Is one man’s trash another man’s treasure?
I am writing this post so that we have a record in the event Private Equity some day offers to offload the business to me. It’s one for those of you who have ever been to the local tip and paid for the privilege.
It has been reported this week that Visy, the German-based waste group Remondis, Sydney-based Sita Environmental Solutions, private equity groups Ironbridge and Archer as well as listed disappointment Transpacific are all eyeing off garbage collector and tip owner WSN Environmental Solutions.
If you happen to live on Sydney’s north shore and ever had the delightful job of taking a trailer load of rubbish to the tip, you may be familiar with their North Ryde facility at Wicks Road. Drive onto the weigh bridge and over your credit card, go and dump your rubbish and unwanted items, get reweighed and both your car and your credit card are lighter. Ask the ladies at the entry which is the busiest day and they will gladly report; “every day, its always busy here”.
There are huge competitive advantages inherent in approved waste dump sites in high density areas. Environmental regulations ensure the approval of another site being built by a competitor next door is virtually impossible. WSN has 10 sites around Sydney and another at Moruya, about 250kms south of Sydney.
WSN collects kerbside waste, recylables and ‘clean-up day’ waste (225,000 households in 2009), and operates seven transfer stations that streamlines transporting and resource recovery. The company also operates an Alternative Waste Technology facilities as an alternative to landfill and its Eastern Creek facility processes 10% of Sydney’s household waste. The company operates materials recycling facilities (MRFs) at Chullora, Macarthur Resource Recovery Park (Narellan) and Moruya, sorting and recovering resources from the council kerbside collections of 450,000 households.
Aluminium, steel, plastic, paper and cardboard are sent (sold) to manufacturers to be processed into new products. Glass is processed at WSN’s new glass recycling plant at Chullora and marketed (sold) as an additive in bricks, tiles and water filtration materials.
At Lucas Heights, Eastern Creek, Ryde and Chullora Waste and Recycling Centres and Macarthur Resource Recovery park, WSN processes garden organics from 613,300 kerbside collections, as well as from drop-offs by householders (including me occasionally) and small businesses. These materials are used either as biofuel (sold) to produce green energy, or processed into compost and mulch products (sold) for agricultural and horticultural use.
The company also benefits from synergies with its subsidiary, Camden Soil Mix Pty Ltd, a leading composting and blending business in the Macarthur region that currently processes 10 per cent of garden organics in the Sydney basin market. Trading as Camden Soil Mix, the business continues to produce high quality compost from the kerbside garden organics that it receives from councils and contractors.
Think about that for a minute; Councils, individuals and businesses pay the company to take their rubbish away and the company is then paid to sell the processed output. It is paid by its customers and its suppliers. Only online lists and the big supermarkets can claim such wonderful economics.
Importantly, with landfill on the nose (pun intended), revenue from landfill now represents less than half of the company’s total. Back in 2003 it was 85%. Perhaps the biggest risks for the company under private ownership are regulations around environmental impact/footprint and the impact of transport and waste levy costs.
Revenues ‘excluding levy’ have increased substantially each year, despite the fact waste tonnes received was lower in 2009 than in 2005 and are generally stable. But for 2009, at least, that’s where the good news ended.
The business saw cash flow from operations drop by more than 50% from $42 million to $20 million and my ‘business cash flow’ calculation records a loss of $30 million. On a net basis however $44.5 million was spent on new property plant and equipment, but depreciation of roughly $20 million per year probably understates the actual maintenance capital expenditure. So call it a loss of $5 – 10 million. This was however a year (2009) in which expenses – particularly interest thanks to a near doubling of borrowings – significantly exceeded the previous year.
Like QR National, one expects private ownership would produce better results but the listed Transpacific Industries (ASX: TPI) achieves a C4 Montgomery Quality Rating (MQR) and is forecast to generate a return on equity of between 4-6% over the next three years (although TPI did raise $1 billion in 2007 and prior to that year generates much higher ROEs).
According to the media, WSN earned EBITDA of $30 million in 2010. Assuming debt hasn’t changed and is at $62 million (interest $5 million), Assets haven’t changed (depreciation & amortisation $22 million) and tax of 30%, the NPAT for 2010 was about $2 million, or a return on equity of about 1 per cent.
In theory there are some great assets with competitive advantages here (with the risk of legislative change always looming of course). I personally think it could be lucrative to own the Ryde transfer station with perhaps a green waste processing facility thrown in, but it seems the total is worth less than the parts. Perhaps that’s what Private Equity has noticed too.
Oh, and one other thing…watch out for the defined benefits plan, which according to the actuaries (read Buffett’s view about the way the fair values are arrived at) has a shortfall of $3.8 million – thankfully all closed to new members!
Published by Roger Montgomery, 25 October 2010.
UPDATE
A couple of weeks ago, Value.able Graduate Chris shared with me a story about his Grandad, a ‘scrapper’ in Adelaide.
There are some people in this world – affectionately known as “scrappers”, who do indeed take what is someone else’s trash and turn it into treasure. My Grandad was a ‘scrapper’ all his life because he used to recycle tins, lead, batteries, old cars – whatever he had – but he didn’t need to. He had his Army pension and his work pension, and him and Grandma lived quite comfortably, plus we also took care of them. I think that he just loved doing it – the game ! :) He loved the fact you could get something for nothing ! :)
Opal miners in Coober Pedy have been doing this kind of thing for ages – some of them are very, very rich and have a beautiful house down here in Adelaide, but have a rickety old shack up there, built out of scrap sheets and with DIY plumbing and wiring. I think that really, they like it that way – and you have to watch yourself when you set foot in their ‘house’ – never be critical of it or their hospitality, because you never know just who you might be talking to ! (and yes – I DO know some of these people as well, and the opal that they find is beautiful).
When you were in Adelaide, you’ll probably have noticed the “scrappers” riding bikes around or pushing trolleys. They’re raiding the bins for the 10c CDL refund – and let me tell you, I know a couple of them and they’re very savvy ! One of them has got a beautiful, MINT CONDITION 1986 Mercedes – in white. It is gorgeous. To most people, these guys look like they have nothing. Some don’t, but some are very, very wealthy from the sheer hard work and long hours of scrounging cans, iced coffee cartons and bottles to trade in for 10c a piece.
That’s why SA is such a great place – the home of the 10c refund. Yes – I do it too, but mainly for kicks and with whatever’s left over from daily life and the nightly one/two beers with dinner. I’m certainly not a “full time scrapper” like these people, but I put the money away and invest it on top of whatever I get from my normal job.
I love Gordon Elwood’s, Pokey Bills’ and Curt Degerman’s stories !
Chris
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.
Peter
:
Hi Roger,
There have been a few comments recently about investing in European and/or US shares because there is better value over there.
Given currency fluctuations are very hard to predict, and could have a large bearing on potential returns, do you consider buying shares in overseas sharemarkets as investing or speculating?
Regards,
Peter
Roger Montgomery
:
Hi Peter,
Buffett’s investing outside of the states but he is careful to invest where he believes the long term trend for the currency is positive. Perhaps you should also look to where the hockey puck is going rather than where it has been.
jeremy
:
Gday all,
Have just tried some IV calculations and have come up with the following using only the data from comsec, am I way off or on the right track?
CBA @ 9%ROR $50.51
JBH @ 12% ROR $20.85
TRS @ 12% ROR $16.05
QBE @ 10% ROR $20.88
BHP @ 11% ROR $48.45
CSL @ 9% ROR $25.94
Any thoughts would be greatly appreciated.
Jeremy
Pat Fitzgerald
:
Hi Jeremy
For JB Hi Fi for FY 2011 using ‘Equity per share’ of $3.44, POR of 60%, ROE of 40% and RR of 11%, I get an IV of $21.61. (I don’t own shares in JB Hi Fi)
jeremy
:
Thanks for that mate, its a really stupid question but how do you get an IV for the next year?
Roger Montgomery
:
Hi Jeremy,
Grab my book. Then when you have it in your hands, let me know and I will give you the page number.
Pat Fitzgerald
:
Hi Jeremy
You need forecast Earnings & Dividends which COMSEC would have for most large companies and you have to forecast Equity. Roger explains how to calculate ‘Forecast equity’ in his post ‘How do Value.able graduates calculate forecast valuations?’. It is worth reading. I have taken the following from that post:
“Take the last known equity per share figure, add the estimated profits, subtract the estimated dividends, add any capital raised through new shares issued and subtract any equity paid back to shareholders through buybacks and you have it.”
jeremy
:
Thanks heaps guys, much appreciated. Im just a dense sales agronomist in Mildura!
Stephen O'Hare
:
Hello Roger,
Your book is a must have for anyone interested in any sought of business – terrific . I’m sure it would be enlightening for brokers to read it.
I have been doing some Intrinsic values on many shares but seem to get a very high value for some , however one I have been looking at is Forge which is way over it’s current price.
Could you give me an indication of your intrinsic value for the stock.
Regards Stephen
Roger Montgomery
:
Hi Stephen,
Of course I would be delighted to help a Value.able graduate. My valuation is currently over $6.50. But of course that needs to be tempered by the very real prospect of not being able to scale up (employ the retained earnings at high rates of return on equity) forever.
Mark H
:
Hi Rainsford,
My 2010 IV is around $8.20 for UGL, with RR=13%. ROE is low at 13%.
(Avg Eq/2 yrs=$1138.5m, NPAT= $144m, Avg eq/Share=$6.90, PR= 75%, DPS=0.64, EPS=0.873, RR=13%, ROE selected=15%)
The company has had over $500m long term debt since 2008. EPS are forecast to increase by 17% and 14% over the next 2 years.
Just looks ordinary to me, so wouldn’t want to explore further.
Hope this helps.
Interesting article Roger. My old man’s a dustman (not really, but it got me skipping down memory lane :-)).
Regards,
Mark H
Roger Montgomery
:
I though it was a terrific photo too mark. Actually reminded me of the days – sadly, far too many years ago – when we would run up and jump onto the arm of the hills hoist, swing around and kick all of those tin bins over. if I had only known of the looming global tin shortage then!
Matty
:
Hi Roger,
I have read and loved your book. Thankyou for sharing that with us. Of course, like yourself I am hoping for those A1 businesses to come down to my level before I dive in again. I hope you haven’t too big of a fan base to destroy those value.able opportunities! Even though you mention even Buffett is not worried about Value investing coming into fashion, I have still been too slow off the blocks to beat the Roger effect on your A1’s.
I have gradually been pruning the duds from the portfolio since reading your book and now feel like I am on a firmer footing. I found your ASX value trap guideline also very useful. I realise that I have fallen for many value traps over the years and hope I am on the investing “straight and narrow” now.
I have been living in Europe for several years now, where the online
brokers don’t seem to have the great tools as per comsec to filter company statistics. I think the locals are not into share investing as in Australia as they rely on company pensions. It is a very time consuming job to find good opportunities and most companies seem to have alot of debt on the books in Europe, but I will plug away.
Most of my savings are outside of Super and in my own portfolio in
Australia as I have been wary of fund management fees, but I have two LIC’s: ARG and CTN. I know that ARG is one of your A2’s, but do you have a rating for Contango (CTN)? CTN is trading below it’s NAV and also below my calculated IV. I have the following calculations
ARG: Eq. 3228.1 Sh. 606.54 EqPS 5.32 NPAT 153.89 Div 117.7 PYE 2894.56 ROE 5.03% ROESel. 5% RR 10% IV 2.39
CTN: Eq. 182.01 Sh. 150.1 EqPS 1.21 NPAT 18.29 Div 2.34 PYE 153.41 ROE 10.9% ROESel. 10% RR 11% IV 1.03
Am I being too harsh on ARG with my valuation? I guess the relatively young CTN is a negative in terms of the MQR. But they have a better ROE than ARG. For CTN, The share price below NAV is a blessing and a curse unless this situation changes in the near future (hopefully just after loading up on it). Is the new dividend policy value-destroying if they base it on the NAV? I am not sure if I need to take into account the cash holdings or somehow treat these LIC’s different to normal industrials. Sometimes there
are tax benefits for LIC’s and fund managers which must be removed to normalise the profit for ROE calculation.
In europe, I am more than 50% cash, earning nothing on bank interest because I see things as very uncertain (at the same time worried about my significant holding of Euro currency!). I realise you can’t give personal advice but this brings me to my second point which maybe you can touch on in your blog. Just before I read your book, I was really getting into William J. Bernstein “The intelligent asset allocator” etc. and was building an ETF portfolio for my euro savings. I was wondering if there was some way of applying a valuation slant to index investing (apart from the
“Value ETF’s” available). Is there a way of calculating the equity and ROE of the market to get an intrinsic value of e.g. the MSCI N. America? Or is this mode of investing not amenable to a value method as it relies on long term market returns. Some degree of “market timing” can be attempted by investing more during recessions for example, but I doubt this is significant boost to returns with index investing.
This method of investing may well be contrary to the Roger way and you have built and continue your success with a small portfolio of companies. I just don’t know I can do this at the same time as keeping the wife and kids happy and one advantage of the ETF rebalancing method is that I only have to slot money in one of my 10 ETF’s every few months.
Even if you cannot respond, I want to let you know that you have one big fan here and I thank you for what you are sharing. Sometimes I think I really studied the wrong thing at university as I am really enjoying reading and studying companies. Maybe the sense of responsibility would take away the enjoyment if I was investing with someone elses money. That same sense of responsibility for my own financial well-being is what drives
me to learn as much as I can to make sure I try and do the right thing from now on.
I have learnt so much from you, so thanks again and keep up the great work (while keeping the wife and kids happy!)
Regards
Matty
Roger Montgomery
:
Hi Matty,
Thank you sincerely for taking the time to write and for sharing your situation. I am pleased that the book is proving useful and I am delighted to hear that you are working through European companies and would love for you to share your findings here. Why don’t you start with some of the better known brands and work backwards from there. Here’s a link to a table of Europe’s 500 biggest companies http://media.ft.com/cms/68c478a2-68b9-11df-96f1-00144feab49a.pdf Please do ‘plug away’. We have contributors now from the middle east, from New York, Malaysia and Europe and I am sure we are onto something really special here. If there is any further encouragement you need, let us all know.
Regarding your idea of valuing the index, it can be done. I do it. I use weighted aggregate data for Aussie stocks and come up with a valuation for the index. I don’t share it but it is do.able. I don’t trade the index but it helps sometimes to put the frequency of companies displaying a margin of safety in perspective. While keeping in mind I am not known for market timing and generally fear it, for what its worth, I think China is setting itself up for an extraordinary rally in its stock market over the next year or two. If the market is supposed to track GDP (which because of the black market may be much higher than is being reported), then this year’s 1.5% gain in the CSI 300 fails to accurately reflect the value created there. I don’t however think CSI 300 futures are able to be purchased by foreigners yet.
Ken Milhinch
:
On a slightly different subject, I think I see a headwind blowing toward TRS. The Japanese discounter DAISO have just opened their first store in Melbourne, with a lot more to follow. They are big enough to literally sweep TRS aside if they want to. The other headwind is the retirement of their chairman Brian Beattie (a few months ago now). I worked directly for Brian for quite a few years, and whilst he was an easy man to dislike, he was also the best retailer I saw in my entire career. I don’t own shares in TRS, but if I did I would be reassessing my position I think.
Food for thought – or not.
Regards, Ken
Roger Montgomery
:
Very interesting Ken,
TRS are also trading quite a bit above IV too. No Advice. Seek and take personal professional advice.
Lloyd Taylor
:
Roger,
Off topic but can you give us your view of the impact on IV of WTF that comes about from the CEO’s statements at the recent AGM.
In particular the statement that, “In view of this, and based on trading performance to date, we consider it more likely
that our first half performance in FY2011 will be in the vicinity of the result we produced in the second half of FY2010 ($25 million).”
This with other comments implies 2011 earnings growth will be small at best and more likely flat year over year.
The last IV I can find that you mentioned for WTF was $5.02/share, which seems to be based on double digit earnings growth year over year. This analysts estimate seems at logger heads with the statements made at the AGM.
Regards
Lloyd
Roger Montgomery
:
Hi Lloyd,
I will be updating the valuations soon. Currently WTF is about $4.27, taking into account a 2011 profit that is not even 10% higher than 2010.
Matty
:
Hi Roger,
I have read and loved your book. Thankyou for sharing that with us. Of course, like yourself I am hoping for those A1 businesses to come down to my level before I dive in again. I hope you haven’t too big of a fan base to destroy those value.able opportunities! Even though you mention even Buffett is not worried about Value investing coming into fashion, I have still been too slow off the blocks to beat the Roger effect on your A1’s.
I have gradually been pruning the duds from the portfolio since reading your book and now feel like I am on a firmer footing. I found your ASX value trap guideline also very useful. I realise that I have fallen for many value traps over the years and hope I am on the investing “straight and narrow” now.
Most of my savings are outside of Super (unfortunately also no real estate) and in my own portfolio in Australia as I have been wary of fund management fees, but I have two LIC’s: ARG and CTN. I know that ARG is one of your A2’s, but do you have a rating for Contango (CTN)? CTN is trading below it’s NAV and also below my calculated IV. I have the following calculations
ARG: Eq. 3228.1 Sh. 606.54 EqPS 5.32 NPAT 153.89 Div 117.7 PYE 2894.56 ROE 5.03% ROESel. 5% RR 10% IV 2.39
CTN: Eq. 182.01 Sh. 150.1 EqPS 1.21 NPAT 18.29 Div 2.34 PYE 153.41 ROE 10.9% ROESel. 10% RR 11% IV 1.03
Am I being too harsh on ARG with my valuation? I guess the relatively young CTN is a negative in terms of the MQR. But they have a better ROE than ARG. For CTN, The share price below NAV is a blessing and a curse unless this situation changes in the near future (hopefully just after loading up on it). As you mention in your book, each $ of value will then be creating less than 1$ market value in this situation. Is the new dividend policy value-destroying if they base it on the NAV? I am not sure if I need to take into account the cash holdings or somehow treat these LIC’s different to normal industrials. Sometimes there are tax benefits for LIC’s and fund managers which must be removed to normalise the profit for ROE calculation.
In europe, I am cashed up, earning nothing on bank interest because I see things as very uncertain (at the same time worried about my significant holding of Euro currency!). I realise you can’t give personal advice but this brings me to my second point which maybe you can touch on in your blog. Just before I read your book, I was really getting into William J. Bernstein “The intelligent asset allocator” etc. and was building an ETF portfolio for my euro savings. I was wondering if there was some way of applying a valuation slant to index investing (apart from the
“Value ETF’s” available). Is there a way of calculating the equity and ROE of the market to get an intrinsic value of e.g. the MSCI N. America? Or is this mode of investing not amenable to a value method as it relies on long term market returns. Some degree of “market timing” can be attempted by investing during recessions for example, but I doubt this is significant boost to returns with index investing.
This method of investing may well be contrary to the Roger way and you have built and continue your success with a small portfolio of companies. I just don’t know I can do this at the same time as keeping the wife and kids happy and one advantage of the ETF rebalancing method is that I only have to slot money in one of my 10 ETF’s every few months.
I have learnt so much from you, so thanks again and keep up the great work (while keeping the wife and kids happy!)
Matty
Roger Montgomery
:
Hi Matty, I have answered your comments above elsewhere and thank you by the way again for taking the time to write. Please continue.
Es
:
Regarding US research. All you need to calculate the IV are on Google finance. Check the valuations for these companies Aeropostale, Medtronic and General Dynamics. They are all trading at massive discounts to IV. The best thing about US companies is that they have massive multipliers on the second table as they do not payout much dividends.
Good luck
Roger Montgomery
:
Hi Es,
Just keep in mind the need to identify sustainable competitive advantages, check cash flow and try to limit exposure to high operating leverage – because you can afford to over there.
ron shamgar
:
looking at the waste industry i can see two opportunities that are risky but the best of the bunch:
STP – sterihealth is an interesting little waste collector trading at its value but is available at a discount from time to time. it has some debt but their cashflow is getting stronger.
TPAPA – this is a play on transpacific not going bust! currently paying 12% dividend with potential redemption or step up in a year.
otherwise everything else does look like garbage :-)
good luck!
Roger Montgomery
:
Nice pun there Ron and please remember everyone, seek and take personal professional advice.
Jim Borg
:
Hi Roger
Have received your book and now completed digesting it.
I would like to congratulate you on its presentation and contents and how easy it is to understand and apply.
I am only a minor investor and have begun actioning the strategies outlined.
If I may impose on you on an assessment I have made on CCV which I have heard you do not particularly fancy but it is an exercise I have conducted to see if I am capturing the presentations in your book.
The assumptions I have used are,
ROE- average for the last 5 years- 19%
Required rate of return- 10%
Payout ratio- 46%
The intrinsic value I arrived at was $0.82 as at 30/6/10. I shall perform future values after your response.
One of the reasons I was attracted to this business was it has brought in a strategic investor, Ezcorp Inc of the USA which has now a 32% interest and has a Market cap of US $963 million.
This may indicate a full blown takeover in the future.
Cash Convestors also appears to have a switched on management, very little debt and has made strategic acquisitions that appear to be improving Revenues.
Your response would be appreciated.
Thanks again for the book’s production and for your advice in due course.
Regards
Jim
Roger Montgomery
:
Hi Jim,
Without offering any advice, yes a 32% cornerstone stake has often been a precursor to a takeover. The only thing we don’t know is the price at which that takes place IF it ever occurs. Regarding your valuation of CCV, I have spoken before about the application of a 10% required rate of return to all companies. You may find this a little low for an illiquid company like cash converters. Also be sure to identify the competitive advantages (and whether they are sustainable). Then be sure to check the cash flow and satisfy yourself that there is plenty. My 2011 valuation is about 10 cents lower than yours because I am using a higher required rate of return and a lower ROE of 16.7%. Hope that helps Jim and thank you for taking the time to post a comment. I hope its the first of many.
Simon Cummings
:
Hi Roger,
I’ve odered and am waiting for your book. Do you have a valuation for this?
Roger Montgomery
:
Hi Simon C,
I am not sure what the intrinsic value is for Value.able, but forced to make a choice I would bet that its higher than the price its trading for.
Greg Mc
:
While I agree with your answer, Roger, I wonder whether Simon was after a valuation for WSN given that he doesn’t have the book yet?
Roger Montgomery
:
Hi Greg Mc,
Is someone posting and requesting valuations and they haven’t got the book!?!? Perish the thought! As you know I try to save the valuations for posts rather than in the comments where they get lost and have to be repeated.
Simon Cummings
:
Hi Roger,
Sorry- i should have been more specific; do you have a valuation for TPI? From the comments on your blog, however, i think your assessment of Value.Able is probably accurate!!
Roger Montgomery
:
Hi Simon,
I will post a list of valuations and MQRs soon and be sure to include Transpacific.
Stuart
:
Definitely higher than the trading price!!!!! But Roger already knew that.
Ashley Little
:
Hi Roger and Room,
On the subject of trash and treasure of a different kind. I understand the Singaporeans are offering $48 per share for ASX. This would be more than double my 2013 valuations. Either the analysts or the Singaporeans have got this very wrong
Let them have it i say
Roger Montgomery
:
Hi Ashely, regarding your ASX valuation, the ASX has never recovered from paying a little too much for the SFE and they went from an A1 to a B3 since then and ROE plunged from 62% to 12% now. My valuation was $25-$26. Wasn’t Singapore at the helm buying ABC Learning at $7.40?
Scott T
:
Yes Roger,
You are correct. A Singapore sovereign fund sounds very sophisticated, but they have made some appalling purchases.
Scott T
Matty
:
Hi Ashley,
I am sure the Singaporeans were watching as soon as I sold my small holding for a $2 per share loss last month after I hang on grimly to ASX for 4 years. This was one of my first attempts at “Value Investing” without really knowing how to put a value on a company, I went for high ROE (Little was I to know the effect of the SFE purchase) and Monopoly market position (Who would have thought our government could change their mind?) and after biting the bullet to put my portfolio on a sounder footing the shares jump 50%!
This also happened after I sold Coles Myer after tiring of mediocre performance in 2006 after 6 years. This just goes to show that you can’t time the market, even as a long term investor.
I am just hoping my new improved High-ROE-Performance portfolio will make the above scenario redundant.
Matty
Roger Montgomery
:
Hi Matty,
Value investing is not trading and estimating intrinsic value is not the same as predicting the share price. You will notice there hasn’t been a word uttered by me about predicting takeovers. In the case of the ASX I did mention in Adelaide only a week or two ago that it has been my observation that around the world, whenever an exchange had its regulatory function removed, it received a takeover offer. Then days later the ASX bid shows up. As a value investor, with the ASX IV much lower than the price, I too missed the leap in price. Your job is not to catch every share that jumps in price – painful as missing them may be. Your job is to follow an approach that over time has done very well, is easy to follow, allows comfortable and stress-free sleep and has worked amazingly well for very many decades.
David V
:
Hi Roger,
I think we can use the ASX situation to illustarte a ‘”buffetism”” about not walking around trying to catch falling knives. Clearly the ASX had lost its edge in regards to ROE % so it was more about ‘”betting”” a take over would eventually occur than forecasting IV growth and in turn an alignement by the market (price).
On the other side of the coin, let’s see if the regulators actually allow the bid to go through. If politicians have any control, it is not looking favourable.
Vishal Hargovan
:
I saw this comment regarding the ASX takeover in the business spectator and I didnt quite understand it:
“But that underlines another weakness of Australia as a regional finance centre – too many of our company valuations are based on local criteria rather than Asian value systems. The Singaporeans are therefore able to buy the ASX at what appears to us to be a high price, but using their higher price earnings ratio it actually boosts Singapore’s earnings per share.”
Can someone please explain it to me? Its sounds wrong, but I would like to know what was the though process behind it.
Ashley Little
:
Hi Roger,
There really is a santa and he and all his helpers work in sinapore
ASX ROE 12% and paying nearly 3 times the equity. Even In the schools I went to this is roughly 4%.
Given they will expect synergies(lol heard that before) lets call it 4.5%. I haven’t checked my online saver account rate for awhile but last time i did it was 6.55%( at call and with a AAA rating- for the time being)
Don’t own the stock but if I did I know two things
1) I would rather be an ASX shareholder than the Singaporean one
2) Would not be holding my scrip in the singapore company when they are issued for one second longer than I had to.
BTW Roger if your ROE goes from 62% to 12% due to an acquistion you paid more than a little too much.
Thanks Roger
and no advice guys
seek and take professional advice
Greg Mc
:
Lloyd will be happy about this development, I’m sure!
Lloyd Taylor
:
Greg,
No.
My patience sorely tested after years of declining IV and no attempt to improve the performance I sold out a couple of weeks after the AGM where it was announced that the MD/CEO “will not be seeking to have his contract as Managing Director and Chief Executive Officer extended”, in consideration for which whe was to be granted a substatial ex-gratia payment.
Now I don’t know about you, but I think this is at best unfortunate timing for such an announcement, and at worst, possibly misleading in view of the discussions with SGX which were evidently underway.
Incorrectly, I interpreted this announcement to mean that it had all become too hard for the great Mr Elstone. As a result I missed out on the bounce. I am sure that I am not alone in being a victim of what I believe may have been a misinformed market due to arguably incomplete disclosure by the ASX. This is just a sorry continuation of the pattern of behavior of this business.
Monopolies and associated self-interest under competitive attack can stoop to very low levels.
Regards
Lloyd
Rainsford
:
Speaking of Transpacific, I wish I had Rogers book before I paid so much for their shares a few years back.! What a disappointment they have been.
Has anyone looked at UGL in terms of intrinsic value? My amateur effort comes up with $9.27 and they are currently trading at over $15. I like the company, the sector (engineering services) and debt and cash flow seem ok, so why such a big gap?. And if my IV is near the mark, does such a big premium mean SELL ??
Rainsford
John Pike
:
Hi Rainsford,
I don’t have an honours degree in “Montgomatrics” yet but I get IV’s close to you for UGL.
(2010) $9.14, (2011) $9.44, (2012) $9.91, (2013) $10.42.
On these numbers it looks to be overvalued at present.
John
Ashley Little
:
Hi Rainsford,
No advice here mate bit I am not rushing off to check if your valuations is way too low for UGL.
This company has been a bit of a market darling for awhile now but certainly no A1 to my mind.
If you like the sector have a bit of a look under the A1 tab here and you may find some A1 businesses in that area that are not trading at a premium to their value.
Hope this helps
Roger Gibson
:
Hi Rainsford,
I agree with your IV for a 10%RR and assess the IV to be about $11.70 next year. On the basis that its current price is about 30% over next years IV then I would have it as a sell.
Irek
:
Hi Roger,
Thank you very much for your very helpfull insights.
Staying in the same business I was wondering what is your opinion abut TOX? I bought it slightly below $2 and sold it a year later for $0.4 profit. I think it is too expensive now but would like you to prove I am wrong.
Many thanks
Irek
Ps. Thank you for your book. One of the best I have read so far.
Roger Montgomery
:
Thanks for your kind comments about my book. TOX free enjoys some competitive advantages namely the advantage of permits that allow it to treat waste in close proximity to collection points relative to competitors who have to cart low value but heavy waste long distances to dispose. I am not sure why you want to be proved wrong – unless you are simply wanting to hear that its cheap. Profits need to rise significantly (along with ROE on the large amounts of equity raised) to justify anything even close to the current price. My value is a dollar less than the current price. Seek and take personal professional advice.
Irek
:
My estimate is $0.85 (@RR13% and 12%ROE). Yes they have some competitive advantages but somhow the ROE does not show any sign of it:) I better buy somthing else. Thank you Roger.
Irek
Scott T
:
Hi Irek,
I own TOX at the moment, and agree with you they are looking expensive at the moment.
I have an IV of $0.97. This is one of my purchases before I read Rogers book and I think I just fluked it.
If you look at the financials (I use ComSec) they are starting to look like one of Rogers really bad company examples. ROE is consistently declining every year. Shares on issue going up every year, Intangibles going up every year. Roger has taught us that this means they are paying way too much for acquisitions, (and they are doing a lot of acquiring).
Ultimately Mr. Market may re-rate this company to more closely reflect IV, or the company will write down intangibles or both.
Having said all that, I am not sure why I am still holding them, sometimes it is hard to sell a company that has done you well, and you bought at the right time. Better re read Chapter 13, Getting Out.
All the best
Scott T
Ken Milhinch
:
Roger,
Thank you for another interesting article. I look forward to the accompanying photos almost as much as the reading too.
Regards, Ken
fred
:
Hi Roger,
Once I finish researching the Aussie market I will be focusing some time on the USA / over sea’s market . Is there a web sight that is as user friendly as comm-sec to help me with over seas company’s .
Thank you for all help alway’s Roger.
Roger Montgomery
:
Hi Fred,
I was just on the phone to friends in the Nappa Valley and they are reading my book over a couple of glass of red wine and asked the same question. I will have to get back to you on that one. If you find something first please let us all know.
ron shamgar
:
yahoo finance is pretty good.
Drew Clarke
:
Roger,
Long time reader, first time posting. Enjoyed your book and your approach to investing, trying my hardest to emulate it. I am an Australian living in NY so I spend a good deal of time reviewing both US and Oz stocks, although I’m not in financial services (yet). I am constantly looking for US financial statements, so I hope the following will help to answer the previous post on sources. I actually find it easier to get financial data in the US than in Australia.
First the free sources: yahoo.com/finance, google.com/finance, moneycentral.msn.com/home.asp.
All three services have balance, cash flow and income statements going back three to four years. They also have analyst estimates going forward.
Any statements that you need can be quickly accessed from edgar at http://www.sec.gov/edgar/searchedgar/companysearch.html (I wish the ASX made it this easy to access financial statements, maybe it is and Im not aware of it)
For paid services there are a number of the online brokerages like etrade, TD Ameritrade, etc.
Hope this helps you to get the data you need.
Thanks
Roger Montgomery
:
Hi Drew,
Welcome to the site and its great to have another New Yorker posting. I have visited the small team at Edgar and hope to be over there again in New York early in the new year. I have kept the suggestions to the topic and will review the suitability of the others first. They will be right back up after I have had a look. On behalf of everyone who posts and reads the site, thanks for taking the time to write. If you have any thoughts about the US economy or insights from the coal face of your industry, feel free to share those as well. I hope your first post is one of many.
Rob
:
I can recommend a more fun way to view the US markets. Check out (being checked and currently withheld)
It’s a free service you can use to construct a hypotetical portfolio and test different strategies. It has a graphical interface for viewing your universe of companies and has a decent screening tool you can use. It displays the last 3 years of financials for each company and provides links to the SEC filings for more indepth analysis.
I used it to perform a market screen looking for under-valued stock. Because this was a hypotetical portfolio I treated it as more of an exercise in quantitative screening rather than looking for A1 companies when they are cheap.
It’s a fun site to set up different portfolio’s based on various screening methods or investment strategies and see how they perform over time. I also set up a portfolio full of Graham-esque Net-Net plays (something I probably wouldn’t do with my own money) to see how the two perform over time.
I just wish I could use a similar interface for the Aussie market!
Ashley Little
:
Hi Fred and Roger,
Etrade if you sign up for it offers you access to the following exchanges
USA NASDAQ
New York Stock Exchange (NYSE)
NYSE Amex Equities (previously known as AMEX)
Canada Toronto Stock Exchange (TSX)
TSX Ventures Exchange (formerly known as VSE)
Asia Singapore Stock Exchange (SGX)
Hong Kong stock Exchange (HKSE)
London Stock Exchange (LSE)
EURONEXT Paris (PAR)
EURONEXT Brussels (BRU)
EURONEXT Amsterdam (AMS)
I have never signed up so i have no clue if you get access to the same data but I presume you will get something
I will sign up and let you know if you like?
Roger Montgomery
:
Hi Ashley,
Will leave the decision to sign up, to you. Of course I would be delighted to receive a report if you do.
Ashley Little
:
Hi Roger,
It costs nothing to sign up so I have sent it off already.
My Etrade account was set up before all this id stuff so it had to go by snail mail.
Siily really having to id by someone you have an account with
Will let all the bloggers know how it goes
Lloyd Taylor
:
I have an E*Trade international account.
No research or data whatever from this. Moreover, the catch is you can only buy stocks in one of the primary indexes that underpins each exchange. This has real limitations for those like me who are hunting value, which more often than not is found outside a major stock index.
For data sources, I use SEC filings, annual reports, etc direct from company websites, although good screening data, including ten year financials etc, for initial search can be had via msn.com (http://moneycentral.msn.com/investor/home.aspx) at zero cost.
Happy hunting.
Regards
Lloyd
Lloyd Taylor
:
Roger,
I make the simple observation, if not general rule, that Private Equity has a consistent record of offloading the trash and keeping the treasure for themselves.
Whenever, Private Equity comes knocking with “the great deal for you” just look at what they have taken out (and its not the trash) and ask what is left after the process is done. The latter is usually a mountain of stinking, festering debt and a business trashed in the process of dressing up short term EBITDA, all to the detriment of long term profitability.
So when the trash man (aka Private Equity) comes knocking offering me trash, rather than taking it off my hands, I turn up my nose. Its better for your (financial) health to do so!
Regards
Lloyd
Roger Montgomery
:
Poetic Lloyd, Thank you again as always for taking the time to write and giving everyone here something interesting to chew on.