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The Results Revealed: How do your Value.able valuations compare?

The Results Revealed: How do your Value.able valuations compare?

It has been a good ten days since I asked you the question ‘How do your Value.able valuations compare?’ And so the time has come to hand in your exam papers and reveal the results.

Some of you have pointed out that there were both 2009 and 2010 numbers in there. Yes, that is absolutely correct (but you don’t receive extra marks for pointing that out). If a company had announced 2010 results, I used the latest numbers. For this exercise I only wanted you to use the numbers to calculate the Value.able value, based on them.

The next exam is going to be a ‘finding-the-data’ test. I will nominate a company and select an annual report and you will all have to go and download it and dig up the numbers. Expect there to be some red herrings in there too. It is your money you are dealing with so it is reasonable to make sure you are being conservative.

Here are my answers to the samples I listed last week. I hope you had a chance to practice. There will be another set of examples soon so you can have another go.

The recent CFA exam saw only 39% of participants pass, so don’t be too hard on yourself if you are out on your first attempt. As Sir Francis Bacon, the 1st Viscount of St. Alban said:  Truth will sooner come out of error than from confusion.

Posted by Roger Montgomery, 17 August 2010.


Roger 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.

Why every investor should read Roger’s book VALUE.ABLE


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  1. Roger,

    I have finished reading Value-able and thought it was a good read.

    I have tried to do the ‘homework on these companies and now that I am missing something.

    How do you calculate Return on Equity.

    My understanding was to find the average of the current and previous years equity and divide that with the NPAT.

    I know I am doing something wrong as I get ASX at 8.91%, CPU 3.23%, CTX 8.70% … I stopped there.

    Please Help

  2. Hi Roger,

    I have really enjoyed your views on investing for a long while now and agree with most of your thoughts. I would like to take up one area where I do slightly disagree. Miners and intrinsic values, have read your comments on the difficulties in calculating reliable future values in the mining sector and understand your views. I think there are some real gems in the mining sector. Lets look at a few statistics. How many miners are listed on the asx? How important is mining to the Australian economy? Can we really ignore mining companies in our portfolios completely?
    When you calculate the intrinsic value of any company it is fact, it is a calculation of past figures. Any future calculation is an estimate of likely events, subject to certain events happening. The further ahead we go the less reliable that estimate will be. If you stipulate the high risk facts that could effect the future estimates on future earnings or even rate, and group the mining companies in a group of their own. Just because it is difficult to do, we should not just avoid the challenge, I have, and would like to see you, and everyone interested in valuing companies to take that challenge and establish a process for establishing future intrinsic values for the high risk sectors on our asx ( not only mining).

    • Hi Paul,

      Regarding you comments about mining companies and risky sectors: I am truly fascinated by how the things I say are subsequently interpreted. I can see how even with the best intentions, comments can be misconstrued. I don’t believe I have ever said that mining companies are unimportant nor that they should be excluded from a portfolio. My comments have always been about how challenging they are to value because ROE is dependent on commodity prices – something that I have admitted I am not good at forecasting.

      Further, I calculate historical intrinsic values as well as forecast intrinsic values. So my intrinsic values are not exclusively a calculation of past figures at all. Having said that I agree that last year’s intrinsic value is indeed based on historical figures. Were I can get my hands on a forecast I will put forward a valuation but keep in mind the wide range of possible outcomes in this scenario.

      Finally I don’t believe I have ever refrained from putting forward a value either. Indeed it has been on every occasion that I put forward a value that I have said it is difficult to do.

      If you can give me forecasts for your risky companies I can value them. But that value will be couched in warnings for obvious reasons. I value every single listed company and I am happy to use forecast data if it can be provided but I don’t want to be the one to put forward estimates for companies with no demonstrated track record of earning profits.

      I am interested in companies with demonstrated track records of high ROE driven by sustianable competitive advantages. Typically, these companies will generate lots of cash and have little need for debt.

      Other investors are interested in speculative stocks and if you are ahead of the curve, for example in uncovering a company whose cash flow is about to turn positive or is about to announce something exciting, then you can do very well. I simply don’t spend much time in that space because I haven’t needed to.

      I see a real need to help investors with understanding the risks associated with investing and the additional risks associated with speculative companies with no demonstrated track record of earnings power and so I will always put forward a proposed valuation but I will always add the comment about the uncertainties.

      I hope that clarifies my position for everyone.

  3. Hi Roger, I trust I have followed your procedures well. If so, I
    believe I have a stock that is quite undervalued and I would be interested
    to see if you believed so as well. FKP. Provided I am correct, of course, I
    believe it’s intrinsic value is $1.39 rising to $2.05 in 2011. current
    share price is $0.82. Now, tell me what I have done wrong!! ha ha. Figures
    based on EQPS 0.41, NPAT 123.2, POR 27.3%, ROE 10.1 going to 27.3.

  4. Hi Roger,
    I sent a response yesterday on WAN Holdings,For the year ended 2010 I calculated an intrinsic value of about $8.40.However,the entrinsic value fell to $3.60 using the same methodology for 2011 forecasts.
    Something is fundamentally amiss with my calculations.When determining the EQPS for 2010 should I use the prior years equity on the same basis as determing theROE?

    • Hi Ron,

      Future equity is prior year’s equity + profits – dividends +/- any changes to shareholders capital. Then divide the result by the number of shares you expect will be on issue at the end of the period.

  5. Roger, on page 151 of Value.able you define free cash flow completely differently from other sources. Usually I see FCF defined as the operating cash flow minus the capital expenditures. You are defining FCF as operating cash flow minus minus capex minus dividends minus net payments for subsidiaries (I assume that is what you mean by intangibles?).

    This concept might be useful, but it probably needs a different name than free cash flow?

    • Thanks Will. I will take on your suggestion and invite everyone to label my cashflow number. Lets give a name! May I suggest “business cash flow”? What are your suggestions?…

  6. Hi Roger,

    I’m a bit behind in my homework because I just finished your book. Is it too late to ask-

    – on your table you have the ‘reported dividends’ column. I can’t seem to find this number anywhere on my Commsec account. I used your link where you have circled some numbers in red on a sample Commsec financials page but no luck. Commsec reports the per share dividend as did the FY report I read. I tried multiplying this by the number of share outstanding but that didn’t seem to work (e.g. you have ASX with a $315.5 reported div but my above calculation came back with$281.97).

    I’m doing something wrong or looking in the wrong place I guess but I’m such an investing neophyte I have to ask…..help? Thank you.

    • Hi Phil,

      You cannot use Dividends per Share X shares on issue (at the end or the beginning of the period) because this will not equal the total dividends paid by the company. The unknown variable is the item Shares on Issue. Instead, wherever possible go to the annual report and use the total dividends paid. It matters less whether you use the item in the notes to Retained Earnings or the item in the cash flow statement but be consistent across time and across companies.

  7. Hi Roger,
    I’ve been playing around with CBA and came up with valuations for 2010, 2011,2012 of around $48,$55 and $58. I was using 20% ROE and 10% IRR from the tables. In the first couple of years my expected ROE are in the 19% range which is close to the forecast ROE in reports. The point I want to make is this. The difference between using 17.5% and 20% in the tables changes my value by around $8. Using 20% could be seen as too agressive yet 17.5% feels too conservative, particularly considering how much value it wipes off the shares. I feel there could be missed opportunity in going too conservative. Do you have a method of getting a value between the two? Pro rata? Cheers Bruce C.

  8. Hi Roger,

    I must be missing something with my valuation for CPU. Where did you get the equity value of $893.56? Must be something I missed in your book ’cause Commsec give Equity of $1245.27.

    BTW Really love your book and the method fo valuing shares. I’ve done over 50 valuations and would like to be sure I am doing it right. Ta, Neil

  9. Steve, Paul and Robert

    Thanks very much for your time in responding. The 2010 figures came out 2 days after I posted so I was working on the 09 Commsec figures. It appears I had over calculated ROE and have since seen Rogers previous post on SXE where he talks of a ROE in the 20’s.

  10. Hi Matt
    Why not go to the financial reports when Commsec leaves you unsure. They can be found at http://www.asx.com.au/research/companies/index.htm then just type in the company ticker and then click on the annual report pdf released today – 24 Aug10.
    30 June Equity (see balance sheet) = $47.419 million
    30 June Number of Shares (see note 13 on diluted EPS) = 121.98 million
    Cheers, Robert

  11. Roger

    In my first go at your valuation model I am looking at SXE.

    Averaging out the ROE I get 35.7 which I have reduced to 35. I am using a RRR of 12%. I get 2.917 and 6.867 respectively on your tables.

    Where I would ask the help of my fellow Montgomery followers is finding the equity per share. I am coming up with .36 using Commsec. With a payout ratio of 50% its coming out with a valuation of $1.63 which is higher than I anticipated.

    The error (if there is one) is equity per share and I would appreciate some further breakdown of this calculation.


      • Matt
        My first effort too – I get diff basic numbers
        Equity 47,420 (pg 26 of report)
        Shares 121,980 (page 46)
        EQPS = 0.39
        NPAT = 8,675
        Dividends 7,913 (page 27)
        Payout 91%
        Prior equity 41,237 (pg 26)
        ROE 21%

        Maybe we both need help :-)


      • Hi Matt

        Which SXE annual report have you been using? I had a look at the 2010 annual report.

        The way I have been working out the equity per share is dividing the equity value listed in the annual report by the number of shares. For SXE 2010 annual report I get $41,419,971 / 124,185,000 = 0.38 cents per share. (BTW the number of shares on issue I calculate by looking at the table on the last page of the annual report. 88.94% of the shares is listed as being 110,450,241 therefore the total number of shares is 110,450,241 / 0.8894 = 124,185,000.)

        With the 2010 annual report I get ROE of 20 (I use the average equity between 2009 and 2010). The payout ratio I get is 91%. Using a RR of 12% the valuation I get is $0.67.

        Corrections to my logic/figures above are welcomed.

        Regards, Steve

      • Hi Steve,

        There are so many variables that can change the valuation. Other investors have managed to match the results. The important part of this exercise however is not to jump ahead and find the same numbers but to practice the calculations. A future post will be an exercise in getting the the right numbers.

  12. Hi Rog
    Well I am enjoying calculating valuations. Thanks so much for this fantastic education.
    I notice your CPU calc above uses Jun 09 Equity of $893.56Mn. I would have thought the June 10 figure (about $1072.9Mn) should be used for a June 10 IV?
    I understand we have to use start equity as the denominator for the ROE calc.
    Best regards, Robert

  13. hi roger
    must admit that as a non accountant I’m struggling a bit with trying to find out the correct numbers to put in to get the same valuations as you do. using LEI as an example from your table, i’ve gone through the latest financial figures and punched in those for 2010 (checking I’m using the right lines by making sure the corresponding period to last year matches your chart – if that makes sense). However I noted that in their announcement King claimed they were giving a 73% pay out ratio, yet I get a 58% payout ratio.

    these are the figures I’m using

    LEI (09) 2339.31 298 $7.85 440.44 415.2 94.3% 1484.99 29.7%
    LEI (10) 2568.142 ? ? 611.961 359.186 58.7% 2339.31 26.2%

    also is there an easier way to find out shares on issue – I’ve been through the entire report and can’t find reference to shares on issue.

    • Hi Marion,

      There’s a function in Adobe Acrobat Reader that allows you to “find” a word or phrase. You will find that in the full annual report, there is plenty of data about shares on issue. Also if you go to the ASX website, most companies make adjustments to their shares on issue and so make an announcement on a form called an Appendix 3b (or 3E or 3Y). In those forms you will find the correct number. The exercise I put up was not to ask you to match the data to annual reports, it was to make sure you are calculating intrinsic value correctly. I will post another in the near future that will help you find the right data.

  14. Hi Roger,

    Great book. An essential book on the shelf for anyone looking to acquire/sell assets not just confined to the world of stock markets. Clarity is power and you have delivered this in spades. Job well done!

    One area I wish to highlight in this blog exercise is the inputs for CTX. For the period you have indicated reported dividends of $186.3m. However, on reviewing the company’s annual report, this was paid in the previous reporting period.

    I did however notice in the same annual report under ‘notes to financial statements’ that a $67.5m dividend was paid in March this year. CTX has noted this dividend will be reflected in the subsequent financial statements.

    • Hi Mark,

      As I have been saying a few times now, this exercise was about using the numbers in the tables -whatever they are – to get the same intrinsic value as me. I will publish another exercise to practise identifying the right data in the annual reports.

  15. Roger, should we focus on the present year IV or on the forecast IV? Generally speaking there isn’t that much of a difference except if there has been a significant change in equity in the current year which won’t be fully reflected in the current year’s calculation. Enjoy your work. Best regards, Rob

    • Hi Rob,

      If there is no change in intrinsic value from one year to the next, can I suggest you might be looking at the wrong companies. Please see chapter 12 or 13 in my book. Own businesses whose intrinsic value is rising by a good clip. After June 30, 2010 we move onto the 2011 valuation.

  16. Patrick Hambling

    Hey Roger, can you check your valuations with mine to let me know if i am on the right track. Intrinsic values are getting easier as I go but still quite difficult, so I am very amazed that you have conducted all this on all the companies in the asx. With MCE, I got

    2010 – 5.63
    2011 – 9.72
    2012 – 12.22

    Hopefully these are close, forecasts are even harder than intrinsic values, and if Ive ruined it can you give me any tips, I worked them out using your source data guide with a rr of 10.

    Finally how do you value Atlas Iron with negative roe, eps book value etc. or is that my answer… dont bother or at least wait until it makes a profit. I remember you said theirs huge upside if the forecasts are correct and that becomes obvious when eps 2010 is -21.3, 2011 -14.3 and 2012 is 40.1. Just a small jump. Thanks so much for your help, have been valuing since I finished reading

    • Hi Patrick,

      I will put Atlas on the to-do list but with reporting season going full speed, I simply will have to delay any checking of calculations for some months. I will also post another set of examples for you to compare your work against.

    • Hi Patrick,

      For MCE, I get:

      2011 – $9.49
      2012 – $10.90

      The payout ratio for 2012 is forecast to be higher than 2011 hence reducing the potential IV based on my calculations.

      All of our calculations will vary depending on our inputs but if they are roughly right, it is very good value. Makes me think of that comment to paraphrase that it doesn’t matter if a person who is 6ft tall weighs 40 or 45 kgs, they are still skinny.

  17. Hi All
    I am jealous of all you guys that can work a spreadsheet.
    As I am a old guy could some one send me an example preferably for Numbers Mac computer I would appreciate Just basically the information you actually put in. I will work out how to put it in.
    I usually do the calculations in my head or on a piece of paper, but thinking a permanent record in a spreadsheet is the way to go.
    Thanks in advance.
    William G

  18. Hi Roger, My best friend just got the book and told me that it is much better than our finance texts that we used to use while doing our finance degree. Just wondering how do you derive with the RR? Do you use CAPM or something? Ohh and using your method, PBP seems really cheap and is PBP an A1 or a C5?


    • Hi peter,

      No I don’t use CAPM. CAPM by William Sharpe, is based on or an extension of the work of Harry Markowitz. Harry work is in turn based on the work (and assumptions) of Bechelier. Bechelier was wrong. Go figure! We have been mismeasuring risk for more than 100 years.

  19. I’ve just finished the book Roger and loved it! Thanks for the practice exercise, I found it extremely helpful. I’ve now created a spreadsheet and have started adding more companies to the list. I just attempted to value FGE after they released results today, however I think my IV is a little bit to high. Could I ask what your latest value on FGE is and what Rate of return your using.

    Keep up the good work,


    • Hi Adam,

      Everyone seems to be getting high valuations for FGE. Must be something in that. Remember to also consider the sustainability of the payout ratio and the discount rate needs to be a bit higher than 11%. Importantly you have to understand the business and think about the impact of management’s comments. They discuss “earnings accretive’ acquisitions. Generally not a good thing. SHows a possible lack of understanding of what drives intrinsic value. It isn’t earnings accretive acquisitions thats for sure.

      • For all those looking at high valuations for FGE just take into account the clough transaction and how wealth destroying it is for shareholders going foward.

        I presonally think shareholders should feel poorer for the deal

  20. Hi Roger

    After reading the book and completing your exercise I wanted to try the claculation method on FGE’s current results. I have tried to be conservative, but still get a very high valuation of close to $8.
    I calculated Equity per Share $1.19, payout ratio 23%, ROE 41.5%, RR 12%. Maybe I’m missing something in the balance sheet? Should I be removing the intanagibles from the Net Asset/Equity numbers?

    Thanks for the book, I’ve been trying to find a way of calculating the value of shares for years.

    • Hi Jason,

      That doesn’t look too bad, but a 23% payout ratio implies, 67% or profits will be retained and reinvested at 41.5% returns. That simply cannot keep happening forever and so you need to increase the payout ratio. I talk about implied growth rates in my book. If you use 67% retained rate (whats left from a 23% payout rate) and a 41.5% ROE, you are implying an earnings growth rate of 41.5% X 67% = 27.8% for a very long time. Thats possible ion the short term but not long term. If it continued forever the company would become the world!

  21. Hi Roger,

    This stuff is addictive.

    My valuations have been around the mark and I notice others are around the mark. A good investor you are, omnipresent you are not. Do you have any idea why people are getting close to your valuations, but not necessarily spot on?

    Also, using your tables, I came up with a very high IV for SRX ($17.80). I feel like buying the stock, but my valuation seems too good to be true. Any thoughts oh wise one? What is your valuation for SRX?

    Thanks for answering these questions. I hope I am not making you regret writing the book :)

    • Hi Andrew,

      Glad you are enjoying it. As I mention in the book; two people looking at the same set of facts will inevitably come up with slightly different valuations. Even Charlie Munger and Buffett have at Berkshire.

  22. Thanks for the table. If you write a second edition of your book a table like this with data from real annual reports would be a good addition.

  23. Hi Roger

    Many thanks for a great book and explaining in laymans terms how to value shares.
    Used your method to set up a spreadsheet to run my portfolio through,have come up with some depressing numbers about what I have paid compared to value.
    That said at least I can use more rational methods going forward. Could I please ask if you have the Intrinsic value for PTM you could share, I have 2009 $3.19 2010 $3.01 2011 3.31

      • Hi Roger

        Thanks for the reply, when you say discount rate is this required return?, if so I have used 10% and a max Company ROE of 60% from the tables.
        I am a liitle over my head with the forecast but used Analyst forecasts and any profit not paid out as dividend increased the following year equity by that amount.
        These are my assumptions.
        Equit Shares Eq/sh NPAT Divd Payout Ratio
        PTM 11F $234.74 561.00 $0.42 $217.98 $196.18 0.899990825
        PTM 10F $213.00 561.00 $0.38 $187.92 $169.12 0.899957429
        PTM 09 $194.00 561.00 $0.35 $162.00 $134.64 0.831111111
        PTM 08 $177.00 561.00 $0.32 $152.00 $0.00 0

        Am I on the right track?. I have only read the book once but thought you don’t learn if you don’t try.
        Regards Bruce

      • Hi Roger

        Using the examples provided I come up with the same numers as yours, so am happy with that.

        But with future forecast’s am struggling a bit.
        When you say discount rate is this the same as investors required return, if so I used 10%.
        For forecast valuations I am using Analyst forecast EPS growth of 16% 2010 and 21% 2011, using the historical dividend payout ratio to determine dividends, and increasing the Equity per Share by the diference between Earnings and Dividends paid.
        Is this right as there is such a big difference between our 2011 numbers?.
        Thanks and Regards Bruce

  24. Hi Roger,
    I got within a cent or two of all the answers. Brilliant exercise thank you.
    I have a similar question to Ron(above) ASX calculated ROE of 11.4% & FGL 11.5% and on both occasions you rounded up to ROE 12.5% not rounded down to 10%.
    And CPU the US dollar should (I think) be less than the Aussie be US$9.18.
    Looking forward to the next exercise and workshop maybe.

    • Hi Greg,

      The exercise was all about making sure you are following the process. Don’t pay too much attention to whether the round was up or down. Down is always more conservative. The title of the column should read Aud not USD. apologies.

  25. Roger,
    I have awarded myself an “A”, because I got them all right. Thank you for this exercise, it was enlightening. I have set up a spreadsheet and processed another 25 companies’ figures, and some of them are quite surprising when compared to their current share price. A couple of doubts linger when it comes to selecting the most appropriate profit figure, but otherwise, it is making very good sense to me. Thank you for sharing this.

  26. Hi Roger,

    I’m doing some IV calculations on various businesses and have come up with a question. When calculating ROE (Step C) you say to use the beginning equity or the average equity in the calculation. When equity has had a large increase from one year to the next, would it be more sensible to use the average equity for the period rather than the beginning equity?


      • Hi Roger,

        Another one I’m trying to get my head around. Let’s say the number of shares on issue increased during the year.

        For the purposes of Step B, should I calculate EPS and DPS respectively using:
        NPAT / final number of shares on issue,
        Dividends paid / final number of shares on issue,

        or should I just use the EPS and DPS amounts as stated in the annual report?

        To date, for me, the two options have yielded slightly different results. Is this to do with the timing of the raising of the new shares, or am I doing something wrong here?


      • Hi Roger
        I had the same issue as Craig with CSL who had a large increase in equity from 2008 to 2009 period.
        Is it possible to include the IV for CSL both 2009 and 2010 with RR to check my calculations (which don’t look correct to me).
        Cheers Calvin

  27. Ron Marlborough

    Thanks Roger for your book and example intrinsic value worksheets.

    The only number I can’t seem to get my head around is, e.g. using FGL, the “ROE Selected” of 12.5%.

    Where does this number come from?

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