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Value.able: The Makers

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Value.able: The Makers

Reports of the death of Australian manufacturing are greatly overstated. Roger Montgomery visits Australia’s unloved manufacturing sector and finds a group of thriving companies worth adding to your watchlist. Read Roger’s article at www.eurekareport.com.au.

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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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22 Comments

  1. Gale
    :

    Hi Roger,
    Just a quick question about interpretation. Sirtex is a share we have held for some time. It seems to be the only company to score a “N/A” against it under “IV f’cast change” in your table. Why was that?

    Regards,
    Gale

    • Roger Montgomery
      :

      I will go and have a look. If for example this years valuation is zero then any positive valuation next year would produce a nonsensical percentage change that must simply equate to N/A

  2. Jon Gosewinckel
    :

    Just wondering if a couple of companies, A2 Milk (ATM on the NZ stock exchange) and Freedom Foods (FNP), have crossed the radar of any ValueAble readers.
    In the past year a confusing (to me) share arrangement was undertaken between the two companies with Freedom Foods becoming the partner and Australian distributor of A2 Milk’s products.
    A2 Milk owns the intellectual property attached to its brand and it seems to be gaining more and more shelf space in Coles & Woolies.
    Freedom Foods has a large stable of brands in the growing health food section of supermarkets, of which A2 Milk is one.
    I’m not up to scratch with calculating IV, especially when it’s complicated by the equity arrangement between the two companies.
    However, A2 Milk does appear to be a brand on the march.
    Has anyone run the numbers on the two companies and have an opinion about which represents the better value?
    Regards…Jon

    • Andrew
      :

      I personally would not put a lot of value in a milk companys brand. My experiecne has been that milk is one area where branding has not made much traction. As much as the A2 brand has increased shelf space, how much has the coles and woolworths generic brand milk increased. The intellectual property and branding is only good if it is successful in gaining market share and being able to charge prices at increased profit margins, however in milk, the buying decision isn’t brand based but based purely on price in which case branded milk products are always undercut by the generic brands ($1.00 a litre)

      The Gruen transfer ahd a good little discussion on milk brands which i found quite interesting. Might be able to find a podcast.

      I wrote something a while back on my thoughts that when it comes to staples consumers seem very reluctant to pay more than what they need to, this sees them, as i said above, make their decision almost purely on price. Where as in the discretionary food people will buy what they want regardless of price as it is a luxury and whats the point in buying an imitation of the chocolate or soft drink you like so much just to save a few dollars and perhaps not enjoy as much.

  3. derek hall
    :

    Vocus Telecommunications (VOC) increased its profit by 80%. Are you still keen on its prospects, even though price has dropped.
    Regards Derek

  4. Brian Aitken
    :

    Hi Shane, I have MACA’s IV, based on a 12% RR @ $2.95. Anything under $2 seems to be a steal
    Regards
    Brian

  5. ken fraser
    :

    Roger, The biggest drawback to Valuable Investing is how much time it takes and not knowing what RR to use. Most people just haven`t got the time to devote to it so your A1 service should be a huge help to most of us.

  6. Shane Davis
    :

    Hi Roger

    Just wondering what you think of MACA Ltd after their recent report. I had a recent intrinsic value of about $2.70 so managed to pick some up in the recent turmoil below $2. How did the report last week look to you and its present intrinsic value ?
    Keep up the good work of educating us investors.
    Regards
    Shane

    • Ryan
      :

      Hi Roger/Shane,

      Also interested in your thoughts on MACA, Roger. Was impressed with their annual report, look to have a strong order book, although in what is becoming a competitive market. Picked some up recentlly at around $2 and have an IV around $3.

      Thanks

      Ryan

  7. Lloyd
    :

    Roger,

    In the article you refer to the decision to take profits and divest of ZGL from the Value.able portfolio with the justification that:

    “For an insight as to why, the accompanying chart of the share price plotted against my estimate of its current and projected intrinsic value offers an explanation. You can see that Zicom Group rallied substantially earlier this year. However, using more conservative assumptions following feedback from my contacts that business in Singapore is slowing, it became apparent that the price was above forecast valuations for 2013, which is one of my five rules for selling.”

    Based on the graph of share price/IV presented in the article such a price to IV disparity no longer appears to be the case. Is this interpretation of the graph correct? Also I assume the forecast IV plotted represents that post the 2011 results announcement. Can you confirm this?

    Secondly, can you clarify the position and rationale for continuing to hold COH in the Value.able portfolio?

    COH has traded well above the two year forward IV throughout most of the time that you have published the Value.able portfolio, but has not been subject to profit taking like ZGL.

    My 2013 IV estimate for COH is around $67 (10% RR), so that the same price/IV relativity that held for ZGL at the time of profit taking appears to apply for ZGL.

    As a result, I seek to understand the rationale for holding, rather than taking profits on COH at any stage in the few years it has been in the portfolio, during which time it has consistently traded above two year forward IV.

    Thanks in advance for the insights.

    Regards
    Lloyd

      • John C
        :

        Hi Roger, In your Eureka Report chart of the “Makers”, you’ve got ZGL’s IV listed as 59 cents now. Could you tell me if that’s post their latest financial report?

        I bought some more on Thursday at 35 cents, after going through their report, and I’m pretty comfortable with that decision, so far.

        I understand that COH has proven over the years to be of very high quality, so you would be more likely to hold on to a company that had a proven record over time, than a company like ZGL with less years under their belt. I’m guessing that you’d regard COH’s own competitive advantages to be more compelling than Zicom’s also, which also feeds into the quality of the respective companies. Probably plenty more factors also.

        However, that suggests that your five rules for selling may not be absolute, and there’s a little wriggle room for companies of the highest quality?

        Still, Zicom, a B2 with an IV of 59c, an ROE of around 20%, and IV forecast to increase by 17%, with a Friday closing price of 32c. Are you tempted to buy back into the stock Roger? It’s at a pretty decent discount! It’s almost down to 50% of your current IV, and is less than 50% of your forecast IV.

        I understand about the report of slowing in Singapore, but maybe that will prove to be temporary. Zicom’s outlook statement is positive, they have disclosed details of a healthy current order book, and their latest results seem very positive… They might not be up in the same league as COH, but they’re cheap, and COH is not.

        I’m looking for a reason not to buy Zicom, but struggling to find one.

      • Roger Montgomery
        :

        Hi John, yes it’s our estimate ‘post results’. As you know there are no recommendations here. Yes we are tempted but we are tempted by many companies at present. ZGL ticks lots of boxes but maybe not all. As I write that I winder when has an opportunity ever ticked every box? Maybe once every few years.

      • John C
        :

        Thanks Roger. I note that one of ZGL’s directors is buying stock again – although it appears only to maintain his 30% stake in the company.

        Their latest presentation (released yesterday) is interesting too. Perhaps a relatively flat year this year, and a few better years to come? It sounds like the softness in the offshore oil & gas industry (due to slow engineering approvals, long lead times, etc, after the big oil spill last year) is not just affecting MCE. ZGL, however, thankfully, is a much more diversified company than MCE, so their income is not as dependent on a single industry or sector.

        I’m happy to continue to hold ZGL, and will keep looking for further opportunities to buy more on share price drops.

        I particularly like ZGL’s continued efforts to innovate and introduce new products with discruptive technologies into various markets. The fact that these new endeavours are largely self-funded from free cash flow (with very low debt) is a real plus.

      • Roger Montgomery
        :

        Hi John,

        We spoke with an analyst who had a one on one session with the company yesterday. We are now checking the veracity of what he said, namely big orders for deep sea drill rigs…

      • John C
        :

        Thanks Roger. I’m still accumulating ZGL based on their c.50%+ discount to IV. Anything further on the big orders (for deep sea drill rigs) report?

      • John C
        :

        Hello again Roger. Just reading through ZGL’s annual report released Friday (yesterday) – nothing too bad there – order book at June 30 2011 slightly down on June 30th 2010, but otherwise I’m encouraged. They are unlikely to release order book or new order details to the market as a seperate announcement (based on their past announcment history) unless the new order is massive, so if you do hear anything further yourself, and wish to share, that would be much appreciated. Cheers.

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