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Uncommon sense – NRMA Open Road reviews Value.able

In the Press, Media Room | Comments (23)

Uncommon sense – NRMA Open Road reviews Value.able

Through Value.able Roger Montgomery shares his common sense approach to investing in clear, easy-to-understand language, writes Kris Ashton in the latest issue of NRMA’s Open Road magazine. Read review.

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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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23 Comments

  1. Eamon
    :

    i thought my 1.90 2011 valuation was conservative, but reading valuations of 1.80-2.08 has me puzzled. Its certainly interesting to note how we have derived slight variations from using the same book.

    Perhaps this could be the attributions from our own opinion or perspective towards the future prospect on a stock.

    Eamon.

      • Eamon
        :

        True! Though it could also be self bias, i.e. materials.

        I notice you tend to discount the material sector more because of the uncertainty or predictability of future commoditiy prices.
        Similarly i struggle to derive meaningful valuations for thiss sectors collectively, my valuations are way higher than what this sector’s companies are trading at, hence i tend to avoid this sector altogether as my valuations for them varies alot.

        Do you find it difficult to evaluate certain sector as well, or do you have a way to take this into account?

        Eamon

      • Roger Montgomery
        :

        Hi Eamon,

        There are companies that are much easier to predict than others. Companies that have booked material contracts early in the year that underwrite increases in earnings are a simple and obvious example. Companies that sell FMCG products with high brand recognition and share of mind and are able to raise prices without a detrimental impact on unit sales volume are another.

  2. Rob Walker
    :

    Hi Warren,

    for NVT I have the following, please note I am new as well, and I have not read Annual Report yet.

    Equity
    2010 2011 2012 2013
    105 109 112.2 112.2

    Shares
    2010 2011 2012 2013
    342 342 342 342

    EQPS
    2010 2011 2012 2013
    0.307 0.319 0.328 0.328

    NPAT
    2010 2011 2012 2013
    64 71 87.2 97.8

    Payout Ratio
    2010 2011 2012 2013
    100% 94.37% 96.33% 100%

    Average Equity
    2010 2011 2012 2013
    101.5 107 110.6 112.2

    Selected Roe
    2010 2011 2012 2013
    60 60 60 60

    IV
    2010 2011 2012 2013
    1.54 1.83 1.80 1.64

    Actual Roe was above 60 for all four years as well, Trading price is around $4.36. Which I my Book puts its along way from the 2011 IV. Therefore I put this stock into the Roger A1 Watch List and move on to next stock to review.

    Cheers

    Rob Walker

  3. Nick
    :

    Roger,
    Just wondering if you ever purchase a stock that is not at a discount to value but you do so based on its IV increasing at a rapid rate?
    Thanks
    Nick

  4. Austin
    :

    Hi Roger (or some experts here),

    I know this does not fit this title but I had been thinking about comparing return of stock market to the return of property. From my “Common Sense” i conclude that property is not worth investing.

    I had put in 2 scenario and found that property always have declining intrinsic value (in your book many times it mentioned low ROE will destroy wealth) I found that this is the case for property.
    Roger and some experts here please comment!

    Scenario 1
    EQPS = 300k (fully paid)
    ROE = 15% (30k value of house, 5k rental)
    Discount rate 10% give Intrinsic Value of 559k. (so it’s equity is 259k discount from intrinsic value.)

    Then Year 2
    EQPS = 330k (retained growth of house’s value)
    ROE = 13.6% (30k value of house, 5k rental)
    Discount rate 10% give Intrinsic Value of 518k. (IV dropped but still 188k discount from intrinsic value.)

    Similarly, Year 3 EQPS=360k, IV=506k and then EQPS will eventually meet IV and then there’s no point of owning this house.

    Scenario 2 is with loan. Highly geared and low ROE. eventually get to the same point. EQPS meet IV.

    Do you think this is the right way to go about calculating IV for property. If so, what is your comment on my study of “comparing return of stock market to the return of property”?

    ( i assumed steady growth of 30k in the first 3 years, and no change in rental for the first 3 years. growth and rental would catch up with value of property but there is also cost of renovating and maintenance to make these negligible.)

    Thanks in advance.

    Regards,
    Austin

    • Roger Montgomery
      :

      Hi AUstin,

      I think that is an excellent insight. Well done. The only comment I would raise is that if equity per share is $300k and you have invested $300k, then ROE will be much lower because the valuation is based on the equity. Negative gearing is a euphemism for; “losing $1.00 to save 50 cents”.

  5. John A
    :

    Hi Roger (and fellow bloggers),

    Thanks for such a great book, it’s been a real eye opener for me! NVT has been a favorite of mine because of its high ROE, low capital requirements, growing market etc But management, by paying out all earnings as a dividend is really hurting intrinsic value!

    My estimates are: 2010 EQPS 31c, EPS 18.8c ROE 60%, RR 10% IV $2.32
    2011 EQPS 31c, EPS 20.8c ROE 60%, RR 10%, IV$1.85
    2012 EQPS 31c EPS 25.5c ROE 60% RR10% IV $1.85.

    By 2012, with the company paying out all earnings as a dividend, EQPS remains unchanged, but because of growing forecast earnings, ROE rises to more than 80%. I’ve used 60% ROE because the tables don’t go any higher. So the company’s IV stalls at $1.85. (Am i missing something here?)

    The question is, what should management do to improve IV? They don’t seem to have a need for the extra cash to plough back into the business, but buying back shares at greater than intrinsic value can’t be a good idea either. Is the company at the point where they need to consider acquisitions?

    This is my first valuation so happy to hear any feedback.

    Cheers JA.

    • Roger Montgomery
      :

      Hi John A,

      As I mentioned to Brad, I am working on a way to deliver higher ROEs for you. While first prize is a business that can retain large portions of profit and reinvest at high rates of return on equity, a very near second prize is a business that doesn’t need to retain any profits and can keep growing returns on equity. Unitab is a business that did this (now taken over).

  6. Warren
    :

    Hi Rodger,

    The figures for NVT (Navitas) are as follows can anyone help with intrinsic values the payout ratio over 100% is difficult to calculate. Can anyone let me know if my final values are correct.

    Year Equity Shares Profit DPS
    2005 134.4 346.5 29.1 8.4
    2006 132.7 346.5 31.5 9.5
    2007 99.1 346.9 32.2 9.3
    2008 93 343 37.4 10.9
    2009 98.4 342.2 49.2 14.3
    2010 105.4 342.4 64.3 19.5

    Year EPS Pay/Ratio EQPS ROE
    2005 8.4 100.0% $0.39 43.3%
    2006 9.1 104.5% $0.38 23.6%
    2007 9.3 100.2% $0.29 27.8%
    2008 10.9 100.0% $0.27 38.9%
    2009 14.4 99.5% $0.29 51.4%
    2010 18.8 103.8% $0.31 63.1%

    My estimated INTRINSIC VALUES
    2005 $1.07
    2006 $2.62
    2007 $2.56
    2008 $3.94
    2009 $6.61
    2010 $9.96

    Thanks
    Warren

    • Roger Montgomery
      :

      Hi Warren,

      Generally, payout ratios of more than 100% are unsustainable, as equity is eroded. Theoretically of course payout ratios could remain about 100% for a very long time. Regardless, I use 100% when it is exceeded.

  8. fred
    :

    Hi roger,

    All my msgs seem to disappear is there a problem with your blog (sight) or do you delete my msgs?

    • Roger Montgomery
      :

      Hi Fred,
      Patience my friend. A key ingredient for great value investors. I don’t sit here waiting for your comments. I get to them when I can. Believe me when I tell you that I answer your comments much faster than emails. Its not unusual for a week to pass before I am able to reply to emails.

  9. Warren
    :

    Hi Rodger,

    Can you or any of your bloggers please help me with the intrinsic values for NVT-Navitas. The payout ratio is higher than 100% it is difficult to work out. How do I calculate this number over 100?

    Thanks
    Warren

    • Roger Montgomery
      :

      Hi Warren,

      Lets see what estimates others come up with first. Is there anyone that would like to estimate the value of NVT. When you do, be sure to post your inputs and workings as well.

      • Craig M
        :

        hi Warren

        go to the annual report and get last years equity figure, now grab this years net profit after tax figure and check that there are no abnormals inflating or deflating it, now divide the NPAT by the equity and you have return on equity, now multiply the ROE by 100 to get your equity multiplier(for companies that payout 100%). This years equity divided by the issued share then apply the multiplier and your valuation has arrived. enjoy

      • Russell
        :

        Warren I got an IV of $1.00 which goes not make sense. Checking again. I see another post and will work through the suggestions by Fred.
        Russell

    • Peter Kruckow
      :

      Hi Warren
      Don’t take this as gospel as I’m in the steep learning curve as well
      and I can get mine marked as well
      NVT
      Shares -342.4 – 2010eq= 105.4 – 2009eq=98.4 – AvEq= 101.9
      Eqps=0.31 Npat= 64.3 Divs paid= 66.77 POR 100%(rounded down)
      ROE= 60% RR=14% IV= $1.32

      The reason I ‘m using RR14% is I have to be as conservative as possible
      until I can convince ‘She who must be must be obeyed on the weekends’
      that my foray into the sharemarket (using Rogers principals) will bear fruit
      Anyone willing to go to my question on ACR in the Decmil blog post 14/9/10
      and show where I’ve gone wrong

      Cheers
      Pete

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