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ValueLine: Mining & Civil Australia

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ValueLine: Mining & Civil Australia

QR National has got everyone talking,  but Roger Montgomery uncovers a float that’s actually worth considering. 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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33 Comments

  1. Lloyd Taylor
    :

    Roger,

    Thanks. You’re clearly in the long term buy hold camp in these situations. For my part I took profit and sold CSL when the headwinds became apparent to me and will buy back in when the price is down, closer to my IV, which will be a swing of around twenty percent. That is what I aim to capture in my tactical approach to value investing. Off course there is the risk in this that CSL will take off.

    As for exchange rate, I don’t know where the AUD is going next, meaning in the next hour day or even week. However I do have a longer term view based on fundamentals. I always stick my neck out and back this view, which in this case is that in six months the exchange rate headwinds are unlikely to swing in CSL’s favor. However, in a twelve to twenty four month time frame the opposite will apply. In the meantime we will have CSL full year result, and all will be shock, horror because of the the current state of denial of the sell-side analysts and those who have faith in them. That will be my re-entry opportunity if my tactics go to plan.

    Regards
    Lloyd

  2. Hannah
    :

    Hi Guys,

    My partner has been advised to buy CCC shares by someone who has been investing for years. I was wondering if you could tell me what you guys think of CCC shares and if you think these would be a good investment.

    Thanks for everyones input.

  3. Lloyd Taylor
    :

    Roger,

    At the recent CSL AGM chairman Elizabeth Alexander advised that if the dollar held at the 98.4 US cent level of October 8 for the balance of the fiscal year, net profit would be “in the order of” between $880 million and $940 million down from the $980 million to $1030 million guidance (based on constant exchange rate AUD/USD $0.90) at the time of reporting the 2010 result.

    How do you take this uncertainty to account in your IV calc?

    Do you downgrade the earnings (and thus ROE) accordingly to reflect something near the worst case (as I do) or do you raise your RR, or simply look for an even greater margin of safety than usual?

    And what is your latest 2011 IV for CSL?

    I get something materially below the $31.05/share quoted in the last Value Line article when I take to account the latest guidance.

    Regards
    Lloyd

    • Roger Montgomery
      :

      Hi Lloyd,

      Have been watching with interest and will be updating the valuations again soon. Currently sitting at just over $29 and declining. We are rewarded for taking advantage of uncertainty and you can deal with it a number of ways. Perhaps surprisingly, the most elegant way is that big margin of safety in addition to contstantly refining the prospective ROEs. It doesn’t sound scientific but when you are dealing with currency prediction, nothing really is. My current estimate for CSL NPAT is $1 billion and flat compared to PCP. I am keeping ROE steady at just over 22% and I have seen several very highly successful currency traders who tell me they think the Aud could be headed back to 80 cents. Of course my ability to predict is both limited and unnecessary.

      • Lloyd Taylor
        :

        Roger,

        “….I have seen several very highly successful currency traders who tell me they think the Aud could be headed back to 80 cents.”

        I agree, but when is the issue. Another financial crisis, or China slow down seem to be the only foreseeable triggers. Both are highly probable over the extended view, but in the next sixth months the possibility looks less than bankable. So I now base the CSL IV on earnings closer to $900 million and in all probability below that.

        Alternatively, the margin of safety needs to be opened up to around twice what I normally look for.

        I prefer to key any buying decision off an IV calculated on an earnings forecast, which I have a high confidence will be met or exceeded, and a lower margin of safety, rather than the other way round.

        This approach has the added benefit in that it causes me to focus on the drivers of the business and the impact on IV, so I develop a deeper understanding of the business, rather than relying on a big margin of safety to cover for my ignorance. That said, if I can find a big margin of safety against an IV calculated with a high level of confidence, then all the better….the ideal fill your boots situation!

        Regards
        Lloyd

      • Roger Montgomery
        :

        Lloyd –

        That goes without saying. The assumptions is always that you understand the business. Recall all of my comments from earlier this year about avoiding businesses that are price takers, have no competitive advantages, commodity businesses et al. These are difficult to build any confidence around forecasts. As always thanks for those well-considered thoughts.

      • Lloyd Taylor
        :

        Roger,

        What is your Value Line strategy in situations as now experienced by CSL?

        Declining IV to the point where you entry price exceeds current IV.

        Do you hold waiting for the AUD/USD to collapse?

        Or do you sell while your ahead, given that the share price is still well ahead of the declining IV and your entry price?

        Regards
        Lloyd

      • Roger Montgomery
        :

        Hi Lloyd,

        DO you think CSL’s competitive advantage has deteriorated? Do you know where the Aussie dollar is going next? While the price is above intrinsic value this year, my current estimate is that IV will rise by 12.5% per annum on average over the next few years. Of course a larger premium to IV would have me reducing a position.

  5. Kris
    :

    Roger,

    Interesting article, i was actually looking at the IPO before i read your article. Glad to see the book is now working for me.

    The debt is a little of a concern to me, but after the listing the company will have enough money in bank to clear debt. But will be interesting to see how it is spent (future growth strategies)

    all in all i think the issue price is undervalued from IV

    my valuation for 2011 is $2.53 id be interested to see if i am close to yours.

    Many Thanks

    • Scott T
      :

      Hi Kris,

      This is exactly my valuation which is why I sent off a cheque to subscribe to the float.

      I was planning on making a profit and selling at $2.00, although as I am not a client of the Sponsoring Broker, I think I may miss out.

      Oh Well, time and patience is our friend, and other opportunities will present themselves.

      Good valuing on your part.

      Scott T

  6. ron shamgar
    :

    Question: what do Maca and Ben bernanke have in common?

    Answer: both of them will be issuing new bits of paper on Nov 3rd!

    Maca will issue 35million new bits of paper at $1 each. Their IV is around $2 depending on how optimistic you are on commodity prices.

    Ben will also be issuing (printing) up to 1trillion new bits of paper at $1 each. To calculate their IV you won’t be needing tables 11.1 and 11.2 in value.able; all you need is to take the total no. of trees on the planet and divide them by the time it takes for Ben to print them!

    Good luck with the IPO ;-)

  7. Simon
    :

    According to (name withheld): “China’s steel production will raise from circa 600mtpa to 800mtpa by 2017”. In his view this growing demand will favour FMG more than RIO and BHP in terms of growth of the share price. What I marvel is how Roger Montgomery and (name withheld) are as similar in their assessment of “Value” as Federer and Nadal are as Tennis players! Unlike (name withheld) I’m not “motivated” to speculate as to where share prices are headed (FMG $23 by 2017!) but I do value the research and leg work he does in finding out what overseas investors and markets are doing in terms of forward planning, and then reporting on them. For his +ve view on China I feel that MACA is well placed to become a IPO that raises its IV rather than drift along sideways over the new decade.

    • Roger Montgomery
      :

      Great Post Simon,

      It is useful to appreciate as you do that there are many, many ways to succeed in the market. I know of those who, for example, trade the opposite side to those institutions entering and exiting companies that join or depart the various indices and does very nicely than you very much. There’s a host of methods that work. This Insights blog is dedicated to one of those methods. Whats neat about it, is that its very simple, easy to follow by anyone and amazingly successful.

  8. fred
    :

    Hi room,

    During my research which has a long way to go I have come across TSM which without going thru the annual report looks good to me . Please do your own research on TSM and let us know.

    Thank you

    • Ashley Little
      :

      Hi fred,

      Having truoble working this one out after the capital raising?

      this years ROE likely down but not sure about after that

    • Ken G
      :

      Hi Fred

      TSM must report their full year results in Dec or Jan? The 09 report looks good if they can keep achiving that it should be handy,ROE30. Noticed friday they have moved into the UK market.They have connections with JBH, Dick Smith, Officeworks and others. They look to be turned on. Would like others views as well.I purchased some early last week, will now wait for full report.

      • Pat T
        :

        Hi Fred,

        ThinkSmart (TSM) also caught my eye early last week after a broker forecast ROE 28 – 30% for 2010-2012. TSM appears debt free and on my calculations intrinsic value is > $1.00 and rising. I bought at 0.62 and they closed at 0.70 on Friday after announcing their UK launch soon after news of that Govt’s budget cuts. What quality rating do you give TSM, Roger?

  9. Ashley Little
    :

    Hi Roger,

    Great article,

    Very good assessment.

    Do you rate it a B1 or something like that?

    My cynical mind thinks you have guaranteed a nice stag profit for anyone who can get in on the float.

    Yes it is cheap but I wont be selling my MCE to take up the offer.

    As for the cash i have i will wait for another A1 at a big discount to IV.

    Not for me, I was looking at the photos of all those large peices of equipment in the prospectus and thought “OMG hope they don’t have to replace those when the A$ is at 50c”

    Good luck to all those that invest in this one it is well priced so unless China totally tanks in the next few months you all should do very well in the short term

    Thanks again

  10. fred
    :

    Hi Roger,

    The other day you wrote that Newcrest Mining may be in for a large correction, I try not to ask a direct question but did you mean on the up side ?

    Thank’s for all your help!

    • Roger Montgomery
      :

      Hi Fred,

      As I also said in that comment, I don’t have any view on what the price of NCM will do. A strategist I correspond with suggested it. So far he’s been 100% right.

  12. James
    :

    Hi Roger,

    Are you concerned about MACA’s debt levels?
    If some of the equity raised will be used to pay off this debt, their ROE will drop and hence so does its value.

    If it is used to fund future growth, do you think the debt levels are manageable given the larger equity base?

    • Roger Montgomery
      :

      Hi James,

      Yes, I have commented about MACA’s debt in another comment. Its rare for me to suggest an IPO arbitrage between price and value and the debt means thats all it is for me.

      • Matty
        :

        Hi Roger,

        Where am I going wrong? I thought I was getting the idea of this business valuation idea and then I tried to value Worley (WOR).

        TYE 1839
        LYE 1655
        Shares 245.4
        EqPS 7.49
        NPAT 291.1
        DIV 231.7
        ROE 16.7%
        ROES 17.5%
        RR 11%
        IV 13.02

        Even accounting for 2011 earnings I get nowhere near your valuation which is north of $20. Any hints on where I am mistaken?

        Matt

      • Ashley Little
        :

        Hi Matt,

        Their is a chance that you are not getting it wrong. Remember valuations chnage and if you are comparing an old valuation of Rogers. Then this could account for a large part of the discrepency. I had WOR over $20 at one stage but it’s IV is south of that mark. now

        Hope this helps mate

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