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QR National share debut beats expectations

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QR National share debut beats expectations

Australia’s biggest rail freight company, QR National, made its debut on the share market this lunchtime. Roger Montgomery said the intrinsic value of this business is closer to about $1.50 than it is to $2.50. Read transcript.

INVEST WITH MONTGOMERY

Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

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

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55 Comments

  1. tim clare
    :

    Hi Roger,

    I’ve heard the QR float likened to a Ponzi scheme – at least for now. Although it was not advertised and i could not find it anywhere in the prospectus, settlement for trades in QR are delayed until December 9th (I think that makes it 20 days settlemrnt period, instead of the usual 3, from listing).

    Hedge funds have bought millions of shares without paying for them until December 9th (by which time they have sold them again). In the mean time, there has been no incentive for people to sell shares they bought via the IPO because they don’t get their money for 20 days.

    Let’s see what happens to the price post December 9 – maybe a shorting opportunity!

  2. Lloyd
    :

    The green shoe and deferred settlement for several weeks make QRN a stock that is very likely to be gamed by hedge funds, amongst others, for the first few weeks of trading. Watch this space once the gaming stops!

  3. Mark H
    :

    For Matrix (MCE), I have:

    2010: $6.01
    2011: $7.00
    2012: $10.18

    ’11 and ’12 ROE’s are more conservative.

    Regards

  5. P
    :

    Hi Roger,

    I am a big fan of your YouTube channel and your book. I notice that you often say Wesfarmers (WES) paid too much for Coles. I.e. with an ROE of over 20% and an equity of over $4 bill. Assume that WES wants half the return, then it should pay less than $10 bill. By paying $24 billion for the equity, its ROE will now be something like 5%.

    Now, MCE has equity per share of $0.86 or $60 million in total. It’s ROE is about 30.3% (similar to Coles prior the acquisition). The Intrinsic Value is around $6 (i.e. 7times its Book Value). By paying $370 million for an equity of $60, its ROE will now also be something like 5%.

    My question is why you would pay 6 times its equity for MCE and not for Coles??? Because by paying $370 mill or $5.30 per share for MCE, wouldn’t our ROE will also be something like 5%.

    Thanks,

  6. Paul
    :

    Hi Roger/Robyn,

    Using the EPS & DPS estimates from “Morningstar” @ 40% ROE for 2011 & 2012…

    and based on a very conservative RR of 13% I get;

    IV 2011 = $7.87
    IV 2012 = $10.92

    Regards,
    Paul.

  8. Grant
    :

    Hi Robyn
    Have been a little hesitant to have a crack at one of these on the blog, as a brickie i have been a bit slower then most to catch on. I used ROE40% RR12%and on current figures i have $6’85.
    Will leave the forecasts after a bit more experience.Cheers Grant Duggan.

  10. Scott
    :

    Roger the book arrived this week and I am turning the pages as I type.

    I would like to get a few thoughts from the forum on MACA. What IV do the others here have on MACA and would people hold it as well as MCE or just move the allocation of funds in that sector all into the best performer, being MCE IIRC (my normal path).

  11. fred
    :

    Hi Roger,

    The another day you said that someone went thru all your A1 company,s and they said that they had lifted by about 60%. ISS is a A1 and that has been hammered. You have made it clear that A1 is a guide to its financial position and performance rather than a predictor and ISS is proof of that.

    Thank’s for all your help alway’s

    SWL does look good to me KEN! seek professional advice of course!

  13. Chris
    :

    Hi Roger,

    Friends (including a banker who worked on the float) and relatives are expecting me to take back all the nasty things I’ve said about QR. I guess all the concerns outlined by us on this blog no longer apply once a stock closes above its float price!

    As for MCE, I got $9.34 last year, about to have a go at 2011.

    • Roger Montgomery
      :

      Hi Chris,

      We aren’t trying to predict short term share price direction here. We are following a simple approach to investing that requires the purchase of high quality companies (QR is not) at discounts to intrinsic value (QR is not). As Ben Graham pointed out, short term share prices are set by “voters” who register their votes but are neither emotionally stable nor intelligent. In the long run the market is a weighing machine. In the long run prices follow value. It took months and months for Myer to fall to my valuation and ten years for Telstra to finally do the same. QR National may take ten years or ten weeks – nobody knows. And of course the intrinsic value may stage a remarkable turn around. The company may actually start making an economic profit too.

  14. Gary
    :

    Roger/Robyn,

    I come up with a value on MCE at 7.50 using a IRR of 10% and using ROE of 35%. They are big exporters from what i can gather with all the awards they are receiving which means the A$ is creating a little head winds but the new facilities at Henderson should hopefully give them some cost savings. I’ve read a research report that the spending on offshore rigs is expected to increase in 2011 which should be a positive which is consistent with MCEs updates.

    Keep up the great work Roger! I’ve learned lots from your book and your blog.

  15. Steve
    :

    MCE on 12% RR, IV approx $5.30 on 30/6/10 reported results with 35% ROE (Averaged method). Forecasts for 2011,2012 based on current Commsec consensus forecasts: $11.24, $14.50 with ROEs around 46%, 44%. Today’s market price: $5.25. Margin of safety 114% on 2011 IV, 116% on 2012 IV. Looking great if the forecasts come true.

    • Ashley Little
      :

      Hi Steve,

      Given the nature of the business with orders taken and long lead times to delivery this type of business is very easy to forecast accurately for 12 to 18 Months out.

      I can say with great certainty that the analyst forecasts will be equaled or beaten to June 2011 they always will be in this type of industry with managments “under promise and overdeliver” attitude.

      Risks are after that.

      This is why Roger says “watch the order book guys thats the key”

  16. Steve
    :

    MCE on 12% RR, IV approx $5.30 on 30/6/10 reported results with 35% ROE (Averaged method). Forecasts for 2011,2012 based on current Commsec consensus forecasts: $11.24, $14.50 with ROEs around 46%, 44%. Current market price: $5.25. Margin of safety 114% on 2011 IV, 116% on 2012 IV. Looking great if the forecasts get delivered.

  18. Ken Milhinch
    :

    I must say that listening to the vested interests talking about QRN almost turns my stomach. “Growth stock”, “Exposure to the China story”, “Buffett just bought a railroad” and sundry other lines still ring in my ears. Personally, I think some of it borders on misrepresentation, especially when it is directed to novice or uninformed “investors”.

    Are these the “professionals” from whom you would have us seek and take advice Roger ? Don’t answer that, purely rhetorical.

    Regards, Ken

    • Roger Montgomery
      :

      Hi Ken,

      I am in transit so stay with me for a second…Thinking about your question, do you want to know why a share trades at a different price to value? Or are you asking why SWL might be ‘cheap’?

  20. RIci Rici
    :

    Share price is being supported by a greenshoe policy.
    Look at the list of substantial shareholders, the queensland government is listed as owning 33.7%. Their actual holding is 40%. The difference represents stock ‘over sold’ during the IPO which has to be subsequently bought back on market and returned to the queensland government. They have 30 days to do this.

  21. Robyn Clancy
    :

    Hi Roger,

    I have read and re-read your book and purchased a couple for family members who have tried to borrow it but can’t wrench it from my hands!! To me it is the only book on the shelf as far as investing goes.

    I have been very busy moving house and my internet was down for a while so today was searching your blog for an intrinsic value of MCE – could you point me in the right direction?

    Many Thanks,

    Robyn

      • Ashley Little
        :

        If i use analyst consenus forecasts then I now get $9.30 for 2011. I note the this is up from about $8.60 a month ago. Analayst forecasts have been revised upwards.

        I have seen one analyst with EPS of 37 cents and If I use this i get $5.60. Not saying this analyst is wrong but it is way different to everyone else.

        Given I have intrinsic value going to about $12 in the next few years It still looks incredibly cheap.

        Not only these figures but an A1

        No advice btw

      • Ashley Little
        :

        Buffet Quote,

        I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.

    • Ken Milhinch
      :

      Robyn,

      I get an IV of about $8.50 for 2011 on the following assumptions

      75% increase in NPAT
      $0.05 increase in dividends
      No capital raisings or share placements
      Using 12% RR

      Regards, Ken

    • Pat Fitzgerald
      :

      Hi Robyn/Roger

      I feel that MCE will be a better investment after the successful commissioning of their new development at Henderson. Any significant delay in commissioning may have a big impact on their prospects. My IV for MCE is $7.14 for 2011 and $8.75 for 2012. I own some MCE but I won’t be buying anymore until the new development at Henderson is completed.

  22. Andrew
    :

    Not surprised it went up. Not dissapointed in the slightest that i missed out. Good for those who got in and made a profit but i don’t follow the hail-mary investment approach of getting on board something and hope that it goes up or that the business somehow changes dramatically and becomes a good one.

    I think we won’t see a clearer picture for at 1 year or more as to how successfull it is due to the need for a lot of funds needing to buy it up as it enters the various indexes etc.

    Judging by the top 20 register it could be some interesting times ahead with the alleged hedge funds making up about 18 of the top 20 spots. If i was an investor i would be hoping like crazy that all forecasts are met as who knows how many short term investors are on the register and willing to dump the stock if anything appearing like not meeting expectations appears.

  23. Steve
    :

    After watching the ABC story about the QRN debut, it’s important not to forget the short term upwards effect on QRN due to ASX index funds re-weighting their holdings. These funds are now forced to buy up QRN in line with its index participation and the buying will no doubt push up the price.

    It will be interesting when the dust settles to see if the market price deflates towards Roger’s IV. No doubt time will show we’ll have another Telstra on our hands.

  24. Simon
    :

    Has anyone heard, read or been told regarding BHP post 2014 building their own railway set in QLD ? Doing so allows some of the multiple billion dollar “dormant” war chest to be enthusiastically prized open and spent under “cost savings” works. Such a modest share buyback would lend itself to a feasibility study not having been completed. After said due diligence if BHP was to go ahead we could see BHP announce start building the railway network before 2012!

  25. John M
    :

    G’day Roger and fellow Value.able aficionado’s,
    Such a capital intensive company such as QR National is always going to be facing headwinds no matter how well the economy goes. As you have mentioned before, waiting for a turnaround story is not the best strategy, best stick to what is known with companies who have a track record for being profitable and have good prospects for the future.
    Roger, are you starting up an investment fund? I am sure there will be many interested people if you are.
    I really found the Webinar today very helpful. Thankyou for your efforts and knowledge.

    I have recently finished reading Value.able a second time. I understood the book fairly easily the first time, but after reading it a second time, all the concepts are meshing together and I am seeing the big picture (especially in conjunction with re-reading a lot of the older blogs) very clearly now. I thoroughly recommend to everyone to go back over everything and keep it all fresh in your mind, so it ends up becoming second nature and gives you an intelligent framework from which you can investigate companies from.

    Happy investing

    • Roger Montgomery
      :

      Hi John,

      Thanks for sharing your support for the book and I agree with you obviously on QRN. I am also delighted the webinar went so well. Of course I am speaking to a silent and invisible audience so the technology makes you feel as though one his talking to himself however I hear it was wildly popular and I would like to consider using the technology myself. It would be a very effective way for everyone to learn how to estimate future valuations for example without anyone having to leave the comfort of their office or home.

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