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Reporting season highlights high dollar impact

In the Press, Media Room | Comments (37)

Reporting season highlights high dollar impact

Industrial stocks are finding life much tougher than miners as the high dollar and subdued consumer demand take their toll on earnings. Roger Montgomery of Montgomery Investment Management told ABC reporter Andrew Robertson what impact he thinks this will have on retail brands including Oroton and JB Hi-Fi. Read the article.

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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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37 Comments

  1. Toni Borrett
    :

    Thanks to Value.able, I am for the first time excited as the market falls so I can get ready to buy into some promising businesses. Thank you Roger and all the bloggers.

  2. John F
    :

    Jbhi

    Everyone is reporting that there profit has fallen. Wow! How do these people read reports.
    I have read the report and got a completley different take on it.
    In part the report says
    “JB Hi-Fi Limited today reported a normalised record full year net profit after tax (NPAT) of $134.4 million1 ( JB forecast was 134 to 139 Million)
    (FY10: $118.7 million) from $2.959 billion of sales for the year ended 30 June 2011. On a statutory basis
    NPAT for the full year was $109.7 million, the difference being the one-off Clive Anthonys restructuring charge
    of $24.7m (post tax) announced in March 2011.
    Total sales growth was 8.3%, with comparable store sales growth negative 1.2%.”

    Get the report and read on… No indication of any fall in profit that I can see. And an increase in dividend by 17% to boot..

    • Andrew
      :

      Hi John,

      The people commenting on the fall in profit are referring to the statutory results which include the one off restructuring charge. If you leacve this out than yes you are correct and NPAT increased. The choice has to be whether you want to use the statutory or normalised. I went for the statutory profits purely as they were the most conservative from a valuation point of view.

      The IV for me dropped regardless of which one i chose, i am looking forward to seeing some updated analyst forecast research so i can look forward. My feeling is that not a lot has to change for the IV to be back to about where i had it pre-announcement. As has been mentioned elsewhere, the debt should be repaid pretty quickly.

  3. Davey W
    :

    Hi Roger,

    It was great to see you last week in Melbourne speaking about when to sell – it has been a wonderfully educational and enlightening experience reading your book and learning about value investing, many thank-yous!

    I have a quick question about calculating intrinsic value – apologies if this has been covered elsewhere, but how do you calculate the page 183 and 184 multipliers for companies with an ROE of over 60%?

  4. Macca McLennan
    :

    What a good post by Paul

    Clearly stating RR ROE etc
    It’s possibly a layout we should adopt
    I would personally like “All” to use the same RR
    My suggestion is 10%

    Macca

  5. Paul
    :

    Hi Roger and all,
    In light of the chaos today on the ASX thought it may be worth revisiting some of the key stocks that keep cropping up on this blog and trying to get a feel for any discounts to intrinsic value that may be emerging. Can’t wait for the A1service Roger and you may agree that I need it when looking at my valuations. Anyway here goes, if anyone could let me know their intrinsic price comparisons, i’d appreciate it.

    ### RR = required return
    ### ROE = return on equity
    ### IV = my intrinsic value
    ### 2011SM=Safety Margin 2011 at time of writing

    Stock RR ROE(2011, 2012, 2013) IV(2011, 2012, 2013) (2011SM)

    ZGL 12% (18.8%, 17.6%, 16.6%) (0.60c, 0.71c, 0.64c) (-32%)
    guidance provided today with NPAT up 30-40% on last year.

    FGE 12% (30%, 25%, 22%) ($7.37, $6.78, $7.02) (-35%)

    MCE 12% (40%, 33%, 32%) ($9.39, $7.89, $10.66) (-43%)

    JBH 10% (38%, 38%, 39%) ($21.08, $24.66, $30.25) (-33%)

    No discount with CSL but is getting closer:-
    CSL 10% (20.3%, 19.8%, 21.4%) ($24.30, $27.16, $31.72) (+18.5%)

    I’ve thrown in BHP as well who appear also to be at a decent discount at current price of $38.00.

    BHP 12% (31%, 29%, 23%) ($61.25, $80.16, $59.57) (-37.29%)

    There are many others but I’ll leave it at that. I realise we are still waiting for annual reports to come out so valuations i’m sure will change again. Could we perhaps start another feed Roger that we can run some comments against your current valuations, prospects etc for various companies as they report ?

    Cheers,
    PaulS

    • Roger Montgomery
      :

      Hi Paul, You need to have a look at the prospects and what management are saying about that. Zicom for example have given rather dour signals although their comments about oil rig demand may be relevant for other companies.

    • Lloyd
      :

      All but CSL (2011) look a bit optimistic compared to my forecasts. Are you using analysts earnings forecasts, which would explain this? Also, I think you may have ZGL IV in SIN$ rather than AU$? Best to aim for a BIG MOS under the circumstances and uncertainty.

    • Craig B
      :

      I clock Zicom at 51 cents for a 12% RR and 40% payout ratio Paul after that result, using starting equity and 219M shares. That’s a reasonable drop from my valuation prior to the guidance.

      Your Forge valuation looks ok to me based on them hitting 40M profit.

      Not too sure about my JBH valuation until I see their balance sheet. The share buy back has thrown me a bit. But at $14 I’m pretty confident there’s an MOS. Still some stores to be rolled out and the ones that opened in the last 2 years wouldn’t have hit their straps yet. Takes 3 years according to some of the literature the company have put out. Also with this company, you have to look at how little they seemed to have been affected by the first phase of the GFC. Merely a speed hump for them. Tomorrow will really be telling. If they hit their forecast profit – $134-$139M before buyback costs and the Clive Anthony changes – what a vindication of their business model, in what are supposedly the worst retail conditions for decades.

    • Nigel
      :

      Hi Paul, I have just been looking at your numbers for JBH, and can duplicate the IV’s, but only if the same Equity for each year. I assume that’s what you did, (please correct me if I’m wrong)
      However I have increased the equity each year by adding the previous years retained earnings, which is what happens in accounting. I get even more impressive results.
      ie ($22, $32, $36)

  6. Lloyd Taylor
    :

    Zicom guidance out today. Superficially YOY looks good, but half over half comment implies decline with more to come. Hmmm! Some excuses of which I suspect we’ll see more from the service sector generally. Commentary, if believed, will reflect directly on MCE. Might want to revisit those 2012 IV forecast.

      • Ash Little
        :

        Hey Guys,

        Just guessing but I think this is the comments Roger is refering to

        “strong world-wide resurgence in demand for offshore rigs particularly for deep seas exploration and production in the last 9 months has increased demand for deep seas offshore vessels.”

        I think this is very interesting

      • Roger Montgomery
        :

        Not quite Zoran. It was an A1 below intrinsic value. and I did explain that I owned it. We don’t tell anyone to buy or sell. I doubt you will ever hear or see me say “very good buy”. We do say everyone needs to do their own research and seek and take personal professional advice. I have written about not following what you see and hear on TV without getting advice that is relevant to your circumstances or without doing your own research. So you’re spot on there Zoran!

    • Greg Mc
      :

      I noticed that comment on offshore oil rig demand too, Lloyd. It will be interesting to see what MCE have to say about it on Monday (which is when Morningstar expect it to report).

      As an aside, I observe that of the three analysts covering MCE on comsec, one still rates it a strong sell (Morgan Stanley?) and the other two a strong buy, as was the case after the interim report. It will be interesting to see whose strong convictions will be justified.

      • Rici Rici
        :

        I just checked morgan stanley’s research data base and they dont seem to cover MCE. I would be curious to find out the brokerage house that covered it with a sell.
        (More interested in the information in the research note, than the recommendation itself)

      • Greg Mc
        :

        Yes, sorry, JP Morgan was what I should have said. Something went wrong between the time that my eyes read it and my fingers typed it. It happens sometimes (as my 4 year old son would say).

  7. William
    :

    Thanks Roger and Nic , I did suspect that NVT will be stripped from its A1 status. I have anticipated that enrollment from overseas students will be lower in the next few years (at least in australia)

    I can tell you that overseas student come and study in Australia because it WAS relatively easier to get a permanent residency after you finish uni here and exchange rate was still ok (around 80cents per US$). However, the government has made it a lot tougher these days to get a permanent residency.

    My valuation is around $3.10 using 10% RR

  8. MattB
    :

    Roger,

    I’d appreciate your assessment of TSM when the results are released. I’m not so much hunting for an IV as I am a comfortable holder of the business but am interested in your views on the roll out etc.

    Regards

    MB

  9. gary
    :

    Hi Roger, given today’s freefall I see alot of cheap A1’s with significant MOS, in your opinion do you think now would be a good time to buy or do you think more falls are likely in the near future.

    I know you have alot of cash in the model portfolio with the Eureka report sitting on the side waiting for a correction such as this. Is now the time to jump in?

    not looking for advice, just your opinon.

  10. SC
    :

    Hi Roger,

    Have you had a chance to look at the Bega cheese IPO – if so, do you have a view? BTW I haven’t done any numbers yet.

    • Roger Montgomery
      :

      Hi Scott,

      We can’t offer any advice, so you will need to seek personal professional advice related to your own circumstances. Generally speaking, the ROE doesn’t look impressive or does it?

  12. Nic Arena
    :

    Hi Roger and crew,

    Just had a look at Navitas’ annual results. I would be surprised if they held onto an A1 rating. Debt has increased quite a fair amount (maybe acquisition of SAE). Don’t think it will slip too far but not an A1 when/if roger releases his MQRs. I have an IV of $2.89 so under current SP. Anyone else see results or as an IV?

      • Peter M (Mully)
        :

        Hi Nic,

        I came to the same conclusion. In addition to their increased level of debt, their cash flow and current ratio don’t look to flash either. Also note that intangibles are approximately 68% of total assets. In fairness, these numbers are heavily influenced by the SAE acquisition whilst the FY11 result doesn’t include a full year’s earnings from the acquisition. My current IV is $2.91 based on 12% RR with both ROE and IV declining in 2012. All things considered, not too much to get excited about at the moment.

      • Andrew
        :

        Just doing some fine tuning on my watch list over this reporting season to cull my list down a bit further and NVT was one i saw fall off my list. I too was not overly impressed and although their performance ROE wise was still quite good, i didn’t like the dominance of intangibles on the asset section, the notes seem to indicate it was mostly through purchasing other companys (i would be less worried if they were licenses etc).

        The increase in the debt was the straw that broke the camels back and i decided to drop it.

        JBH is the only other company on my list to have released results so far and this saw them go from my top investment group to the second.

        I think the ones that do stay or increase their quality will shine out like a beacon.

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