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Is UNV a diamond or destroyer of wealth?

Is UNV a diamond or destroyer of wealth?

Last month on Your Money Your Call John asked for my insights on Universal Coal (ASX:UNV)l.

UNV is not currently investment grade. It is a business that would not receive an adequate MQR.

Section 3.13 of the Prospectus reads: “The directors… believe that they do not have a reasonable basis to forecast future earnings on the basis that the operations of the company are inherently uncertain”.

Given this statement by management, any investment in Universal Coal appears to be speculative.

Without confidence in the future of the business, estimating its Value.able valuation is nearly impossible and investing is risky.

Turn the stock market off, focus on extraordinary businesses (re-read Chapters 5 – 9 of Value.able), calculate what the business is truly worth and buy them for less than they’re worth. And if you haven’t already done so, pick up your copy of Value.able at my website, www.rogermontgomery.com (there aren’t many Second Edition copies left).

Sky Business Channel have been invited to appear on Your Money Your Call this Thursday, 10 March. Tune in from 8pm Sydney time.

Posted by Roger Montgomery, author and fund manager, 8 March 2011.

INVEST WITH MONTGOMERY

Roger is the Founder and Chief Investment Officer of Montgomery Investment Management. Roger brings more than two decades of investment and financial market experience, knowledge and relationships to bear in his role as Chief Investment Officer. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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17 Comments

  1. I thought this one might be appropriate for a company like UNV.

    There is an old story about the market craze in sardine trading when the sardines disappeared from their traditional waters in Monterey, California. The commodity traders bid them up and the price of a can of sardines soared. One day a buyer decided to treat himself to an expensive meal and actually opened a can and started eating. He immediately became ill and told the seller the sardines were no good. The seller said, “You don’t understand. These are not eating sardines, they are trading sardines.”

    Like sardine traders, many financial-market participants are attracted to speculation, never bothering to taste the sardines they are trading.

  2. Hi Roger,
    Thanks to you and the various media owners for making available video and audio from your appearances. It is a great help to be able to catch up with your thoughts. Congratulations on the stability and consistency of your opinions and views.

    In one of your interviews you said a company may have assets with value but without earnings you generally cannot arrive at an intrinsic value. I understand that concept.

    Do you look at companies with share prices below book value as a source of opportunity? I am interested more from a learning exercise than actually putting money into this idea. I am too green to take on that type of risk just yet.

    You were interviewed by some international people who have since recommended PrimeAg (PAG) as a potential long term buy. The company numbers are dreadful. Certainly not something you would consider investment class. However it seems their book value is around $1.90 while their price is $1.55
    It is an interesting story with the way they are made to account for water rights as an intangible asset.

    How would you look at this – if at all? Am I really looking at something which seems cheap?

    • Hi Luke,

      The answer is; yes, I do however remember this, if the ROE is less than your investor required return the intrinsic value must be below the equity per share. Hope that helps. I have never mentioned PAG, its not on my lists.

    • My intrinsic value is $2.45 and you know I like to buy at big discounts to intrinsic value. If you choose to pay higher prices you do so at very great risk of loss. I cannot predict share prices. YOU MUST SEEK AND TAKE PERSONAL PROFESSIONAL ADVICE AND DO YOUR OWN RESEARCH.

  3. Anyone know of a site that shows for a company the average ROE for a particular industry (as an example GICS industry)? Also, any that shows the biggest competitor to a particular company? Also, i know i am pushing my luck now but total market size of the industry?

    I have just had a bit of a breakthrough with something i have been thinking about and trying to do for a while amongst a series of other things that i did not think of previously.

    I couldn’t find what i needed on commsec.

  4. Roger,

    previously you spoke about some mico companies which were a potential buy and you would reveil once you had made aquisitions. I have been researching and I am having a guess that one of your potential buys was. (ZGL) Zicom Group?

  5. Thanks Roger,

    Diamond or wealth destroyer you ask. I am not smart enough to know that. So I will keep my cash and stick with waht I have got.

    700 Million tonnes of reserves accroding to the prospectus??????

    That is alot of coal and this alone makes it tempting but visions of Mark Twain,liars and gold mines come immediately to mind.

    Hope it goes well but it is not my type of investment.

    • Hi Ash,

      700 million tonnes is worth something but the cost of extraction and the timing will determine the value. Those are the variables that need to be estimated. Then there is the ever present possibility of further capital raisings that dilute your ownership and you start to understand why its just easier to say NO and move on.

      • Speaking of capital raisings Roger, do you have any opinion on Stephen Mayne’s strategy of getting and keeping at least one share in over 600 companies so as to profit from capital raising offers?

      • Sounds unneedlessly capital intensive. Why bother with things like that when you can just take advantage of the really good opportunities when they come a long and be able to buy more.

        Not a big fan of trying to grind out profits.

      • hi Roger,

        talking about mining companies, i was wondering if you can tell me what equity figure are you getting at for Atlas iron for FY11? i currently have $1.70 which includes the giralia acquisition.

        thanks.

      • Simon Anthony
        :

        Carbon Tax Carbon Tax Carbon Tax !!! Now we can understand why its just easier to say NO and move on.

      • Simon,

        UNV’s projects aren’t in Australia therefore no Carbon Tax in Australia will affect them. :)

        Cheers

      • Hi Roger,

        Having invested in a couple of prospective mining/explorer companies before I found the value investing faith, I can certainly attest to the fact that these companies over promise but very often deliver little, have frequent capital raisings, and quite often simply fold.
        Circle of competence also comes to mind, so unless you have an insight into the company, I’d regard buying shares in this company as basically gambling. There are better options in far better companies, so why bother with this one?

        Cheers
        Mike

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