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Value.able: Take five

Media Room, On the Internet | Comments (113)

Value.able: Take five

With June 30 fast approaching, and following a series of reports that highlight a decline in global economic growth, analysts around the globe have begun to reassess their assumptions about commodity prices, inflation, China and company earnings. But every dark cloud has a silver lining. With that in mind, Roger Montgomery suggests five businesses to put on your watchlist. Read Roger’s article at www.eurekareport.com.au.

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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113 Comments

  1. Grant Duggan
    :

    Thanks for those comments Rici Rici in regards to SIV i learnt something valuable again.

  2. darrin
    :

    HI Roger

    The ‘take 5’ present no significant MOS.
    As the valuable approach would be to wait and be patient. Is this the correct line of thought?

    cheers

    darrin

  3. Ron shamgar
    :

    Hi,

    There’s been a lot of talk about TGA lately here. It is a quality company, but I suggest you use the pro forma balance sheet in the latest capital raising presentation to calculate your current and future IV.

    You will be unpleasantly surprised.

    Cheers.

  4. fred
    :

    Hi Roger,

    ISS Group ( iss ) did you read what i wrote yesterday on your blog regarding ( iss ) buy back and then read ( iss ) announcement today.

    Not Bad!

  5. ZORAN
    :

    FGE

    Is there vaccine against buying more FGE as it goes down day after day?

    My “sickening feeling” has been challenged by greed.

    The fact that last years performance was much better than index is quickly forgotten as you are “only good as your last trade”(who said that?)

    Cheers
    Zoran

  6. fred
    :

    Sorry to all you Forge ( fge ) holders but I did NOT buy any and its coming back to pick me up, then back up we go. I have a intrinsic value of $7.50 about, you lucky ducks.

  7. Mark Ab
    :

    Hi Roger,
    I hope I’m wrong on this point but frankly I am a bit staggered at what I perceive to be the level of ‘stock punters’ that are leaving comments. In regard to FGE among others, buying with a decent MOS is a critical part of the investment approach, along with suitable time frame. Why bother purchasing and studying a book about disciplined investing and then throw all of those disciplinary aspects out the window at the time of action? Some people never cease to amaze…

    • Sue
      :

      I think one of the main reasons the share price of Forge has dropped has nothing to do with the actual performance of the company. Over recent weeks a number of panelists on the TYV show “Your Money Your Call” have questioned the whether the management of Forge has the best interests of all shareholders at all times and thus why would you want to be holding shares in a company where you cannot have confidence in the management.. The comments relate to a proposed transaction in March/April 2011 between Lynas Corporation and “Forge”. However all the so called “analysts” have the wrong company in mind. The “Lynas” transaction was with Forge Resources Limited NOT Forge Group. I have now heard at least 5 of the show’s panelists over recent weeks (including Julia Lee last night) make reference to the wrong company! I have sent an email to the show alerting them to the defamation of the company but have not received a response or noted any clarification aired on the show. The real IV of Forge Group is still much higher than the current share price. Hopefully common sense will soon prevail!

  8. Rod h
    :

    Roger,
    You mentioned a week ago you were going to do something on FGE last week so I’m hoping you’ll do something this week.

    I notice someone on this blog rang the company and talked to someone important.
    I Also notice that A share monitoring type company I subscribe to did the same thing TODAY and again got some rosy feedback as well.

    I’d like you to mention the company you had shares in that you thought you had a good relationship with the management.

    With this share in mind I’d also like you to outline the need to have a basket shares and not just focus on one or two ….
    As even though eveything appears rosy after talking with management (With any company not FGE specifically) sometimes management can lie and we don’t want to put all our money in the one basket. I’m concerned some people may be seduced by the huge returns of a couple of the shares mentioned in this blog and may not have a balanced approach.

    • Roger Montgomery
      :

      I try to talk to management as little as possible although I am always happy to take their calls when they call me. You can be very very successful without talking to management at all. And they’ll be relieved because they can get on with running their businesses.

  9. fred
    :

    Hi Manny,

    Regarding Cash Convertors ( ccv ) I believe the gov is looking at changing the law on short term loans so that will hurt ( ccv ) be careful

  10. Guy
    :

    Wow what is going on with FGE. Brad thanks for the Q&A With the CFO of Forge great stuff. I bought into Forge back around the $3.45 mark at one point I was over 100% up on FGE but after the recent downturn of the market and down 6% today I too am feeling a little shaky with FGE. The Roger in me says hold fast things will recover even buy some more while the emotional market loses site of what Forge is really worth. But on the other hand how is it that forge has dropped more than 10% in a few days and is down another 6% as I write this. The last announcement on comsec is a profit upgrade and yet it looks like people are throwing FGE stocks away for nothing just to get out. This has truelly got me baffled. I know I’m supposed to turn the market off. But to me FGE is waaaay below IV and I should be buying more but where do you find the strength to buy when it’s so counter intuitive.

    • David Martin
      :

      I am not too concerned about FGE and have a figure of $8+. THanks Brad for your initiative and making contact with them directly.

      The more i consider this stock the more i realise the problem must be Phillip R who is selling to buy a house – must be a big house!!

      Good luck with the house Phillip

      • Phillip R
        :

        Haven’t sold them yet! Need them to go up a bit in the next week or two!
        Not sure what you mean by big – but big for me! Something I had only dreamed about, so have got to go for it, just not the best time to pull out of most of my investments…

      • Greg Mc
        :

        It’s not just Phillip’s fault, David. I mentioned last week that I had sold primarily for house related reasons, though I did mention a couple of things that caught my eye about FGE’s most recent announcement. That said, if our kitchen and bathroom were not currently being destroyed and rebuilt, I’d still hold them, and I did say not to let my personal situation influence anyone else’s decision making at all.

    • Joab Soh
      :

      Hi Guy,

      This is why it’s easier said than done when Buffett says “Be greedy when others are fearful”.

      Personally, I found turning off the market actually helps. If you keep looking at price changes every 10-15 minutes, it’s harder to “accept” that price can fall so low because you have subconsciously attached yourself to Mr Market’s wisdom. Instead, I look at the market twice a day and mainly just to check for announcements and MOS. If there’s nothing exciting, I will ignore Mr Market for that day.

      Lastly, I have learned to be very disciplined on requiring a large MOS. If there’s a sufficient MOS, whether you caught the bottom of the price action is not important in the long run.

    • Wayne
      :

      You should be refering to a set of exit rules when thinking about exiting. The following are what I refer to. All are rules that I have copied from Rodger’s book I think?

      1. The performance of the business declines
      2. The value of the business declines
      3. The price rises well above the value
      4. The value of the business is no longer expected to rise at a satisfactory rate
      5. You are fully invested, but have found something superior

      “He who lets the world, or his own portion of it, chooses his plan of life for him has no need of any other faculty than the ape-like one of imitation.

      [Conversely,] he who chooses his plan for himself employs all his faculties.
      • He must use observation to see,
      • reasoning and judgment to foresee,
      • activity to gather materials for decision,
      • discrimination to decide,
      • and when he has decided, firmness and self-control to hold to his deliberate decision.”

      John Stuart MILL 1859

      Regards
      Wayne

  11. Manny
    :

    Sticking to the retail theme as bloggers have been talking a lot about oroton here, does anyone have idea on why CCV (Cash Convertors) is down by around 7% today. Is it due to the EZCORP deal or the fact that there “may” be a cap on payday loans. My IV is much higher (in the late 80cents range for 2011-12 FY).

    My research shows that this is a great little stock and it’s footprint will extend with the EZCORP deal but maybe I am missing something.

    Can anyone throw some light on this?

    Cheers
    Manny

  12. fred
    :

    Hi Roger,

    ISS Group ( iss ) on the ( 18/11/2010 ) announced a buy – back of no more than 13,520,809 over the next 12 months and up until the ( 11/05/2011 ) bought back ( 1,520,166 ). Since the Q-3 announcement on the ( 13/05/2011 ) up until ( 30/05/2011 ) ( iss group ) have not announced buying more shares even though @ times the price has been lower than they have payed in the past. 2 things come to mind is either ( iss ) will stop buying back OR ( iss ) believe that they might be able to buy – back for a cheaper price. Please do your own research due to mine could be incorrect!

    Thanks always Roger

  13. Brad
    :

    Hi Brad J

    I read a KO annual report a couple of years ago. Do you know who they claimed their biggest competitor to be?

    You and me, or moreover their 6.5bn customers – they claim we need 64 fluid ounces of liquids per day to survive (just under 2 litres) – at the time they were selling 1 fluid ounce (29ml). Explains the water strategy.

    Growth plus ability to increase prices vis a vis inflation is pretty as much as a sure bet as they come.

    Interesting.

    Cheers

    Brad

    • Brad J
      :

      Thanks Brad,

      Some businesses are a sure thing and Coke is as good as it gets. Buying $100k worth of shares at current prices and putting them in the bottom draw for 20 years could prove to be a very good investment. You may want to sell occasionally if Mr Market is offering you a price too good to be true, but I figure you could easily get a 15% compounded return over that time. Now if that is true your $100k would turn into $1.6m or a $1.4m gain once you have adjusted it for 3% inflation.

  14. fred
    :

    Hi Roger,

    Panoramic Resources Limited ( pan ) current $ 1.97 & close to the 52 week low & I do NOT hold ( pan ) @ PRESENT. ( pan’s ) chart seems to follow the Nickel price so if you are bullish on commodities ( nickel ) ( pan ) might fit the bill, Nickel warehouse stock levels @ a 52 week low as well but at a 5 year high. I have a intrinsic value of about $ 3.00 but please do your own research and seek professional advice.
    I have mentioned this stock only a couple of weeks ago, sorry for mentioning it again.

    Thanks always Roger

  15. Brad
    :

    Re Slater and Gordon, what is their competitive advantage?

    What is their economic goodwill?

    Same questions apply to 1300 Smiles and WHK…

  16. Brad
    :

    Re SIV, I’m mot sure of companies such as this (mms after lease acquisition) business model which is to borrow money from a bank and lend it to others.

    All’s well until the music stops and the oxygen is cut off.

    In the GFC, even Amex and GE had trouble borrowing money.

    If I’d want to be in the lending business, I’d want to have a solid deposit franchise.

    • Rici Rici
      :

      The key with these types of companies in my opinion is to look at the spread between their borrowing rate and their effective lending rate.

      Under most economic conditions, finance IS available, but the cost of that finance rises during periods of economic/financial uncertainty.

      This is where the spread comes in. If the spread is wide enough, then the company can continue to operate profitably even with higher internal financing costs.

      • Rici Rici
        :

        If one looks back to the GFC period, companies like FXL and SIV saw their share prices drop like flies because of the perceived risks you have identified.

        But therein lied huge opportunities for those prepared to do their homework and go through not just management forecasts (through investor presentations) but more importantly delve into the notes to the financial statements.

        From memory FXL was achieving its financing at around 7% yet it was lending that money out at around 30%. Who cares if financing costs rose by a few % points, on spreads like that, so long as most customers keep paying (and this can be checked by looking at customer arreas), the company will be ok.

        Why do you think the banks focus so heavily on credit cards, on the rates they charge they can even afford to have decent unrecoverable debts and still make good profits.

        Now compare this same situation to say the REITS during the GFC where the spread between their rental ylds and their financing costs where much more thin, and one can see where their problems where (apart from the fact that they were borrowing short term and investing those funds in a long term illiquid asset with a relatively narrow spread between finance cost and rental income)

        I made a killing on these two stocks

  17. Brad
    :

    Hi Joe

    Re IFM, I have watched this co for about five years. The problem seems to be the car companies outsourcing of their epc’s (electronic parts catalogues) seems to ebb and flow.

    No growth and value hasn’t been rising, notwithstanding high roe.

    Cheers

    Brad

  18. Robert P
    :

    I have been having trouble with some of the published data.
    In particular when using totals for earnings and equity the number of shares is often difficult to obtain.
    Using the per share numbers often gives at least one contradicting value (nta), often ROE as well/
    This has not been restricted to one company.
    A recent example is ONT. I downloaded the annual report.
    Part of the problem relates to options etc.
    Using the ROE from the annual statements seems preferable but then this leaves the problem of which NTA to use for value (Rogers way of calculating). it is probably possible following the Simmons approach to derive a ‘total’ IV but then the number of shares are needed to convert this to a IV per share.

  19. Robert P
    :

    I have been having trouble with some of the published data.
    In particular when using totals for earnings and equity the number of shares is often difficult to obtain.
    Using the per share numbers often gives at least one contradicting value (nta), often ROE as well.
    This has not been restricted to one company.
    A recent example is ONT. I downloaded the annual report.
    Part of the problem relates to options etc.
    Using the ROE from the annual statements seems preferable but then this leaves the problem of which NTA to use for value (Rogers way of calculating). it is probably possible following the Simmons approach to derive a ‘total’ IV but then the number of shares are needed to convert this to a IV per share.

  20. Brad J
    :

    Hi Bloggers,

    I thought it would be interesting to see what the IV for Coco Cola (KO) in the US would be since it is WB biggest holdings and his favourite.

    If you want to have a go you can use numbers from http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx?symbol=KO

    I was surprised that my IV came out at around $100 and the stock at the moment is trading at $66.51 which is a MOS of 33%.

    The share price has only gone up by 41% over the last 10 years. In fact its high was in 1998 where it was trading at around $85. The companies profit has more than doubled in the last 5 years.

    Now when you take WB comments about the future of the US and its best years are ahead of it along with the enormous growth Coke will get in the developing world this would be a good buy. WB has also recently stated that inflation is going to be an issue and your best hedge against it is to invest in good equities.

    In fact I think if you had a 15-20 year horizon an investment in Coke will probably set you up for a healthy retirement.

    Great subject worthy of a discussion.

    • Pat Fitzgerald
      :

      Hi Brad J

      In regards to the IV for KO. I suggest that you check the ‘implied growth rate’ against the forecast growth rates to see if the ROE is sustainable (see page 112 of Value.able, use the ‘beginning equity’ to calculate the ROE for the ‘implied growth rate’ calculation). When the ROE is not sustainable some people have stated that they change the ‘payout ratio’ and ‘ROE’, others the ‘payout ratio’ only and others the ‘ROE’ only. I change the payout ratio.

  21. Brad J
    :

    RE – Forge Group

    With the recent pull back in FGE shares and the lack of news on upcoming contracts, I was getting a little uncomfortable about my holding, so I decided to ring the Company –
    I spoke to Andrew Bell their CFO and these were my questions and his answers –

    Question 1 – How are is the business travelling?
    Answer – We are very happy with turnover around $400m and Net profit of between 38.5 to 40m expected.

    Question – 2 – How are your contracts going as there haven’t been a lot of updates lately?
    Answer – We have a strong backlog of work and we feel very comfortable about the future. We are quoting like crazy on big and small jobs and only announce large contracts with no need to announce all the small contracts we are getting.

    Question -3 – How are things going with mining boom in WA and is competition heating up.
    Answer – From our point of view the boom is truly on and engaging. There is enough work for everyone and there is no slow down from our point of view.
    Comment – Thank you Andrew for your time.
    Answer – Thanks Brad and hopefully we should have some good news for you shortly.

    Andrew was extremely helpful and generous with his time. I won’t be selling down my holding, not to say that they couldn’t pull back further in the short term.

    Rogers value of $9 looks right to me based on this update. Current MOS is 37%

    • Phillip R
      :

      I agree with you Brad J (on MOS), but Mr Market sure doesn’t at the moment! My IV was similar to yours, so bought shares in FGE just below $6 several months ago. Unfortunately I will soon have to sell my shares as I need all my investments for a house purchase, and I must say that I’m sweating a little on FGE and Matrix at the moment!

      I fully agree with the investment philosophy on this site and have lurked here for more than 6 months. What I didn’t realise is that riding out the storms is fine as long as your financial situation doesn’t change and you suddenly need to withdraw your funds! *Ouch!*

      Regards to Roger and everyone from whom I’ve learned so much!

      • David Martin
        :

        Phillip , there is more to investing than investing – regardless of the opportunity it is essential to align your investments with your time frame and for me, a 3 or 6 month durtation is unfortuately a parking job – cash and TD’s. You can’t affor to be a forced seller of the right stock at the wrong time.

        i hope all goes well with your house purchase.

      • Brad J
        :

        Hi Phil,

        Don’t worry we are all learning at the moment. I feel possibly one of the mistakes you have made is that you are using money you need. I am also leveraged to the market and just to give you an idea my portfolio was up $220k a month ago and now it is only up $90k as of today. This is over a 6 month investing time frame.

        WB has never borrowed money and this is where I am going wrong. It gives him a mental edge over other investors who are leveraged to the market. If you are highly leveraged you can loose all your money and more but this won’t happen without leverage.

      • Rob
        :

        Hey Brad,
        you make some excellent points here. I have never borrowed to buy shares but have observed the following.

        When times are tough I feel the stress of my mortgage. In my previous house I repaid the mortgage and felt a great relief.

        Leveraged investments probably do amplify the emotions of fear and greed. These combined with patience are exactly what you are trying to control when you turn the market off.
        Cheers
        Rob

    • Tiago
      :

      Thanks for sharing the conversation with us, there was also an annoucement early this month upgrading earnings, accumulating a little bit today!!

    • Rob Walker
      :

      Thankyou for taking the time to post this Brad J, it was recieved very well

      Regards

      Rob Walker

    • roger
      :

      thank you for the info on fge I bought into it today around 5.22to 5.30 31/5/11,I have been waiting for a low .
      everything looks right on the numbers side
      Regards R H

      • Brad J
        :

        Well done Roger,

        You have purchased at a VERY large discount to IV, not to say the stock can’t drop further. At the moment the volume investors are winning the race but this is sure to change at some point in the future.

        My only concern for the future, but not at the moment, is their order book. I don’t have this concern with VOC and MCE, so I think they are the better investments. I still hold FGE though and will continue to hold for the time being.

      • Brad J
        :

        Hi Roger,

        Harder to grow the same amount in percentage terms as they are working off a higher base.

      • Tim Phelps
        :

        Hi Ash,

        Good news. Quick question: how do we interpret the value of this contract?

        I assume 65m goes to increased revenue for FGE, but is there any way at this stage to determine the estimated costs involved for FGE and the impact on earnings?

        Cheers

        Tim

      • Brad J
        :

        Hi Ash,

        Yep some good news but we are going to need a lot of these in order to maintain the same growth levels of the past, but it is a start dare I say.

        Something I find way more exciting is the drop in the Matrix share price, down another 3% today with a 30% MOS. I had a look at their last investor update and they had just received another $80m in orders over the quite Christmas period and had quotes for a further $400m. When you consider their Moat, lack of competitors, new facility, and bargain share price it just has to be worth considering buying more. I am grinning from ear to ear.

        Also Ash I would love to know your opinion on Coke in the USA as an investment opportunity.

  22. Mei
    :

    I can see the numbers stack up well for Oroton but their bags are not ‘extraordinary’ and they are competing against so many other designer brands. Besides, Oroton just doesn’t have the kudos of European designer brands; just like blokes prefer European sports cars!

    • Andrew
      :

      You are right, Oroton are competitng against European brands with better reputations. However this is where you have to really have a look at what Oroton are doing and their competitive advanatage.

      Basically in the theory of Micheal Porter there are three generic strategys to create a competitive advantage. These are cost-leadership, differentiation and Focus which then is linked to the previosu two.

      The way i see it is that Oroton have Focus-Differentiation. They use their affordable price point to make their product stand out. They offer a quality product at a price that makes it attractive to their customers. You can buy an Oroton bag for $500 or a Chanel or Gucci bag for $1500-$3000. Fashion concious people might want to buy that Chanel or Gucci bag but they can’t afford it, Oroton is a very fashionable brand in australia and they are affordable so they will get that.

      In Australia, i believe oroton truly has very little competition, som emight be on the way however. I don’t believe they compete in the same market segment to the European designers which are luxury in every bit of the term. Oroton are more affordable luxury.

      And just as blokes prefer European Sportscars they still end up buying the commodore or the japanese sports car.

    • Adam W
      :

      Is Oroton competing with the high end European brands? It seems to me that Oroton fills a different space in the market. Oroton’s bags are not $1000+ like Louis Vuitton, Prada, Hermes. You are not going to pick up a $20 handbag at Oroton, but at the same stage it will not cost you $2000 and it will still be of a good quality.

      Similar companies in the UK such as Jigsaw and Reiss seem to be doing rather well at the moment. They fill the gap between a 15 pound jacket from Topshop that will last 1 season (if you are lucky) and the 1000 pound jacket from Burberry.

      Interestingly brands such as Reiss and Jigsaw are the brands of choice for Kate Middleton at the moment. If only we could get Kate Middleton carrying an Oroton handbag or two!

      Cheers
      Adam

  23. Grant Duggan
    :

    Not related to this post but would appreciate if someone could point me to a previous blog regarding feedback about a company code SIV silver chev.Have searched with no luck so far but if i vaguely recall there was reasons for not pursuing them further.
    Yes i have been doing some research on this company and if figures are correct a MOS is appearing.
    Would like to hear anyones thoughts on this company,that might be of benefit,and yes i have read the eureka report about them.Thanks all again for making this such a great place for quality feedback.

    • Roger Montgomery
      :

      Paul Rehill Submitted on 2011/03/23 at 12:26pm
      Last time I looked, Silver Chef had Total Debt / NPAT > 5 which rules it out as an investment for me. If the debt works well for SIV, NPAT will rise relative to debt so that at some time in the future Total Debt / NPAT < 5. At that point, I would investigate it further which may be in a few years time. You can find other stocks that have the same or greater ROE as SIV but negligible debt which makes them relatively less risky. Graeme M Submitted on 2011/02/02 at 2:10pm One company I have been looking at is Silver Chef (SIV). They providing restaurant equipment finance and catering equipment finance through the unique Rent-Try-Buy. I have them trading at a slight premium to the IV. Was wondering other thought of the business. Thanks G Thomas Lyddiard Submitted on 2010/11/25 at 6:25pm Hi Roger, I have been looking into Silver Chef (SIV), which looks very pronmising. From what I understand, it has a barriers to entry, has a good ROE and has had a steady ROE for the past few years since it was listed in 2005. It has a good positive share trend and has also just raised its earnings forecast for the financial year. The only concern I could find was that it had a very high debt -to -equity ratio, which i understand can be a two edged sword. But it has a good cash flow history that has just kept on increasing exponentially. Kind Regards Tom

      • Rici Rici
        :

        I would add to these comments that essentially SIV is a finance company, so it will have a high debt level.

        When the stock was trading at around $1.30 a couple of years ago i believed it had a significant margin of safety to compensate for the risk that it is a finance company.

        However the stock has subsequently risen significantly. I believe that there are two potential additional risks:
        (a) the founding MD has stepped asside. (For a finance company management plays an essential role (ie this is not a buffett like company whereby the product sold doesnt rely on management capability, ie its the product rather than management that is more important)
        (b) they are doing a DRP at a significant discount to the share price. Why????? I understand that they can profitably redeploy the funds from the DRP (see above post about implied interest rate charged) in a similar nature that the banks use a DRP but why the large discount. Why not just reduce the pay out ratio? could the founder (allen English) be trying to extract his money out of the business????? Relative to his holdings only a small proportion of his share holding participated in the DRP.

  24. Joe
    :

    Hi Roger and readers,

    I have a question about a stock that has been mentioned on this forum before, and has been perplexing me for the last couple of days – Infomedia (IFM).

    As far back as 2004/2005 this stock (on a metrics basis) demonstrated all the qualities outlined in Valuable – consistently high ROE, little/no debt, positive cash flow, and operating in a market niche (catologue systems for car parts) where there seems to be little competition. At the moment, according to the ‘montgomery model’, this stock seems to be trading at a large discount to IV.

    Yet the performance of this stock has been disastrous. Shareholders equity, Revenues, and all fallen considerably since 04. While there was a significant write-down in 05, I cant seem to find anything else that would account for this deterioration in shareholders equity (I have only started to trawl through the fin statements tho…)

    Is anyone here familiar with this company and their story? Can anyone explain why a company with strong ROE/cashflow/little debt could go so wrong?

    • Roger Montgomery
      :

      In 2001, Silver Chef had an intrinsic value of 69 cents. Its share price at the time was 94 cents. Since then the intrinsic value has declined to 30 cents and since 2005, intrinsic value has varied between 24 and 30 cents. Profit is basically unchanged since 2001. EPS was 4 cents in 2001, rose to 7 cents in 2004, and declined steadily until 2009 when EPS hit 3 cents and then 4 cents in 2010. Lots of great stats but not quite a Value.able business.

      • Ash Little
        :

        Hi Roger,

        Can You please confirm you are refering to Infomedia(IMF) and not Silver Chef (SIV)

        Thanks

      • Rici Rici
        :

        i’m sure Roger was refering to IMF, SIV has only been listed since 2005 odd.

    • Rici Rici
      :

      check out the correlation between IFM and the AU$/US$ over the last 10 years. Currency translation has been working against this company for 10 years running.

      Its on my watch list, but the time to strike, in my opinion, is not until the AU$ has a STRATEGIC step down, maybe after the resource boom comes to an end.

  25. nevada
    :

    Hi Roger What is your view on housing , Australia house hold debt
    mortgage stress ? effect on the banks because of their leverage to
    domestic property market .
    Delinquencies going up from what i have read .

    and housing bubble in china i have heard you talk about that and the potential effect it could have on resource sector , could be trigger for aussie housing bubble to pop .
    i am from sweden originally and find australia property market very expensive on many metrics , even if their is no bubble. i can not se any growth but negative growth below inflation for long time ahead .

    • John M
      :

      BANKS

      During the GFC the banks took a price and profitability hit, yet they have survived and recovered in price. When GFC Mark2 hits, the banks would have to substantially raise the level of bad and doubtful debts on their balance sheets which would be a blow to shareholders in the near term. However, over the long term I believe that the banks would recover just like they recovered post the GFC. While ever people on this wonderful island (I borrowed this from Roger) are paid electronically, pay their bills electronically, get home, personal, and business loans, make investments, take out superannuation products and do any other banking functions, I believe the banks would make a comeback.

      HOUSING MARKET

      The RBA has to contend with a two speed (patchwork) economy and the RBA has resumed a more normal monetary policy (raised interest rates).

      Many home buyers that took the first homebuyers grant with little deposit, and with income barely enough to just satisfy record low interest rate repayments, are suffering as the interest rates march steadily higher to tame inflation (as you mentioned, delinquencies are on the rise).

      Many households rely on two incomes to afford their mortgage repayments. You can only hope that employment stays at these extremely low levels. If too many of these dual income families start becoming single income families, then this would be the start of a wave of defaults on home loans.

      Unfortunately many homes will be worth much less than when they were purchased, and once their (the banks) house is sold, the unfortunate people that were the beneficiaries of first homebuyers grants will have to pay the piper over and over and over and over. With no house and hefty rent payments, they will be doing it tough trying to repay the loan for what is owed after selling their home-sweet-home at a loss. The banks at least get back the value of the house even if it is less than originally recorded on their books.

      VALUE INVESTING

      Whether house prices fall to match a more realistic affordability ratio or house prices stay stagnant until affordability catches up is of little consequence to value investors. The value investor can only use what is known in determining the viability of an investment. Roger’s Value.able method focuses on extraordinary businesses that have predictable earnings no matter what is happening in the local and international economies. Investing in good quality businesses de-risk the investment process by choosing businesses with low chances of failure and choosing businesses that make investment decisions that are in the benefits of shareholders.

      The Value.able method focuses on high quality businesses with great prospects. Roger also uses the super-powerful technique called Margin of Safety (MOS). The greater the MOS, the greater the risk management undertaken (remember also that Intrinsic value is an approximate range of values). Also, as an added bonus, the greater the MOS, the greater the possible investment returns. See a market downturn more of any opportunity to purchase extraordinary businesses at bargain prices.

      If Mr Market has a bad day or two, MOS might also appear for many of the extraordinary businesses that Roger has been mentioning lately. Remember that the most miserable corner of the market can be where you might pick some real gems for a bargain price if you don’t get caught up in market sentiment.

      Best of luck on your investment journey.

    • Steve I
      :

      Nevada,

      I find this whole topic very simple. It has nothing to do with unemployment, as that can be a lagging indicator, and everything to do with credit growth or contraction. Steve Keen has been speaking about this for years and describes the concept that it is the rate of change of credit growth that influences the economy.

      We have been on a credit growth cycle since 1990 starting from 20% of mortgage debt to GDP and is now just under 90%. We all know what has happened in the US and they peaked at 75% debt to GDP. When looking at the index of house prices and comparing it to mortgage debt to GDP it turns out that they are highly correlated, with house prices much more volatile. Household debt to GDP in the US has fallen only slightly and house prices are still falling even now after three years.

      Once credit growth stops expanding, the rate of change immediately has a flow through impact on housing and the rest of the economy. I think we have finally hit this point. From my own experience, not many people have substantial capacity to borrow more than they currently have. The FHOG boost during the credit crisis ‘kicked the can down the road’ and we are now down the road. Overall debt levels are now greater than in 2007/08 and the debt contraction process that started before the FHOG boost is now again happening.

      Can credit continue to grow? I don’t think so. The problem with the world at the moment is that credit has been expanding at a much faster pace than economic growth since the 70s and is completely unsustainable. Economic forces lead to this imbalance eventually being balanced. In Australia private debt has been expanding virtually at a exponential rate since the early 90s. It is not sustainable. Therefore we haven’t necessarily had a property price bubble, its mainly that we have had a debt bubble which has been directed towards property prices.

      On a side note, credit card debt is now at extreme levels. Delinquencies are up and I was surprised to see how high the latest figures are.

      We are in a position when we have more debt than ever before in a period where we have had historically low interest rates. We are heading into a global inflationary environment where interest rates will be tending upwards, unless they are artificially held down by Government (e.g. US). We also have a historically high level of mortgage participation.

      It is pretty clear to me what is going to happen over the next few years. The economy weakens as credit growth flat-lines and then contracts. This leads to higher unemployment and lower economic growth, even while interest rates rates compound the problem.

      With a (relatively) optimistic scenario, Bank earnings could be similar compared to the GFC. We didn’t really have too much economic problems through this period and personally from what I’ve seen I think things are worse now than then. If earnings are similar to the 2010 financial year, I have IV for CBA at around $31 per share. Revenue and bad & doubtful debts will be the key areas.

      With a pessimistic scenario, there is no floor (chain-reaction of events) and you are looking at the bank experience in US, UK, Ireland and so on, where the floor was Government bail-outs.

      Read:
      http://www.debtdeflation.com/blogs/2011/04/01/this-time-had-better-be-different-house-prices-and-the-banks-part-1/
      http://www.debtdeflation.com/blogs/2011/04/11/this-time-had-better-be-different-house-prices-and-the-banks-part-2/

    • matt
      :

      The RBA details the housing market as part of its twice yearly monetary policy report ; ie relative cost , the level of leverage used and the default rates. This will give you a good overview.

      Bank financial reports will also go into this. the latest CBA report states the average LVR is 45%, 70% of loans are an avg 8 payments ahead, about .1% of first time buyers loans past 30 days.

      hth

    • Ilya
      :

      Hi Guys,

      I certainly think that Australian housing market is overheated. There are however very strong differences between our situation and the US.

      Steve wrote: “We have been on a credit growth cycle since 1990 starting from 20% of mortgage debt to GDP and is now just under 90%. We all know what has happened in the US and they peaked at 75% debt to GDP”. While this is true, our housing market is very different to the US. As a whole US market is a lot more diverse, both geographically and socio-economically. I think 75% figure for US hides the reality that some of the areas were a lot more overheated than others – California, areas of East Coast and Phoenix come to minds. The problem in those areas was a lot more pronounced and they have since corrected most. Australian market is a lot more homogeneous, with a handful of capital cities account for almost 75% or population, therefore the direct comparison of percentages is misleading.

      There are also big difference is the quality of our credit compared to the US. As bad as the FHOG were we never quite plunged the depth of irresponsibility achieved over in the US. Starting with Carter successive US governments have undermined lending standards in the name of fighting discrimination. This was turbocharged under Clinton and extended further under Bush. Banks were basically forced under threat of legal action by the state to lend to people who could ill afford to pay back. This was seen as affirmative action.

      We also have never had such ridiculously low interest rates as the US. As low as our rates have been we never saw interest rates as low as 1-2%. These are actually negative interest rates given that inflation normally runs at over 2%.

      The next piece of the puzzle are ridiculous bankruptcy laws that basically allow Americans to hand over the keys to the house back to the bank and walk away. Many did.

      On top of all this US also had quasi-government enterprises like Fannie Mae and Freddy Mac underwriting poor quality credit with government guarantees (read moral hazard) while Wall Street developed instruments that separated originator of the loan from the risk of the loan (read more moral hazard).

      Given the significant differences in our domestic situation, I believe the most likely scenario for our housing market is a period of prolonged stagnation or gradual decline. The dark horse for me is the owners of investment properties. Most property investors bought property in anticipation of substantial capital gains because rental returns have not kept up with appreciating prices. They may decide to dump their investment properties to seek better returns elsewhere causing a sharp drop in prices.

  26. Ian Bowditch
    :

    David and all
    Re FGE If you are happy with your valuation of $7.50 and a MOs of 28% then its a buy. Incidently my IV is $7.45 before their last upgrade.
    Regards Ian Bowditch

    • Sue
      :

      I think FGE share price dropped recently as a result of some confusion regarding it being connected to Lynas Corporation. Lynas recently looked to enter into a transaction with “Forge” and many thought this was with Forge Group Ltd when in fact it was with Forge Resources. Many market commentators questioned whether the transaction was in the best interests of “forge” shareholders as concern was raised regarding a conflict of interest between Lynas and “forge” directors. The transaction did not proceed but Forge Group appears to have been incorrectly tainted by this issue. I still have a valuation in the vicinity of $7.50 for FGE.

      • dom connelly
        :

        Hi Sue,

        i think the worrying issue that has seen the share price of FGE suffer of late, has to do with a couple of issues in my opinion :

        1. the impending change of management / board which is looming closer and the PUT options granted to “keep them focused ” seen as a negative

        2. some people are seeing CLO involvement as not a work partnership, but a backdoor takeover attempt to gain FGE wonderful balance sheet and future contract work ssynergy.

        cheers

        dom.

      • Andrew S.
        :

        Right on, Sue – how ASX (or whoever the relevant authority is) lets a second company list as ‘Forge’, even if it is ‘Resources’ rather than ‘Group’, is beyond me. I’ve seen another ‘Matrix’, too!

  27. zoran
    :

    THAT SICKENING FEELING
    Day 1.Market down by 1.7%(my p/folio down by 2.3%)
    Day 2.Market down by 1% (my p/folio down by 1.8%)
    Day 3 market UP by 1.8% (my p/folio UP by 0.3%)

    Time to RESHUFFLE, YOU BET.!

    Cheers
    Zoran

  28. Grant W
    :

    Andrew S’s query – amendment:

    Apologies – the page reference in Value.able is 161 not 160

  29. Grant W
    :

    In regard to Andrew S’s question on ANZ: I ignore “abnormals” which happen every year. ANZ reports an “underlying” profit which adjusts for a number of items, including integration and amortisation costs in each of the last four years. If you read the paragraph in bold type on page 160 of Value.able I think this will help you.

    SGH query: your ROE number seems high to me. Last year (June 2010) the profit was $19.8m on average equity of $126m = ROE of 15.7% (I am using average equity rather than beginning equity as shares were issued during the year). SGH reported a profit of $13.33m for the half year to December 2010. Analysts’ EPS forecasts for the full year are 19.8c which equals a profit of $29.56 (issued shares 149.3m). This seems high to me but, even using this figure, I get a return of only 17.5% on average equity (there have been more shares issued this year). Using a required rate of 12% I get a value around $1.80.
    Hopes this helps

    • Andrew S.
      :

      Hi Grant and Sav,
      thanks very much – found both helpful – ‘abnormal’ clearly must mean REALLY ABNORMAL to be treated as such.
      I redid SGH, dropping the ROE to 15% but still using 11% rqd rtn and came up with a 2010 IV of $2.13, 12 cents below last Friday’s close.
      Analysts contributing to Morningstar rate Slater and Gordon as in the top 10% of value-for-price shares ie undervalued.
      The business has social kudos – via its ‘no win, no pay’ litigation option SGH will presumably represent plaintiffs with a good ’cause for action’ (personal injury) but not the funds to pursue it.
      The steadily increasing yearly profits since listing in 2007 do not suggest a high risk business.
      The second half result this year will have to even better the excellent first to achieve a ROE of 20%. The NSW and QLD law firms Slater and Gordon aquired during 2010
      should help.

  30. Sav
    :

    Hi Andrew.

    I am no expert but basically, in my view, if an “abnormal” happens more than once in a few years then it definitely ain’t that abnormal and the companies should just accept it! It’s like a farming business in Australia telling its shareholders, “we would have made a mozza this year if it wasn’t for the drought conditions, hence we are classing that as abnormal. I mean really folks, you should see our profits when there isn’t a drought. Really very very good. That’s when you should judge us”.

    Really? In Australia? Droughts abnormal? Don’t think so.

    Meteor shower destroying the crops maybe. But not droughts.

    And so it should be with ANZ. If their abormals occur reasonably regularly then it’s just a part of doing business, and they should be judged accordingly.

    As for Slater and Gordon, I wouldn’t be using a RR of 11% for them. I would use 14% or 15%, which will reduce your IV to down around 2 bucks roughly. They are a high risk business. They have no product to sell except for the CHANCE that they may win a lawsuit. The bigger the suit, especially class actions, the longer it takes to settle, the more expensive it is to prosecute, and the higher the overall risk. Their revenues will be extremely lumpy year to year. Just because this years is high doesn’t mean next years will be. Next years could very well be zero.

    Not for me I am afraid.

  31. Ken G
    :

    Hi All
    For those that have not read the book “Margin of Safety” by Seth Klarman will find it as a PDF file at the following “”
    There is only one printing and the books sell for about $700 or more. It has been scaned from a book but is still OK. Well worth reading. Hope the web address works Regards Ken G

      • Joseph Rich
        :

        Although Ken, having read the book – it is one of my all time value favourites (along with Value.able of course :) A real pity that the original 1993 edition is no longer in print (and therefore must be purchased on ebay for >$1000).

        Another great book I’d highly recommend to anyone reading this post is ‘You Can Be A Stock Market Genius’ by Joel Greenblatt (terrible title, but great book). Talks about ‘special situation’ investing, and catalysts that can cause certain stocks to become undervalued.

  32. David King
    :

    What is the current view of graduate investors in FGE. (I have some, and am holding happily for now) Roger last had its IV at $9 (up from $7.50 in late March, I don’t quite know why.) . I sstill have IV at around $7.50. It’s trading at around $5.80. Is it a buy? .Or do I need to be updated on something?

    • David V
      :

      Hi David,

      The latest new from the company was their NPAT figure. If you use this revised measure, then this should help you calculate what your forecast of IV is.

      Is it a buy? Only you can make that assessment. Read (or re-read) the book and focus on indicators that lead to a buy decision such as margin of safety; rising IV and competitive advantages. You can also take the contrarian view and read the chapter on selling. Are any of the strategies for a sell decision coming to light? Hope this helps.

      • Greg Mc
        :

        Technically it was NPBT, David which makes quite a difference. It was also 10-15% below the first half although they refer to the pcp. Perhaps there were timing issues partly to blame, but we don’t know. I note also from the presentation from Decmil that tendering for projects now is a very competitive business. Is the mining services party slowing down or getting too crowded?

        In the end, I sold mine. Why? To an extent it was to do with my view of the near term outlook for the sector and FGE’s weaker likely result for the half. But mainly I sold because I’ll be needing the money for something else fairly soon (house) and so I was inclined to take it and run at $6.40. So don’t let my personal situation steer you in one way or the other.

    • Jeff Burnett
      :

      Hello David

      Interested to know where you heard RMs IV for FGE as being $9.

      I have FGE IV as being $7.65 to $8.68. A MOS of 23% from $7.65.

      Thanks

      Jeff Burnett

      • Matt R
        :

        IS THERE A RULE OF THUMB ONE CAN USE TO CONVERT NET PROFIT BEFORE TAX, TO NPAT?

        IE REDUCE NPBT BY ~30%

        OR IS THIS TOO CRUDE?
        THANKS

    • Mark
      :

      The current share price is 5.85 and I get around 7.50ish give or take. That gives a MOS of close to 30 percent.

      That is pretty good in the current market I woud think.

      I am thinking of buying more but I got in thanks to RM at around 2dollars and then 3 dollars and still holding.

      I think the market might still go down a bit more so I am waiting til i get a MOS closer to 50 percent on anything I want to buy.

      • ken fraser
        :

        Mark and Jeff or anyone, Is this how you calculate discount to IV on Forge. $5.85 divided by $7.50 equals discount to IV of 22%. MOS calculation is it $7.50 minus $5.85 equals $1.60. Then $1.60 divided by $5.85 equals 27.35%. So discount to IV is different to margin of safety. Is this the right or wrong way to calculate or is margin of safety the same as discount to IV? Can anyone clear this up for me please?

      • ken fraser
        :

        Sorry previous comment is wrong it should be. Mark and Jeff or anyone, Is this how you calculate discount to IV on Forge. $7.50 minus $5.85 equals $1.65. Then $1.65 divided by $7.50 equals discount to IV of 22%. MOS calculation is it $7.50 minus $5.85 equals $1.65. Then $1.65 divided by $5.85 equals 28.2%. So discount to IV is different to margin of safety. Is this the right or wrong way to calculate or is margin of safety the same as discount to IV? Can anyone clear this up for me please? Thanks a lot.

      • Jeff Burnett
        :

        Hello Ken

        MOS = (IV-SP) / IV

        ie FGE as at 27.5.11

        (7.65 – 5.86) / 7.65
        = 1.79 / 7.65 = 23.40% MOS

        Hope this helps

        Jeff

      • David King
        :

        For Ken Fraser, If you know price, and MOS is 22%, then IV is say $5.85 x 100/78 . If you know IV is $7.50 and price is $5.85, and you want MOS, then MOS = $7.50-$5.85 =$1.65 divided by $7.50% =22%.

      • ken fraser
        :

        Jeff and David, Thanks a lot. I wasn`t sure when bloggers were talking about MOS and discount to IV. Some seemed to be coming up with different figures so I thought they may be talking about two different things. I now understand it that MOS and discount to IV are the same thing and the same percentage. If this is wrong let me know and don`t laugh. I know it`s simple.

    • John Watson
      :

      Hi David,

      I have a current IV for FGE of $8.40 using an 11% RR, and 35% ROE.
      My 2013 IV rises to $13.90 assuming 35% ROE; 50% POR and using Comsec’s forecasts for EPS and DPS to arrive at a 2013 BV of $2.48. I am continuing to hold FGE and the only concern I have is management’s flagging of being on the lookout for acquisitions.

      John Watson

  34. Andrew S.
    :

    Hi Roger,
    I’m looking at ANZ and wondering – do you use the Net Profit or the NP before abnormals? (ANZ seems to have ‘abnormals’ every year of the last four).
    Also SGH – I have IV over $3 – Morningstar inputs from June ’10 – eq.p.s $1.31, roe 20%, rq rtn 11%, p/out r/o 30%.The first half result this FY was 40% up on the pcp, which enabled me to feel more comfortable using the ROE of 20%. Where am I out? Thanks.

  35. fred
    :

    Hi Roger

    One of your 5 to add to our watch list is the oroton group limited ( orl ). Do you think Roger that the retail sector as a whole will also recover or just the few. example ( thorn, jbh and djs )

    Thanks always Roger

      • David V
        :

        And buffet said, “be fearful when others are greedy and greedy when others are fearful”, as long as your analysis stacks up then follow your assessment ……… I am sure most have read this before but I do own ORL shares.

    • Andrew
      :

      Doesn’t matter if the whole sector doesn’t recover. Oroton do it really well and are coming on my radar as a MOS starting to develop (too small to buy at the moment) on my 2010 and 2012 IV’s.

      We want to buy quality companys and Oroton fits that bill for me, the question now would be if i was in the market of when do i want to jump in and the answer i came up with is about at least 30% below my IV.

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