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How does cash flow through Decmil?

How does cash flow through Decmil?

I met with Justine and Dickie, the CFO and COO of Decmil recently, and got a good understanding of how cash flows through the business.

I am comfortable that the disastrous acquisition track record of the past is now just that; past. The board now appears stable, culture within the business appears to be excellent and if Justine and Dickie’s enthusiasm is anything to go by, their reputation, which has taken 31 years to build, will see them continue to secure projects from blue chip clients (don’t ask me what ‘blue chip’ means).

There are of course macro risks in supplying picks and shovels. The GFC for example didn’t dent BHP and RIO’s aspirations, but it did dent the banks’ willingness to lend on new projects. A macro shock could thwart the capex plans of many resource companies and this would inevitably impact Decmil and its peers. Operating leverage however is not as high as you may think and I invite you to investigate.

So go forth and conduct your own research and as always, seek professional financial advice. You can also use the steps in Value.able to calculate the value of Decmil yourself.

Posted by Roger Montgomery, 14 September 2010.


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.

Why every investor should read Roger’s book VALUE.ABLE


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  1. I just thought I would send in a bit of trivia, the term blue chip comes from a casino.Its a blue chip used for gambling and has the value of $500 it has been picked by someone as a term for high value stocks

  2. Hi Roger, since last July, I have been watching you on your money your call and studied your book, I have gained 50% return on small cap share from July 2010 to December 2011. However because of your absence during the summer holiday, I have not been doing well. I need your advise on NAV bought for 0.24, MOL for 1.45 and BGE for 0.35, I don’t I should wait and see or sell these share. Appreciated

  3. Hi Roger,
    For DCG, I have worked out the 2010 IV as $3.13 based on 22.50% ROE and 10% RR. How does my figures compare with everyone ? I have yet to work out the future IV. Any advice for me on the future IV calculation ? Many thanks.

  4. Roger,

    I have spent several weeks now working up some 250 valuations in a spreadsheet and of course, using your book and advice to guide me. I am more than satisfied now that it presents a very logical means of assessing a company’s valuation when using the financial reports. Thank you very much for my education in these matters – it has already borne fruit.

    What I am not comfortable with is the future valuation scenario. It seems to me that we are applying an estimate using another set of estimates prepared by somebody else (analysts), and at the very least they must be considered suspect. Remembering these are often the same analysts who make pronouncements about “target” prices for stocks on a regular basis, and history has shown they are not very good at it.

    I simply do not know how anyone outside of a company can know what the net profit will be or what the dividend payout will be in 12 months time, much less what the equity willl be or the number of shares on issue.

    Clearly you will not agree with my view on this, but I am prepared to be persuaded.

    • Hi Ken,

      On the contrary, I agree with your concerns entirely. I run a range of valuations based not only on analysts estimates but also on numbers extrapolated from historical performance. Neither is perfect and both or estimates and so they are riskier than using actual data. It is nevertheless useful to see the impact these forecasts could have on intrinsic value if realised. Remember BIG discounts to all intrinsic values are a must.

  5. Hi Roger

    When deciding on what to select as my Required Return (RR) one of the factors I take into account is the Dividend Yield (DY).
    I aim for a Total Return (DY+RR) of 14-15% minimum.

    For example:
    Wotif: DY ‘5’ RR ’10’ TR ’15’
    Super Cheap Auto: DY ‘4.5’ RR ’11’ TR ‘15.5’
    REA: DY ‘2.5’ RR ’12’ TR ‘14.5’

    Looking at other people’s Required Return’s it appears that I am barking up the wrong tree.
    Should I just select the capital gain that I require and treat any Dividend as a bonus ?

    • Hi Pat,

      AN interesting question. As you all know from the book, I use an after (corporate) tax investor required return and that return represents the total. In reality it is a mistake to get bogged down here and try to be precisely wrong. Better to be approximately right and ask for very very big discounts to whatever intrinsic value you come up with. It really is not a science despite the appearance of precision.

      • Pat,

        I suggest that you are in effect double counting the Dividend Yield in the approach you outline (if I understand it correctly).

        Roger’s IV approach values the dividend stream at the required return (RR) via his table 11.1 while the retained portion of earning is valued via table 11.2 with the pro-ration of the values being determined via the payout ratio.

        To accommodate your approach you would have to use differing RR’s to value the Dividend stream versus that of the retained earnings stream, which is a bit illogical. You have a required rate of return for an investment in the business, so I suggest that the same RR should apply whether it is via dividend, or growth in IV (capital gain) through retained earnings.


      • Hi Lloyd

        You are correct it would be double counting and I have gone back to the way I was choosing RR’s previously.


    • Pat,

      For what it’s worth I take an entirely different approach and allocate a RR% based upon the GICS sector in which the company operates. I have a large spreadsheet that only requires me to input 5 figures and it does the rest by looking up the numbers from the two tables (11.1 & 11.2 from Roger’s book) and looking up the RR% from the company listing/GICS sector. Works for me, and I can always override a percentage if I need to. For example, I have the transport sector set to 12%, but in the case of Qantas, I override that to 14%.
      It is not an exact science, and as Roger has pointed out before,we only need to be approximately right.

      • Thanks Ken

        Because a number of other people were giving small businesses a RR of ’10’ I thought I was doing something wrong and went looking for a solution. All that did was get myself confused but I have re-read pages 191-193 of Value.Able and I am back on track.

  6. Hi everyone,

    I am having trouble working out future Intrinsic value. I am using Commsec and on the forecast page all that is available is
    EPS(c), PE and Growth for 2011 and 2012.
    Can anyone explain how to work out future intrinsic value using these figures?


    • Hi John,

      WIth the data you have presented, there are a number of approaches to adopt to get the data you need for future intrinsic values. Start with Chapter 11 of my Value.able and keep in mind that future equity is equal to: Previous equity+profit – dividends +/- capital issued and capital bought back. Hope that helps.

  7. Hi Rodger,

    I was given your book as a Fathers Day present from the kids and I’m very suprised that it is so easy to read and follow.

    I seem to be comfortable working out a companies intrinsic value now for previous years and future years. But, does this value represent a value now (start of financials) or at the end of the financial year based on the calculations?


  8. Hi Roger,

    I believe I am getting better @ value investing, it does take time but with your book by my side and your blog, I don’t need to check on my pick’s every day. I get a rest from worry…….hehehe

    Regards and many thank’s

  9. Roger did you have any discount in your valuation for NAB re: the potential AMP acquisition? If not what is your current valuation for NAB — is it still 28$?

  10. Ric,

    TY Equity $7570.4
    LY Equity $6812.5
    Shares 1231.1
    EQPS $6.15
    NPAT $2020.8
    ROE 28.1% (Using the average of the two equity figures)
    Dividends $1349.2
    Payout Ratio 66.8%
    Choosing ROE of 27.5% and RR of 10%(I use 11% for retailers)
    IV = $23.91

    Hope this helps
    regards, Ken

  11. Can anyone shed some light on what Diluted EPS means.

    What’s a diluted share and do we use diluted shares and diluted earnings in our calculations?


    • Hi Steven,

      Diluted simply means: earnings per share (EPS) if all ‘convertible securities’ such as convertible preferred shares, convertible debentures, stock options (primarily employee based) were exercised. The diluted EPS will always be lower than the simple EPS unless the company has no more potential shares outstanding.

  12. Here go my valuations.

    2010=$2.85. roe used %20,roe calculated=22.54,eqps=.73.RD=0
    2011=$3.05 roe used %20, roe calculated 22.07,eqps=.879,RD=23.1
    2012=$3.46 roe used %20,roe calculated=21.2,eqps=1.047,RD=24.3

    I have a current buy price of below $2.05.

  13. Hi Roger

    Firstly thank you for the book and the insightful information contained within. It has certainly opened my mind to a different way of investing.

    Re DCG I have used a RR of 12% and have come up with a current val based on 2010 accounts of $2.25.

    I currently trade on comsec but can’t seem to work out where to get the relevant information to calculate future years intrinsic values. Can you please help.

    • Hi Greg W,

      On Craig’s earlier suggestion, I will make the subject of forecasting intrinsic values a topic for a blog post. As I noted earlier, its not a subject you will find elsewhere or in any other book, so I will extend the knowledge on the subject.

  14. Hi Roger,

    DCG, I get just under 90 cents but it has picked up alot of cash which is a good sign but it doesn’t pay dividends .

    Thankyou again for all your hard yakka!

  15. Roger,
    Can you please check IVs

    WOR Eq/share 7.46 ROE 15.9 POR 64% RR10% IV 13.2

    MND Eq/sh 1.68 ROE 57.7 POR 87% RR10% IV 13.54

    ACR Eq/ sh 0.5 Roe 57.8 POR 0 IV 11

    Thanks, David

      • Hi Roger
        In regards to ACR I get a lot higher IV so could you please show me where I’ve gone wrong
        Sh/on/iss 160.6
        2010 eq 80.5
        2009 eq 31.2
        Av eq 55.85
        eqps 0.50
        npat 46.55
        roe 83
        RR 14%
        IV $6.88

        ‘L’ Plater

    • Hi David

      Your numbers are for 2010 and Rogers are probably 2011. I agree with your Eq/share for 2010. ACR’s forecast earnings for 2012 give a dramatically different ROE, therefore using a lower ROE may be a good idea.

  16. Because of DCG’s low dividend policy I have gone for a RR of ’13’.
    With a forecast ROE of ‘22.5’ I have the IV at $2.14 for 2011 and $2.63 for 2012.
    Note: I own shares in DCG.

    • Hi

      As Roger’s table already takes into account the dividends I think I should have used a lower RR for DCG of say ’12’ which gives me a IV of $2.44 for 2011 and $3.01 for 2012 when using a forecast ROE of ‘22.5′. Any further upgrades of earnings could mean that a ROE of ’25’ may be applicable but I will wait until that occurs.

  17. I saw a Youtube Roger where you said IV of WPL was about $24 (May 2010)…So I have obviously gotten something terribly wrong to come up with IR $52.57…I used the table from 10 Aug 2010 ….http://rogermontgomery.com/how-do-your-value-able-valuations-compare/

    I have re checked it and can’t work out where I went wrong…

    I thought I had it when I got an IV for WOW of $25.17….Is there a follow up of the table you posted 10Aug2010 so I can hopefully try and back track places I’ve gone wrong…Thanks.

  18. Have a small parcel of shares in DCG and WOR and ANG. I believe that DCG has the greatest pot. in improvement ROE and as such will BUY DCG again if WOR share price doesn’t become any cheaper in the near term. The question I have regarding Decmil is how much value do you place on its rep. & goodwill in the company going forward to secure projects overseas compared to its rivals. Is decimal destined to become a big fish in a small pond ? (i.e Australia) or does it have a board that has exceptional expertise in neg. with companies in countries within Latin America and Central America ? Is so its future looks very bright indeed!

    • Hi Simon,

      Thats a question to put to the company. My take is 20% NPAT growth for the next couple of years. Getting too big will mean a loss of the culture they have so carefully cultivated. Perhaps an acquisition or two as well. Lets watch closely.

  19. Orright, I’ve refrained from putting forward any attempts at valuations because it took me some time to read and absorb the book and at the end of a long day running the business I’m more interested in getting the kids to bed and having a medicinal. I’m not certain that my assumptions are correct on this one. However, I’m prepared to have a stab at DCG….please be kind.

    ROE (from continuing operations last year) = 21.04%, assuming 22.5% for this year.
    EQPS $0.73
    RR 10%
    POR 0% (not sure how long this will be the case)

    Valuation: $3.14 this year, $3.85 next year.

    Assuming Comsec’s more optimistic ROE of a bit over 25% but payout ratio (after this year) of 25%:

    Valuation of 3.80 this year and 3.93 next year. All contingent on no major surprises of course (or me making silly mistakes).

    I’m looking forward to seeing other bloggers thoughts on this, albeit with some trepidation.

    • Hi Greg Mc,

      Don’t worry. I actually think your numbers are pretty good. Conservative ROE’s are always preferable as is a conservative discount rate. A higher discount rate may be worth considering too.

      • My reading of the way we should be calculating eqps is 2010 amount, plus 2011 retained profit, then using this amount as the basis for the valuation)see page 196 valuable.
        Greg mc calcs seem to use the 2010 amount?

        Can anyone help to clarify this? have I st%$#ed up?

  20. Hi there. Can anyone confer? For Woodside (WPL) and using Comsec data, I get an IR of $52.57 using a RR of 10%…

    Current Equity=9865
    Current Shares=748
    Payout Ratio=45.1%
    Prior Yr Equity=6705
    ROE selected=25%

    • Using the same data as yourself except I chose a RR of 12% to compensate for their level of debt and industry and payout ratio of 56% (1.949/1.1) I get $37.00

    • Ric,
      I agree with all your inputs except the dividend figure (I have $774) and I would not calculate the ROE on last year’s equity. At the very least I think you should use the average of the LY and TY figures. Personally, I have made a rule for myself that if the equity increases by more than 25% I use this year’s equity to calculate ROE, because that is what the company will have to perform against going forward. On that basis, the IV is $30.56, but again, I prefer to use 14% for miners & drillers due to the risk associated with these businesses, in which case the IV is $18.32
      Hope this helps.

      regards, Ken

    • Ric

      On a more qualitative note WPL cant afford to pay dividends and the CFO has the most terrible attitude towards fully underwritten dividend re-investment plans i.e. company pays a dividend without paying a dividend.

      I wouldn’t own WPL even with your money…in my opinion anyway.

  21. Hi Roger,

    Thanks for an insight into your Decmil meeting. Based on the raw data available on the Comsec site I got an IV of $0.45. However I have noticed a lot of your replies include the phrase keep digging. So I have and my 2011 IV is now $2.54. How did I go?

      • Maybe I am more conservative, but I only have DCG at
        $1.82 – 2010 = EPS 19.4; DPS 4.5
        $1.97 – 2011 = EPS 22.2; DPS 5.4
        $2.27 – 2012 = EPS 25.1; DPS 10

        ROE 20% RR 12%

    • I too looked at the commsec figures first because they are so easy to get.

      The ROE on commsec is extremely low – 8.7%. So after reading Roger’s post, I looked at that and was very confused. However, looking at their financial report, the ROE is above 20%! Based on the higher ROE, their value is above $3 (I have decided that I don’t like to say figures that are to the cent since all valuations are approximate).

      The lesson from all of this? Look at the financial report!

  22. Hi Roger

    I have been running the ruler over Decmil the last couple of days.

    Using RR of 12% and ROE of 25% I get a valuation of $2.72. Going forward I am not clear if they intend to pay a dividend for 2011 & 2012, some advice to contrary which if correct increase value to $3.26 and $3.85.

    Are the RR and ROE close to your inputs? and hence values as DCG would appear reasonable value at $2.15.



    • Hi Ray,

      When it comes to dividend policy, it is the board that makes the decision. So you go and have a look at the make up of the board and their backgrounds. You will see there is some serious experience including a former exec from the industry’s gorilla. That gorilla however pays out a very high percentage as a dividend, so you might argue that he’ll be voting for divs. The usual pearls like “franking credits have no value to the company – pay them out” will be trotted out, but hopefully the board will see the nonsense in paying divs and then raising capital or borrowing money for acquisitions.

      • Thats an interesting term to describe a board member, is it a technical term?

        Hopefully he will get lost in the mist of the board room and dividends will be managed in the best interests of the shareholders and the company.



  23. Hi Roger,

    i get a value of $5.24 with all earnings re-invested. Though I couldn’t find a statement in the Annual Report stating a no Dividend policy.

    With a 50% payout ratio I get $3.71.

    Both well under the $2 share price.

    That’s assuming a return of 30% on equity, which is conservatively under the 37.7% I calculated using the 29M cash flow on the starting equity of $77M.

    I must say I find the issues around the discontinued operations problematic. I wouldn’t feel comfortable investing in Decmil. Not so much because I’m alarmed at what I read in the Annual Report. More that I don’t understand it all. I should probably concentrate on firms that lack that extra layer of complexity.

  24. Hi Roger,

    Thanks for the update on DCG. I have a holding of DCG in my portfollio and when I recently applied your valuation methodology using a forecast 25% ROE and a 10% required return, I came up with a 2012 valuation of $4.26. Other investors might want to use a higher required return given the acquisition history alluded to in your post.

    Kind regards,


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