts to represent an approximate measure of the performance of the combined group on an annualised basis and to provide a reference point for comparison in future periods…”

    I would have preferred reading this at the outset so if anyone talks to management, please point this out for better shareholder communication.

    Using the higher reported $49.3m NPAT, note the net profit margin has dropped to 6.3% which is much lower than the previous 3 years (+9%).

    ROA (average assets) has fallen from +20% to around 14%. Return on starting equity (adjusted for new equity issued during the year) is about 37% (which is lower than +40% for prior 3 years). The high level of cash and declining NPM of Abesque and lower margin business of CTEC were contributors.

    Trade and other receivables is unusually high at 41% of total assets compared to prior years. (As is trade and other payables at 56%).

    Overall, I thought the result was fairly good but there are things to watch out for in future results.

    Regards Paul Rehill

    • HI Paul,
      Regarding the point you have mentioned for CTEC acquistion, what I think they mean is, CTEC has generated revenue of 266 million, and 18 million profit from it beetween Jan 2012 to June 2012. had they been on book for entire FY, the revenue would have been 786 million and Profit of 46.1 million from CTEC ALONE. so total profit would have been 75million all up.
      Balance sheet is very strong with cash they are having. its like a money spinning machine. The thing to lookout for this company is future order book beyond 2014. So far they have covered themselves pretty well with the order book of 900 Million, you can expect similar results for FY2013 if not better and more cash on the balacesheet. now that can be taken as positive and negative both. I would rather use that money to be invested in the assets which can generate more than 4% what they are getting from Interest on that money.

      • Hi Prerak

        The revenue and profit refer to the “Group” being Forge Group as first referenced in the first paragraph on page 4.

        I think the larger near-term risks involve contract pricing under new management, especially with Andrew Ellison departing the highly profitable Cimeco. Hopefully the lower net profit margin for FY12 doesn’t represent a downward trend. Also, there is a risk of an overpriced acquisition with all the cash on hand. These are bigger risks than China falling over in the near term.

        I also thought the CTEC net cash outflow on acquisition (section 10.5) looks misleading ($3.4m). Given net assets includes $70.6m of trade and other payables that need to be funded from cash obtained in the acquisition ($12.2m), trade and other receivables etc. and there is no mention of that in the discussion.

        Regards Paul

  10. ashley.little.581
    :

    EAX report on 22 August.

    I hope you have time to cover this little stock.

    I am looking forward to it myself

    Cheers

    • Ash,
      I’ve been watching this little stock ever since you mentioned it a while ago. Not that you want to hear it, but I would be watching it a whole lot closer if the price drops about 10-20% from current levels.
      Regards,
      Dave.

      • ashley.little.581
        :

        David,

        If a 10-20% price decline ( or greater ) has nothing to do with the performance of the business then I too would also be happy.

        Cheers

  11. danny.blight.3
    :

    Hey Roger,
    While not an overly surprising result i thought echo entertainments result was very disappointing, how might this play out with crown and who could be the overall winner in the long term.

    regards

    Danny

    • In regards to the whole Crown Vs Echo thing. I think it has to be takeover by Crown or nothing, i cannot really see the benefit to Echo in allowing Crown to open up a casino on the other side of the harbour purely to cater to the VIP market. This is especially so as Echo came out and said the future is about the VIP market so allowing a competitor to use your licence to take away the market you say is the future just doesn’t make sense. The profit sharing arrangement would need to be considerably attractive to make it an option and the packers aren’t known for their generoisty to other businesses not part of their own little nest.

      On the other side it appears that Crown has government support in NSW which is good as it is a heavily regulated industry. I think the casino in Barangaroo will happen i am just not sure as to how it will come about yet and how it willa ffect both businesses.

      Just my thoughts anyway, i used to be a fan of both Crown and the old TAH because of the casino’s but the more i looked into it the less attractive it became. If i had to choose one i would go Crown but i am happy to watch them from a distance.

    • I would think when James visits State Parliament and the residents refer to him as the ‘PacMan’, he must hold some serious sway. With that in mind one would think he either wins the war of attrition with Echo or gets a new licence.

  12. Roger,I invested in Toll when it was run by Paul Little, now its worth half of what I paid. My problem is I followed the Manager as opposed to the real value of the stock! Any thoughts?

    • i am not roger and i do not have license to advise i can say only what i did with my wife telstra stock that she held and bought for $7.4 inT2 float.
      i sold it and claim in capital loss offsetting capital gain that i make from another investment.

      this is from 2011 tol report:

      sales 04— 3272
      sales 11— 8225

      ebit 04— 191
      ebit 11— 430

      napt 04— 174
      napt 11— 295

      borrowings 04— 419
      borrowings 11— 1516

      liabilities 04— 1080
      liabilities 11— 3047

      equity 04— 1094
      equity 11— 2804

      eps 04— $0,50
      eps 11— $0,39

      No. shares 04— 321
      No. shares 11— 710

      roe 04— 15%
      roe 11— 10%

      from this data maybe price is about right $4.48 close today, but i would not buy it myself.
      roe is too low for me.
      debt is too high.
      managers ownership is too low.

      basically numbers are not good to buy this company.

      i get involved in shares in 2001 ( my sister in law husband is day trader ).
      lost $3000 — read tips in bulletin.

      stop for a year and did some reading.

      bought slm on float for $1.9—sold 2 years later for $3.8
      bought wor on float for $ 1.75– sold 1 year later for $1.85—– watch it go to $40
      bought all for $ 0.79– sold months later for $0,93—– watch it go to $18

      did not buy any thing from 2004 until november 2008. read all annual reports from Mr. Buffet and books connected to him and accounting.

      in 2006 move supper from balanced option to cash only.

      well that is from me.

      thanks ned.

      • Good stuff xiao fang xu. I hope that data from the annual reports makes it clear that growth exists because more money has been tipped in to purchase it. If the growth in NPAT, EBIT and sales growth had occurred without the increases in capital raised and debt, the share price performance would have been quite different. The question of course is, would the earnings have grown so much without the additional debt and equity? This will tell you whether the company has any competitive advantage of value.

    • Hi Paul, “When a manager with a reputation for excellence gets involved in a business with a reputation for poor economics, it is the business who’s reputation will remain intact.”

  13. Roger, perhaps you could comment on MFG (and similar funds if relevant). But in particular MFG. Confusing price rise against IV. I was in (but out now).
    Regards,
    Glenn

    • Hi Glenn,

      Hamish and Chris are friends and I reckon they are doing an amazing job in all aspects of the funds management business.

      Investor expectations of Aud decline (following from Iron Ore price drop and international central banks backing off) may further the trend to investors offshore.

  14. Lyndon Orpwood
    :

    Hi Roger

    I would like to hear your thoughts on Codans plan to purchase Daniels Electronics and its capital raising.
    Regards
    Lyndon

  15. christophe capel
    :

    Hi Roger,

    Great to get weekly insights thanks.

    I would be interested to hear your thoughts on CSL and WOW.

    Regards

    Christophe

    • christophe capel
      :

      Hi Jo, check the question from Paul Kulen on Roger facebook page and the comments, this should provide you with what you are after

    • I remember i always used to get confused when companies came out with what i thought was a good result only to see the share price going down. It doesn’t seem to be logically right does it?

      In short the reason the price went down is simply that there were more people selling than there was people buying. This means the price will drop until it can match the orders. Why this is the case is always hard to predict without asking every person who made a transaction. It is just so much easier to ignore the everyday fluctuations in the market as really it is nothing more than noise.

      I can’t speak for credit corp as i am not particularly interested in them but in most cases the reason i am aware of is that they might fall below what the analysts etc epected them so even though it was a good result, it was still dissapointing as they expected it to be better.

      On a personal note, i simply ignore what the market does and will dissect the information myself. To be a value investor i think is to think independently and critically.

      I am currently doing a uni course and we cover some sharemarket related topics in one subject and the question of “why do share market prices go up and down?” was one that came up. I prefer to simply ignore them other than a signal as to whether value exists or not.

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