Is JB Hi-Fi cheap (and still an A1)?

92 Comments

1. 

   Sterling
   October 27, 2011 at 5:20 pm:

   I’m currently doing a calculation on JBH and am wondering if anybody can please tell me which page in the latest annual report can I find the number of shares?

2. 

   Trevor B
   September 5, 2011 at 11:22 am:

   I’ve found difficult finding the right figures to use from the Company
   reports. I followed your calculation in your book but the problem I now
   find is what numbers to use from the actual reports. In your book you
   provided the figures but I am unable to track down the JB HI FI analyst
   report quoted on page 187 and dig out the figures from that report, to
   match those that you supplied, to confirm my learning.

   If I use the JBH 2010 report as an example, the ingredients are:
   No. of shares: 108344987 (easy to find)
   Equity (end 2009): 229252000 (easy to find)
   Equity 2010: 293296000 (easy to find)
   ROE: 108344987/229252000 = 51.7% (if average equity of 2009 & 2010 is used
   then 45.4%)
   EPS:109.7c (or diluted 108.42c) (easy to find and doesn’t make much
   difference to calcs)
   Div: 0.66 (easy to find)
   Payout ratio: 0.66/1.097 = 60% (if use Div paid/profit (67083000/118652000)
   then 57%)

   So, I’m uncertain what ROE to use and what payout ratio to use.

   Obviously, using one will provide a greater margin of safety than the other
   but it seem logical to me to be most accurate, then having achieved an IV,
   apply a margin of safety on the final price. Variance in ROE and Payout
   Ratio effect the calculated IV greatly. A difference of 4% in payout ratio
   provides $0.90 difference in IV in the above calculation.

   Questions:
   Should I use actual dividends provided for divided by profit to determine
   Payout ratio?
   Should I use the forecast EPS and Forecast Div to calculate the forecast
   payout ratio?
   I can see that averaging equity produces a lower ROE (except JBH 2011
   report) which gives a lower IV – hence safety margin? Is it ‘wrong’ to use
   just the previous year equity?

   • 

     Roger Montgomery
     September 5, 2011 at 11:44 pm:

     Hi Trevor,
     Questions:
     Should I use actual dividends provided for divided by profit to determine
     Payout ratio? Use your knowledge of the company. What have they said?
     Should I use the forecast EPS and Forecast Div to calculate the forecast
     payout ratio? You can but it must be representative of what is likely. Regarding the next question think about what you are trying to reflect. When did the company raise the money through the year.
     I can see that averaging equity produces a lower ROE (except JBH 2011
     report) which gives a lower IV – hence safety margin? Is it ‘wrong’ to use
     just the previous year equity?

   • 

     kev sep
     September 6, 2011 at 10:17 am:

     Hello
     Trevor B

     Re JBH calculations.
     Start Quote”
     No. of shares: 108344987 (easy to find)
     Equity (end 2009): 229252000 (easy to find)
     Equity 2010: 293296000 (easy to find)
     ROE: 108344987/229252000 = 51.7% (if average equity of 2009 & 2010 is used
     then 45.4%) ” End quote.
     You did not show a NPAT to use in your ROE calculations. Equity per share should be
     Shares on issue / equity ie using your figure 229252000/108344987.

3. 

   Peter
   August 27, 2011 at 4:02 pm:

   Hi Roger,

   I am really struggling with JBH decision to buy back shares with debt. Apart from the obvious distortion to the ROE calculations, are there any really good reasons for them to do this in terms of improving shareholder value ?

   Thanks

   Peter

   • 

     Roger Montgomery
     August 28, 2011 at 12:46 am:

     Increase in intrinsic value per share, when buyback is conducted below. Hope that helps Peter.

     • 

       Peter
       August 28, 2011 at 12:21 pm:

       Roger

       I can see that it increases future IV, however the reduction in book value in 2011 affects my calcs considerably. When I evaluate assuming no buyback I get IV’s of $12.80, $13.90, & $16.70 for 2011,2012, 2013. When I use the buyback case I get $6.70, $16.60 & $19.20.

       So yes it does increase future value of the equity, but there is less of it. Hypothetically, what if they did it again next year ? ROE goes up, equity goes down, current year IV takes a hit, and future IV is leveraged up again.

       I suspect I am answering my own question but I guess that underscores the importance of focussing on the business itself, rather than the formula.

       Thanks – I need an A1 service I think.

     • 

       Roger Montgomery
       August 28, 2011 at 5:00 pm:

       You’ve got the mechanics right. So well done. Take it to an extreme and you end up paying silly multiples of equity. That can be overcome with some adjustments to the model remembering you’re searching for bargains.

4. 

   David Hicks
   August 13, 2011 at 8:54 am:

   Hi Roger,

   Nobody has considered the interest liabilities associated with the JBH increased debt. It seems to me that about $14m increased interest will need to be expensed next financial year.

   I would be interested in your thoughts on this.

   • 

     Roger Montgomery
     August 15, 2011 at 10:24 am:

     Hi David,

     I agree 100% with the interest needing to be expensed. But I don’t agree that “nobody has considered” it. Good of you to raise it for those who haven’t though.

   • 

     Kev Sep
     August 15, 2011 at 10:54 am:

     Re Estimated interest costs for JBH. With 10.8 milllion less shares there will be a savings in dividends paid which will help but not cover my estimated interests costs.

     and Roger – Thanks for a great service.

     and Roger should you be willing to publish.
     and a request: Would like to make contact with a follow blogger in WA (due to time zones) who is in the early learning Value.able curve to use skype to discuss and dissect select company reports. No internet contact for next few days but will be in Derby at end of week.

     • 

       Trevor Bozoky
       October 18, 2011 at 11:53 am:

       Hi Kev. I’m in Perth and happy to discuss VA with you.

       Trevor

5. 

   Brad
   August 12, 2011 at 2:03 am:

   Haven’t received my copy of Value.able yet but have been following the blog for the past fortnight.

   While I won’t comment on the financials (it’s covered well above) here’s just a bit of info for your consideration;

   – When people are referring to ‘online gaming’ above, this isn’t itself what’s eating at in-store sales. Australian console users still have to purchase their retail titles in-store to then play online. Your Call of Duty, Halo’s etc., the huge volume sellers still require a physical purchase. They’re losing their walk-in casual game buys to sites like playasia, zavvi, etc because everyone is purchasing online and saving considerable amounts of cash doing so. Hit forums, ask people who purchase games regularly, and note the franchised and independent game-only retailers closing everywhere.

   – Nintendo, Sony and Microsoft all want to make digital distribution a reality. They’d have to be stupid not to see Apple’s business model in regards to this and not try and follow it, remembering Sony and MS have film/series rentals and purchases available via their consoles already. The primary barrier is download limits and bandwidth currently available in Australia. The first we’ve seen increased dramatically in the last year and the NBN will resolve the later. Digital distribution on the PC has been cornered by a few players Valve’s ‘Steam’ being the most prominent example; they’ve recorded over 100% year-on-year sales growth for 5 straight years running. The next generation of consoles (Nintendo’s confirmed for next year) will bring this transition on rapidly if not immediately.

   – The streaming music service I’m not convinced on at all. Look up ‘Pandora’, a free, ad-supported service built around a similar concept but with 80 million plus users now (restricted to US only). Something like this will be mirrored here eventually. Sony’s online ‘MyPlay’ was launched alongside a barrage of false fanfare and has fallen flat. It makes me think about the rumours earlier this year regarding Apple pulling back on its network of resellers; surely JB can’t sell this service alongside iPhones, iPads and iTunes vouchers?
   Looking forward to reading the book.

   Cheers,
   Brad.

   • 

     Roger Montgomery
     August 12, 2011 at 10:03 pm:

     That final point is a very good one…cutting one’s nose to spite their face?

     • 

       David Sinclair
       August 15, 2011 at 11:04 am:

       Hi Roger,

       I wouldn’t say that JBH’s proposed streaming service is cutting off their nose to spite their face. It looks more like a case of recognising that they will inevitably lose in-store music sales to online services and wanting to capture at least some of the lost sales through an online service of their own. The good side to it is that it shows the management are aware of the issue and looking for a solution. The big questions are will it work and how much money will they have wasted on it if it doesn’t?

       David S.

6. 

   Nic Arena
   August 11, 2011 at 8:40 pm:

   Kept hearing all year how bad retail was (and it definitely has been). But what we know from the past is that generally the best operators gain more market share during tough times in their industry and in a wider market downturn. JB HiFi is clearly one of the best retailers in the country! Just look at the results compared with myer, DJ and Harvey Normans. People forget that other shops eg: Sanity, Target and Big W also sell CDs/DVDs and electrical equipment. I would suggest that these guys will lose their share of the market well before JB does. Now JB is going to stream music online and again you will hear people mention that online shopping will take away business from JB. This is true but how long do you think it will take to get around that JB sells singles online much cheaper than others. We pay much more on iTunes than other countries and if JB sticks to their low cost provider they could gain considerable market share in downloads. Just my thoughts.

7. 

   sapporosteve
   August 11, 2011 at 7:45 pm:

   That photo is a laugh. I assume that is the value investors up the back……

   • 

     Ash Little
     August 12, 2011 at 9:47 pm:

     Still laughing at that steve

     Hope they come to the pilgrimage

8. 

   Matthew Smith
   August 11, 2011 at 6:17 pm:

   Roger,

   Hope you can set me straight with this query.

   JBH has $152m of equity FY11 which I think could generate earnings of $112m on revenue of $3.2bn in FY12 and is likely to payout 60% or ~$67m (I doubt management would let it DPS drop though).

   So the avg. ROE FY12 is ~64%.

   At present im using a 45% ROE to estimate forecast values…but 45% ROE on $152m only generates $68.4m in earnings which doesn’t make sense due to the debt and distorts the forecast equity per share.

   If keep my 45% for the multiples but manually change earnings to $112m leaving everything else I arrive at a 2012 value of $17.40 on a 2012 forecast equity per share of $2.00.

   If you could comment on this it would be great!!!!

   • 

     David Sinclair
     August 15, 2011 at 10:53 am:

     Hi Matthew,

     The recent share buy-back was funded by additional borrowings, so they effectively swapped equity for debt. It was a change to the way the business is funded but that shouldn’t affect the operations of the business, which means the expected proficts also shouldn’t change. Getting the same amount of profit from a smaller amount of equity means that return on equity is increased. Return on capital won’t change though, because debt and equity are both counted as capital so swapping one for the other without changing the business operations at all means that nothing has changed. It is a good example of why it can sometimes be helpful to assess businesses by their return on capital rather than return on equity. The return on equity is affected by changes in the way the business is funded while the unchanged return on capital shows that the operations of the business haven’t been affected significantly.

     David S.

9. 

   david
   August 11, 2011 at 4:29 pm:

   Dear roger,
   I was at a meeting today where they revealed that JBH borrowed 250 mill to buy back shares. This has increased their debt to equity ratio from 23 % to 152%. It has artificially improved their ROE to 88%. Allegedly quite a number of their directors have been disposing of portions of their shares over the last12 months. Is this the behaviour of an A1 company acting in the best interests of their shareholders (of which I am one). Thank you . David

   • 

     Ash Little
     August 12, 2011 at 9:30 pm:

     Hi David, Good cashflow should see debts paid off quickly…IMHO the buy back has added lots to shareholder wealth.

     That said I am often wrong

10. 

    Robert P
    August 11, 2011 at 2:31 pm:

    I have worked out two formuli that are close approximations to the table. To find your own look at Simmon’s book, also consider the no dividend case. Using a different formula for the case where the ROE is less than the target return is also useful, as is using a maximum ROE. It is possible also to use your own ‘margin of safety

11. 

    Michael W
    August 11, 2011 at 11:13 am:

    Not surprised that JB are finding this difficult in the area of music and games. They are swimming against the macro trend towards online distribution.

    With music the trend is quite obvious for everyone to see. With movies a little less so, but we’ll bare the full brunt when Netflix hits our shores.

    Gaming is also gaining momentum in the online move. iPhones/iPads/iPod-touches/Androids are eating the lunches of the handheld consoles (PSP, Nintendo DS) in a big way and there’s no shrink-wrapped software for devices like these. Even the traditional consoles have dabbled in this area for quiet a few years now, with mainly “indie” and lower-content games at present, but the trend is inevitable.

    But with change comes opportunity. Especially in the growing device accessory market.

12. 

    Will
    August 11, 2011 at 9:41 am:

    Roger, at what price would The Reject Shop (TRS) be a buy for you again? You expressed concerns at beginning of year that return on equity was flattening and that the long term growth of the business would slow down.

    • 

      Will
      August 11, 2011 at 9:57 am:

      Also would like to know if you have an opinion on Cash Converters (CCV). As you know they have a buyout offer on 30% of shares at 91 cents, and the buyer EZPW (NASDAQ) may use CCV as a vehicle for International expansion. This directly addresses your concern about Australia presenting a limited footprint for expansion.

      It seems to me that the market crisis is handing us a gift to be able to buy CCV here at 65 cents.

    • 

      Roger Montgomery
      August 12, 2011 at 7:28 pm:

      Now that the shares have plunged…. I will do a retail wrap up soon and be sure to include it.

      • 

        Ash Little
        August 12, 2011 at 7:59 pm:

        Still not value IMHO

        But I am often wrong

13. 

    Ian
    August 11, 2011 at 8:26 am:

    Music software and games declined by 9.1% on a comparable store basis. It was driven mostly by games which declined by 16.8% on a comparable store basis.

    This has been one thing that I have been watching with JBH as I believe that there will be a continual migration of purchase of music, movies games etc to be downloaded rather than going into the store and buying a DVD or disc.

    About 25% of JBH sales are from music, DVDs and software and while comparable store sales will probably continue to drop this should be offset in the short term to some extent by opening more stores.

    JBH put the increase in inventory down to $49M for new stores. This seems a bit high considering that stores increased from 144 – 157 including the Clive Anthonys stores (about 10%) but inventory went up from 334.8 – 406.9M (about 22%).

    The increasing Australian dollar would be expected to reduce the cost of imported inventory when it is calculated in Australian dollars.

    A reason for the higher inventory could be that the end of financial year sale was not as good this year as last year and JBH may have been left holding more inventory than at the end of the previous financial year. I am sure that retailers try and reduce inventory at the end of each financial year to make the reported figures look as good as possible.

    Overall lower sales per store on a comparable store basis may mean that JBH is left with extra inventory than last year if they did not reduce the amount of stock that they ordered compared to last year or assumed that demand may start picking up and ordered stock on that basis.

    I have never been to a Clive Anthony store but if they hold less inventory than a JBH store then closing these down could mean an increase in the amount of inventory held per store.

14. 

    Scotty G
    August 11, 2011 at 1:17 am:

    Music/DVD/Games sales declined 9.1% on a comparable stores basis with games being the being the leading contributor at -16.8%. Lifted this straight out of the presentation accompanying the annual report. Even though the presentation is usually management putting a positive slant on everything but there can be some snippets of info to pull out of these.

    With regards to the substantial rise in inventory, I went back and read every annual report to see what the change in inventory levels was every year up until now. During the years 2001-2006, excepting 2002-2003 at 14%, the average increase was 48.25% with the rollout of stores at about 45-55 in that period.

    Between 2006 and 2010 the increase in inventories slowed to 31% then 28%, 19% and finally just 3% between 2009 and 2010.

    So why the big jump, +21%, this year? I believe part of it can be contributed to lower sales in this time of lower retail spending. This leads to more stock hanging round if management aren’t quick enough to decrease product inflows with product outflows.

    I can’t really explain the remainder of the increase though. Did the Clive Anthony purchase come with a large level of stock? I couldn’t really find any documents to verify this one way or the other.

    As for the effect on JB Hi Fi’s value it is more in the perception of mangements ability to control inventory levels and, thus, the wider business. I guess we may have to wait until the mid year report to see if the situation has changed. All suggestions welcome!

    • 

      Ash Little
      August 12, 2011 at 7:46 pm:

      Good Summary Scotty G,

      My only thing to add was that clive anonthy was an ouch for the shareholders. This was flaged awhile ago but it does not make it better.

      It is a bit better than than the other “Clive” from a competitor though………..Now that is realy burning shareholders funds.

      9

15. 

    Craig
    August 10, 2011 at 10:04 pm:

    Hi Roger,

    Am I correct in saying sales growth in music, movies and games was down by 9.1%, with games being the biggest contributor to the decline? In fact, it appears “handheld” games sales in particular (they cite PSP and NDS, but also Wii) were responsible, as opposed to “console” and PC games.

    As to a reason, maybe the hard-core console and PC gamers are always going to make their purchases, whereas the tablet and hand-held casual brigade are making a switch to iOS and Android apps, which you can obtain for less than $1, or even for free.

    Just a thought.

    Regards,
    Craig.

    • 

      Roger Montgomery
      August 11, 2011 at 12:51 am:

      Spot on I think Craig.

      • 

        David Edmondson
        August 11, 2011 at 9:24 am:

        Interesting to note the decline in ‘handheld’ games sales and the concurrent decline in Nintendo revenue. Nintendo have (amidst posting a first quarter loss) reduced the RRP of their 3DS device by a third (3DS only launched months earlier). Some discussion as to how Sony will price its soon to be released new handheld ‘Vita’. So, two thoughts from me; Is there a worldwide slump in handheld sales generally and/or does JBH’s results refect a rise in online sales/downloads from other sources?

    • 

      Luke
      August 11, 2011 at 2:04 am:

      You are absolutely correct. This is an interesting paradigm shift. Just look at the result of Nintendo’s 3DS (without many hand-held sales, the game developers will not develop and people won’t buy the device etc).

      Mobile phones have cannibalised many markets, including:
      – Watches (which are more of a jewellery item rather than a functional item now)
      – Alarm clocks (I trust my phone over the alarm clock in a hotel room)
      – GPS (new android phones have excellent navigation)
      – Mobile casual gaming (as we are referring to here)
      – In some cases, entire computers. If all you ever want to do is check your email, a phone is cheaper than a computer.

      It’s not surprising that console/portable game sales are falling. JB can not get a slice of the iOS and android app markets so it’s as though they are losing a slice of media sales permanently.

      It will be interesting to see what they do with their online music store. At the moment, people just want open format music with no DRM at a low cost without an annoying user interface. iTunes is annoying and their music won’t play on a lot of devices. Amazon sells mp3s at low cost but will not sell to Australians (which is very annoying). If JB does this right, they could sell huge volumes of digital music in Australia/NZ.

      Thoughts anyone?

16. 

    Simon Anthony
    August 10, 2011 at 7:55 pm:

    For those of you that are regulars to this blog and have long memories you would recall how along with BHP QBE is one of my favorite businesses. It should stand out on its own as a buy me now business with its price falling 26% since last week in May and a further 2.8% today when the rest of the ASX 200 is rallying up 2.7%!

    So what is happening? I think as a value.able graduate we should discuss what isn’t happening to QBE as a business.

    To start with lets look at the facts. Unlike its peers, QBE has a limited exposure to bear markets because most of its investment portfolio (90%) is invested in fixed interest securities, or is held as cash in $U.S and cash-like investments (highly liquid). So in regards to what has happened in the last fortnight QBE investments should have been bought with the same furor as U.S bonds or even gold, by investors as a safe haven asset. The very fact that institutional investors sold QBE shares is illogical at best and ignorant at worst.

    So what about the remaining 10% well that is in equity markets although its holdings should recover along with the rest of the market I would not be surprised if QBE management would take advantage of recent events and either add to this 10% holding or buy back its own shares to increase the value of its portfolio.

    QBE’s core insurance business continues to perform well. With industry-leading Combined Ratios and Insurance Margins, QBE current share price presents a very good buying opportunity, with its current price lower than the March 2009 lows. This is what investors should be focusing on a ever growing quality business that is out of favour with the market yet is well placed to capitalize as it continues with its own M&A in the U.S market.

    • 

      Chris B
      August 11, 2011 at 10:45 am:

      Hi Simon and bloggers,

      You are right in saying that QBE has been a great business in the past (and may continue to be – I have not spent any time on it lately). But all I wanted to say is this… A lot of QBE’s profits are leveraged off the interest rate in the U.S. Even just a 25 basis point move in interest rates has a massive impact on QBE’s bottom line. With the fed vowing to keep interest rates at record low levels until mid 2013, QBE can expect lower returns for at least the next few years.

      As far as the insurance side of their business goes – yes they have done a great jon in the past. They have integrated so many other insurance businesses seamlessly (and organically) …however, there is always the very real chance that we will continue to see these crazy weather patterns – floods, bush fires, droughts, cyclones (etc) and this might not be good news for QBE. And i understand that they can try to mitigate these risks by charging higher premiums, but for my liking, I think there are other, lower risk opportunities out there – trading at much larger discounts to value than QBE is. In fact, i don’t even think QBE is cheap at these prices.

      Take care,

      Chris B

    • 

      David Sinclair
      August 11, 2011 at 2:50 pm:

      Hi Simon,

      There is one more issue (at least) that you need to consider. Because most of QBE’s investment portfolio is in bonds its returns on investment are strongly influenced by bond yields. Bond yields in most of the regions where QBE operates are currently so low that they can’t really go much lower. In the long term, bond yields will rise and QBE’s return on investments will rise with them. In the short/medium term, however, the low yields will continue to be a drag on QBE’s profitability and this situation will probably continue for longer than anyone was expecting just a few months ago. On the positive side, QBE has a strong track record of producing underwriting profits so return on investments is not as critical to them as it is to many other insurance companies. Insurance premiums will rise over the next year or two as a result of the number of big catastrophe claims recently, which will help to maintain the underwriting profits, and the generally depressed state of the industry at the moment will help with QBE’s growth-by-acquisition strategy.

      QBE is a cyclical business and is probably fairly close to the bottom of the current cycle. That is usually the best time to buy a cyclical business, but you will need to be very patient because it may take a long time to reach the top of this cycle.

      David S.

      • 

        Simon Anthony
        August 13, 2011 at 7:27 pm:

        Spot on David! In regards to your statement “Bond yields in most of the regions where QBE operates are currently so low that they can’t really go much lower. In the long term, bond yields will rise and QBE’s return on investments will rise with them.” -That is precisely why I believe that QBE shares were over sold last week.

17. 

    pat
    August 10, 2011 at 6:29 pm:

    JB Hi-FI’s sales drop of 9.1% in the music/games area. Play station and Nintendo sales down16.8% . The Internet is having an affect here I would say where playing online is more appealing and cheaper.I was suprised that their music did so well.
    Inventory increase probably caused by lower game sales, timing of new stores opening and Clive Anthony stock or mabe they got a good deal somewhere and decided to load up.Their stock turn I think was around the same as last year. Their online music business could be interesting its low cost but needs great volumes to make significant money with competition from free music ITunes etc.
    Its a tough business but their cost of doing business is probably lower than anyone else can hope of.

    • 

      Roger Montgomery
      August 11, 2011 at 12:45 am:

      Good one Pat.

18. 

    Stephen
    August 10, 2011 at 4:59 pm:

    Bloggers,

    I’d like you to indulge me for a moment whilst I have a rant.

    You see, I’ve come up with an idea for a brand new business product for investors. It’s called:

    The Financial Report for “Dummies” nicknamed “Dis.Abled.”

    This report is to be generated by ASX listed companies every time they report to the market on their results over the previous six months. It’s a report that uses plain simple language to tell the truth about how a company has performed. It’s aimed at investors who are not economists or forensic accountants. It won’t seek to dazzle you with bells and whistles. It will seek to inform and educate you, and help you decide whether to keep your portion of the business.

    It won’t be 100 pages long and it certainly won’t be a platform for Boards seeking to misdirect investors about their performance as custodians of investor’s money.

    It will apply accounting standards that are actually standard. Because let’s be honest, if the components in my car which are currently manufactured to a set of standards that are in fact standard, were manufactured in an auditors loose definition of standard, then the vehicle simply wouldn’t work. Probably wouldn’t even look like a vehicle.

    If I can’t sell this new concept to corporate Australia then I think next tax time I’ll get a corporate auditor to present my profit and loss statement to the ATO. I’ll ask them to use the appropriate standards of course. I’m getting older so perhaps I can depreciate myself. My work ethic could be an intangible asset, and the credit card, a current borrowing. Hmm….maybe there is something to a smoke and mirrors auditors report after all.

    Stephen

    • 

      Roger Montgomery
      August 11, 2011 at 12:49 am:

      Great one Stephen and I am sure there are a few people here who’d fund the start up too.

19. 

    Robert P
    August 10, 2011 at 3:32 pm:

    Have been looking at the companies in which I have an interest in the current annual report season.
    I have discovered that they often publish an NTA per share which seems to exclude ‘goodwill’ This confuses the calculation if they were done on a per share basis. (e.g. COH compare nta per share and equity per share)
    The other problem is getting the exact number of shares, sometimes it can be done, sometimes external sources are needed, and the number is only approximate (e.g COH).
    Another problem is in treating capital gains, some expenses. I have been doing the calculations both with and without capital gains. (e.g CKL). Also purchases not included for the full year may confuse the calculations.
    Using a program for such cases would be complex as in the design all possible ‘special cases’ must be included in the code.
    Scanning the annual report for the exact number of shares is also complex.
    As an (ex) programmer I have not worked out all the exceptions.
    So I will be interested in the valuations.

    • 

      Andrew
      August 11, 2011 at 8:06 am:

      Hopefully this helps

      Nta won’t include goodwill as it is not a tangible asset.

      You can get the full number of shares on issue in the annual report usually around the note 23 mark. Look for the note titled either contributed equity, issued capital, share capital or shares on issue.

    • 

      Chris L
      August 12, 2011 at 1:50 am:

      Hi Robert,
      NTA (Net Tangible Assets) is a measure of what ‘concrete’ items the company would be left owning if they paid off all their debts, in other words stuff you could pick up and carry off to the auction house (or auction on site) if the company failed.
      Equity is another estimate of what the company would be worth (Assets-Liabilities), but makes no allowance for fact that some of the Assets would not be sellable ie they exist only on paper or in forms which are hard to value/realise the value on in a firesale. They aren’t measuring the same thing and neither is ‘correct’ they are both just estimates of what the company might be worth if liquidated right then.
      The per share part just gives you an easy way to compare that estimated value to the share price.
      There are a couple of ways of getting the number of shares. Again, it’s not that one is right and the other wrong, they’re just used for different things. If you look at COH Preliminary Final report p42 (note 11 “Earnings per share”) they give you the average figure they used for their EPS calculations.
      What I suspect you want is note 21 “Capital and reserves – share capital” on p53 (other reports will call it something else with a similar meaning) where they give you beginning and end of year figures, plus movements for two years. So, not it’s not approximate :)

20. 

    Jonathan
    August 10, 2011 at 2:47 pm:

    Hi Roger,

    After being mislead (slightly) at university, through a course in corporate valuation, I have been very pleased with your book. I just graduated and things are a bit clearer (I have now read Value.able 3 times).

    I’d like to know the formula you used to obtain Table 11.2, as I want to build the table in excel myself. Or if you have the table already in excel, whether you could post it on the blog?

    Jonathan

    • 

      Roger Montgomery
      August 11, 2011 at 12:35 am:

      I haven’t been providing that but I am sure you’ll be able to work it out for yourself if you really need it.

      • 

        Will
        August 11, 2011 at 9:46 am:

        Roger, you could always charge for those spreadsheets….

    • 

      Rob
      August 11, 2011 at 9:38 am:

      Hi Jonathon,
      You can work the formula out, but if you are having trouble just enter Table 11.2 into a spreadsheet and use the index function.
      I’m not the best on Excel but here’s mine. It should be self explanatory. “Adj_ROE” is just a name range that points to a cell that adjusts ROE to the relevant value in the table e.g. ROE 68 Adj_ROE 60
      =INDEX(‘Table 11.2′!A2:H25,MATCH(Adj_ROE,’Table 11.2′!A2:A25,FALSE),MATCH(RR,’Table 11.2’!A2:H2,FALSE))
      It’s a pain typing them in but worth it.
      BTW the formula and the tables are different between the two versions of Value.able.
      In the latest edition Roger makes a slight change to the lower end values, making them a little bit more conservative.
      I thought Roger might let me post this as it doesn’t give out the formula but allows you to use his tables as they appear in the book.
      Of course, if you take up Roger’s offer of his A1 service then you won’t need to go to the trouble anyway.
      Roger, I’m looking forward to it because I can never seem too get the external data to import consistently into Excel. Works most of the time but when it doesn’t it’s a pain.
      Cheers
      Rob

      • 

        Rob
        August 11, 2011 at 11:18 am:

        This post should read. It’s one of the many things I’m looking forward to in your A1 service.

21. 

    Andrew
    August 10, 2011 at 1:29 pm:

    Is this what you were after Roger?

    “JB Hi-Fi stores software (music, movies and games) which represents approximatley 25% of total sales, declined on a comparable store basis of 9.1%, driven predominatley by the games category at a negative 16.8%. This reduction came from the casual gaming category of Wii, PSP and NDS. However we comtinue to gain market share and saw a comparable store growth in PS3, Xbox and PC gaming”.

    You might want the specific ones which unfortuatley can’t find other than the mentioned games figure.

    Not surprised in the decline in some of the game formats, smart phones would have taken a large chunk of the PSP and NDS market with them being portable devices. The nitendo Wii is a rather old console now and is about to be upgraded so i am not surprised there either.

    I would imagine that music is down a rather decent amount as well.

    Thinking about it and you mentioning that their online service will be available for all mp3 devices including ipods etc, i can see this to be a great move that is in sync with the market. Music is going digital, CD’s are becoming obsolete and a lot of people don’t like itunes. JB has the brand to become a decent challenger.

    • 

      Roger Montgomery
      August 11, 2011 at 12:32 am:

      You’re in the age cohort to offer some fantastic insights ANdrew so keep us informed of your thoughts.

      • 

        Andrew
        August 11, 2011 at 9:08 am:

        One observation i wil share about JB is that i have seen a distinct shift in buying patterns. When i first went to JB stores the DVD and CD area was always packed and to get away from the crowd you would walk through the computer area.

        Now the opposite seems to be true with the computer,lap top, tablet and phone etc area being the busiest and the CD/DVD and game area are relatively quiet which is why i am not surprised with the drop in these areas and why i think it is a good proactive move going online in this area.

        I have also been seeing a slowdown in the number of people at registers which was a big reason for my own downgrade of quality. I will say that the sample size has been reasonably small so not sure if this is a trend or just specific to stores.

22. 

    Geoff B
    August 10, 2011 at 11:42 am:

    Roger,
    I would love to know what your opinion is of Chandler MacLeod’s (CMG) results.

    • 

      Roger Montgomery
      August 11, 2011 at 12:48 am:

      Hopefully someone here at the blog can help Geoff. I will have to put it on the list for future review. Reporting season is a very busy time for us.

    • 

      Grant W
      August 11, 2011 at 11:00 am:

      ROE is under 10% – no need to do any further analysis

23. 

    Geoff Cruickshank
    August 10, 2011 at 10:55 am:

    On the inventory:
    At June 30 2010 JBH was carrying inventory of 334m, or 1.47 months of stock sales (not quite right should be adjusted for margin) at the average monthly sales for 2010. At 2011 the same figure is 1.65 months of stock, or an increase of about 5 days sales.
    Put another way, on the increase in sales you’d expect the inventory to increase about 30m, so about 40m of the increase is either timing or slow sales in June or dud product.

24. 

    James
    August 10, 2011 at 10:04 am:

    Analysts reports appear to indicate that software sales of music dvd & games fell by 9%. See this article http://bit.ly/r8I5XR. However the company’s annual report does not appear to mention sales breakdown. Inventory has increased by 21.5%. Two possible reasons might be: Falling sales in the post Christmas 2010 and End of Financial Year promotions; and an opportunity to build up stock due to industry impairment clearance by manufacturers and importers. If the former then it might be of concern. If the latter then JBH may have secured some bargains that they may offload at a healthy margin in the lead up to December 2011

25. 

    ron shamgar
    August 10, 2011 at 9:27 am:

    i believe the change in the levels of inventory reflects the fact that suppliers are asking for their payments to be paid quicker.

    • 

      Roger Montgomery
      August 11, 2011 at 12:56 am:

      I have spoken with the company so will be updating with the results shortly.

26. 

    Allan
    August 10, 2011 at 9:10 am:

    Wonderful and insightful post Roger on one of the darling stocks of the blog and Value.Able.

    I have done some investigative homework and offer up the following:

    – Inventory – Increased levels could well be due to many new stores and the fact JB are also now offering more high end electronics = higher carrying costs. At their market leading prices of course.

    – Music – I estimate sales down 20% in line with the decline in the industry as stated by the music bodies.

    – Games – Sales fell around 15-17%. No time to play video games (maybe when the A1 service is launched!!) but perhaps it was just a bad year for content. Or parents not spending on their children.

    – DVDs – Estimate around a 3% decline in sales. DVDs are a much larger segment for JB given limited access to direct downloads. The company also said they are taking share from discount department stores – If true then this just means more foot traffic in store.

    My 2 cents worth anyway. Would love to buy more at lower prices as need to demand a large MOS in such volatile markets. There are not too many companies like this out there – Listed or unlisted.

    Look forward to reading other contributions

    Cheers
    Al

    • 

      Roger Montgomery
      August 11, 2011 at 12:56 am:

      Thanks for all of those thoughts Allan.

    • 

      Jonathan
      August 11, 2011 at 11:36 am:

      I have an Xbox 360 and found many sites on the interent offering games at large discounts compared to the stores in Australia (JB Hi-hi, EB games, Game). While the games bought from overseas can’t be traded in at local stores (as they are not PAL), there is always ebay to help get rid of non-PAL games.

      There is also the chipping of Nintendo and handheld consoles which compounds the poor game sales.

      While local stores do provided big discounts on older games, but still incomparable to the online stores.

      As for PC games, there is Steam that provide gamers with really cheap games.

      With NBN rolling out (not sure when), but when it does, the speed of (il)legally downloading games, tv series, movies and music will far outweigh the premium that we’re expected to pay at local stores.

      Just my 2 cents from a gamer point of view

      • 

        Roger Montgomery
        August 12, 2011 at 10:14 pm:

        Thanks for sharing some insights from the real front line.

27. 

    Alex
    August 10, 2011 at 12:55 am:

    Software accounts for 25% of sales.

    The sales growth decile was “predominantly” in the software games category, specifically from casual gaming category. But they didn’t specify how much music and movie sales declined either…

    (Source= the market slide show presentation)

    One wonders if this is due to the trend and move to online gaming..

    mmm interesting in that they are moving to establish an online music streaming platform instead. Just how are they going to compete with Apple, and the various other streaming music services, I really don’t know Roger… this is a huge ask…many a company has failed before them…

    I also fail to understand why you would increase borrowings to buy back shares off market at the peak prices ….how can this be good?

    The ambitious roll-out also continues to worry me.

    Isn’t the explanation of increase in Inventory, simply old stock they couldn’t sell in the depressed retail market…

    The whole story continues to worry me. I think the money has already been made on this story..

    Cheers

    Alex

    • 

      Andrew
      August 11, 2011 at 11:16 am:

      In regards to the roll out, i have some concerns as well. Not due to the amount of stores being rolled out but that they are likely to be the less profitable tier 2 stores. I think this might have been confirmed as well in the presentation. I also would hope that these new stores will result in sales growth but there is a chance (i don’t know how much as i haven’t looked into yet) that they may expand their footprint but instead simply cannabalise existing store sales.

      JB has to start thinking online as the available space is decreasing especially for the tier 1 stores.

28. 

    Rici Rici
    August 10, 2011 at 12:20 am:

    just a quick comment before i reflect on the rest of your topic,
    i wonder whether the drop in the AU$ will provide a free ‘kick’ to inventory profitability.

    With the AU$ down, then inventory on hand might become more ‘valuable’ (assuming AU$ stays down for the duration it takes to convert inventory into sales)

    Non-discretionary retailers have been complaining about price deflation (with constant margins) reducing profits.

    So this might give some (temporary) respite.

    • 

      Roger Montgomery
      August 11, 2011 at 12:23 am:

      Good logic Rici Rici.

29. 

    Matthew D
    August 9, 2011 at 10:32 pm:

    My IV appears to be way out. Interesting.

    • 

      Pat Fitzgerald
      August 12, 2011 at 9:01 am:

      Hi Matthew D

      I suggest that you check the ‘implied growth rate’ against the forecast growth rates to see if the ROE is sustainable (see page 112 of Value.able, use the ‘beginning equity’ to calculate the ROE for the ‘implied growth rate’ calculation). When the ROE is not sustainable some people have stated that they change the ‘payout ratio’ and ‘ROE’, others the ‘payout ratio’ only and others the ‘ROE’ only. I change the ‘payout ratio’.

      My IV for JBH for 2012 is $17.75 and for 2013 it is $21.08.

    • 

      Pat Fitzgerald
      August 14, 2011 at 1:57 pm:

      Hi Matthew D

      For further clarification this is how I adjust:
      Where the ‘implied growth rate’ is greater than the ‘forecast growth rate’ I increase the ‘payout ratio’ so that the ‘implied growth rate’ equals the ‘forecast growth rate’,
      where the ‘implied growth rate’ is less than the ‘forecast growth rate’ no change is required as the ROE is sustainable in the short term at least.

      Also because of the uncertainty of future earnings I apply an extra discount to future years IV’s similar to the DCF formula.

      I discount by the following:

      where r = required return

      2013: IV / (1+r)
      2014: IV / (1+r)*(1+r)

      Using 2012 EPS of $1.38 and 2013 EPS of $1.524 and a RR of 11 my IV for JBH for 2012 is $17.23 and for 2013 it is $20.82.

    • 

      Pat Fitzgerald
      August 23, 2011 at 2:05 pm:

      I also create another IV where I use the ‘5 year forecast growth rate’ to change the ‘payout ratio’ so that the ‘implied growth rate’ equals the ‘5 year forecast growth rate’.

30. 

    Andrew Rowan
    August 9, 2011 at 10:24 pm:

    Taken from the investor presentation.

    “JB Hi-Fi stores software (music, movies and games), which represents approximately 25% of total sales, declined on a
    comparable store basis by 9.1%, driven predominantly by the games category at negative 16.8%. This reduction came
    primarily from the casual gaming category of Wii, PSP and NDS. However we continue to gain market share and saw
    comparable store growth in PS3, Xbox and PC gaming.”

    In regard to the inventory increase, this may be attributible to JB now starting to look more like a “Harvey Norman” in the types of products they sell, such as larger goods, and apple products, which on an item by item basis are worth more than DVD’s, CD’s Games etc.

    Based on 144 stores and $406M inventory is ave. $2.8M p/store, compared to 131 stores in 2010 and $334M, ave $2.5M per store. Increase of $269K in inventory per store. Wouldn’t take too many ipads, 3D screens etc. to account for that.

    That’s a quick stab at it anyway.

    • 

      Roger Montgomery
      August 11, 2011 at 12:23 am:

      Well done ANdrew, Spot on on both scores although maturity – not quite yet

31. 

    Mark Ab
    August 9, 2011 at 10:14 pm:

    Hi Roger,
    a couple of ideas that I just thought of – little bit far fetched but thought I’d throw them up.
    Next generation A1 should include the following;
    Ability to develop and offer to other markets – US, Japan, UK, HK etc., and;
    Inclusion of credit ratings for Govt. Treasuries (as an alternate independent to current ratings agencies, and also for those investors that look at the macro-perspective and O/S markets).

    Just think what could be possible by shifting the global approach to investing for both the private and the professional investment community?

    Regards
    Mark Ab

    • 

      Roger Montgomery
      August 11, 2011 at 12:21 am:

      Hi Mark,

      Some of that has already been considered. We have a function that will allow the community to contribute to continuous future development. Its a serious enterprise with a heavy investment in continuous improvement to ensure it remains the global leader.

      • 

        Will
        August 11, 2011 at 9:48 am:

        Do you have a discussion thread where the next gen A1 service can be discussed?

      • 

        Roger Montgomery
        August 12, 2011 at 7:27 pm:

        Hi Will,

        That will come with it. The community, armed with the A1 service, will be an amazing one to be part of. I am personally extremely excited about that!

32. 

    Jonathan
    August 9, 2011 at 9:53 pm:

    Hi Roger,

    Thanks for showing us your thought patterns when you go about analysing a company.

    I have a question regarding your business cashflow figure.
    How do you get that value?
    My value is -103 million
    Change in cash = -24,489
    Change in borrowings (current+non current) = 162,958
    Change in cont. equity = 4,628
    Dividends paid = 88,411

    Thanks again for posting!

    • 

      Roger Montgomery
      August 11, 2011 at 12:19 am:

      Buyback?

      • 

        Jonathan
        August 11, 2011 at 11:20 am:

        Thank you very much :)

      • 

        Matthew Smith
        August 11, 2011 at 12:59 pm:

        Roger,

        I didn’t quite understand your comment about cash profit of $71.2m and then a $88m dividend was paid. That would make total company cash profit $159.2m.

        I calculated it as;

        Cash -24,489
        ST Debt -35,000
        LT Debt 197,958
        Equity 4,628

        Op Cash -192,075

        Div 88,411
        Buyback 174,134

        Total Company Cash Profit 70,470

        Where do my numbers differ to yours??

        PS I do like it how you are vague from time to time…nothing worse than being spoon fed!!

      • 

        Roger Montgomery
        August 12, 2011 at 7:35 pm:

        Don’t mean to obfuscate. Cash flow is 71.2. Thats tine business cash flow after the div is added back. “then” they paid a dividend.

33. 

    chris b
    August 9, 2011 at 9:33 pm:

    One question on cashflow, and the impact of the higehr debt.

    I work out negative cashflow of $208M, with the following calcs:

    Cash – ($24.5M) – 27.2 down from 51.7 less
    Borrowings – $197.9 – 232.5 up from 34.6 less
    Capital – (9.8) – 98.5 down from 108.3 following buyback add
    Divs paid – $4.36M – 75.84 up from 71.48

    Comments appreciated

34. 

    Anthony
    August 9, 2011 at 9:13 pm:

    I just don’t feel comfortable with our rising aussie dollar which will further encourage on line overseas sales both of which will erode future earnings

    • 

      Roger Montgomery
      August 11, 2011 at 12:18 am:

      Thanks ANthony. Lots of people share your view.

    • 

      Matty
      August 11, 2011 at 6:31 am:

      …..and when the dollar drops all of those imported goods are more expensive and the consumers shut their wallets again. Same logic can be applied to economies growing “too fast” so fund managers are worried that interest rates will go up to slow things down so the end result is that the market tanks.

      On the other hand, the account (business) in which you have your money is persistently being valued at a fractional dollar. We’ve put our hard earned out to sea and the horizon is a billowing rolling cumulonimbus, but for now I’m on the good ship JBH (substitute your multitudes of quality undervalued businesses). Captain, bring me to the shore of fabled returns!

35. 

    Dino
    August 9, 2011 at 8:55 pm:

    change in inventory

    Stockpiling (strong aussie $)
    average inv turnover days up (people spending less or using the net)

    Not alarming as like woolies they are a cash bus. with long credit terms.

    • 

      Roger Montgomery
      August 11, 2011 at 12:17 am:

      ALmost spot on Dino, I had a chat with the CFO today and will put the explanation up shortly. Your conclusion – not to worry – is spot on.

36. 

    Ben
    August 9, 2011 at 8:33 pm:

    I hope the streaming service is not going to be plagued by the legal issues surrounding grooveshark. http://en.wikipedia.org/wiki/Grooveshark#Legal_issues

    Perhaps a better comparison is Rhapsody or Qrocity.

37. 

    Todd
    August 9, 2011 at 8:19 pm:

    Well i’m in !! Its only taken 6 months after reading Rogers book and wouldnt have done so prior. Strong volumes of BHP at $34.95 ($7 below my intrinsic), ANZ at $17.70 ($4.5 below), WBC, MCE, FGE and smaller plays (my gambling side i still enjoy) on GFF and CPU. i am still not convinced of retailers such as JB especially with Apple being a significant part of their business and opening up competition to their Itunes category. Online ordering for generic name brand products is becoming easier and more importantly better value, i am nervous about their debt and agree with Rogers comments on increased margins with savy shoppers ready to change any pre existing shopping habits if value is not offered.