ValueLine: Transurban
Put simply, if you want a high return on your money, Transurban probably isn’t for you. Its success hinges on revenues going up and interest rates remaining stable or declining. Rather than paying down its existing debt, Transurban persistently refinances and the amount that still needs to be re-financed before 2020 now exceeds $3.5 billion. Like airlines, investing in Transurban is unlikely to put you on the fast lane to high returns. The stock does not look cheap and in Roger Montgomery’s opinion, there are plenty of better (A1) and less risky options out there. Read Roger’s article.
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.
Gail
:
Andrew, Matthew, Rob, Peter & Ash, thankyou all for your helpful replies. I have been hard at it and already see an improvement in my ability to identify the important info. Now all I have to do is feel confident enough to act on it. Please everyone keep this blog going, its fantastic. Thank you Roger for your wonderful book.
Josey
:
Thanks Ron, I appreciate you thoughts.
ken fraser
:
Rob, Thanks, I meant RMS not the price of gold.
Josey
:
Hi All,
I’m a relative newbie and would value your thoughts on Atlas Iron. I am confused as to if Roger thinks this is a good business? I believe it is trading below its IV – what are your thoughts?
Cheers
ron shamgar
:
it looked good before they issued 250million shares to acquire giralia. i would stay away from it for the moment.
Duncan
:
Hi Folks
Monadelphous. are the figures as good as they appear to me? i am taking the pee a little as i’m so rubbish at extracting the right date for i.v especially for forecasting. Does anyone have a current and on going i.v?
thanks for the help
Dunc
DC
:
FY12e IV(f) $17.74 ish
EPS$2.0
P/O ratio 85%
ROE 60% used (published 65%)
RR 10%
$2.0 X 6.0 X 85% = $10.20
$2.0 X 25.158 X 15% = $7.54
Ron F
:
Hi Roger,
Late last year you put together a hypothetical portfolio with Peter Switzer on the Sky Business Channel
That gave me idea of constructing a hypothetical portfolio back dating it even further, not necessarily the companies you discussed with Peter. But still, the selection of stocks is from A1 Companies you had stated your IVs for them. Some of the IVs you had given us prior to the shows, but I can’t remember which ones.
The reason for only selecting stocks that you stated the IVs for is that my skills are not at level of a Graduate Investor. Actually, for every IV you have given us, I do my own IV calculations on them trying not to take a mental note of yours. Some of my calculations were within two to 5 percent of yours and others were either too high or low. Overall, I think I have been correct around 40% to 50%, so I am halfway there.
That reminds me of Bon Jovi’s rock anthem Living on a Prayer – We will give it a shot, oh we’re halfway there, oh we’re living on a prayer, take my hand and we will make it I swear, oh living on a prayer.
I went to one his recent concerts and while in the stadium I thought I was twenty years younger until I step out of it – I suppose old rockers never die they just keep stumbling along.
A little bit of trivia of Bon Jovi, he was a janitor working at a record studio, or maybe a radio station, anyway, while working he was noticed by management humming and singing to the songs being played. That launched his career. Lucky ? maybe. Whatever, he seized the opportunity and became highly successful driven by hard work and self inspiration.
The real purpose of my exercise is to illustrate you are never too old to learn value investing and that a pray-dream will come to reality without stumbling along, but only if we are self inspired and work hard to enhance our skills in value investing by meticulously studying your principles and always using them in a practical sense.
Before stating the basis of the portfolio, there are some caveats,
1. The IVs could have be higher or lower at the time of buying than when you stated them
2. You may have bought these earlier or later or not at all – Roger, that is your own private business.
The basis of the portfolio is,
1. Starting with a portfolio of $50,000 at 1st of August 2010
2. Investing the same amount for each stock – just for the purpose of the exercise to keep it simple.
3. The goal of having at least 8 stocks. This is no disrespect to Roger, given I know you have stated your average is around 2 to 4 stocks. For my own personal intention, it will be 8 stocks until I build up my skills.
4. The bought dates for the stocks is from allowing two days for analysis after the release of the FY10 annual reports for each one, but only if they were at a significant discount to the IV. or buying them when they were.
5. At all times having some reserve cash on hand. In my unqualified opinion, I think having reserve cash is important to facilitate a chance to buy a stock when it becomes available at a significant discount, rather than sell one that may only have, say, 3% MOS left with low future IV increases. If you were to sell that example one or any other, you first need to consider the government interest free loan (CGT) weighed up against the new stock’s discount to the IV and future increases and to a lessor extent Mr Market may drive the price to an acceptable premium.
The details of the stocks and results are,
Stock/Bought Date (all in 2010) /Stock increase to 18/2/11 /All Ords increase from date bought.
FGE/ 17th August / 97% /12%
MCE/ 17th August /170% /12%
ACR/ 1st September /73% /13%
ARP/ 1st September /19% /13%
NCK/ 1st September /38% /13%
MIN/ 1st September /57% /13%
DWS/ 6th December /24% /5%
Bought DWS at a discount on an adjusted IV after the downgraded profit announcement; the the discount was generated by Mr Market driving the share price down.
At the moment, according to my calculations MIN and DWS are at premium, respectively 12% and 10%, to the 2011 IV and the 2012 IV increases are below the premium for both.
Summary as at 18th February 2011
Cash on Hand $7,600
Total share return 68.7% (doesn’t include dividends and fees)
All Ords 9.6%
Total overall return including cash 60.4%
Note: Cash includes Commsec fees and interest and company dividends.
Others may have chosen fewer stocks or different ones, bought at different dates and have a higher exposure in some to others. But all of the above is just a purely hypothetical portfolio.
I enjoy watching the broadcasts of you and Peter Switzer, looking forward to watching many more and the other segments you have on other shows.
Regards
Ron F
Rob
:
Hi Roger,
Before I place an order for yet another copy of Valueable, is there any chance it will got to iBooks for viewing on the iPad. I keep lending out copies and never get them back quick enough. I won’t lend them my iPad tho’.
Regarding risk and resources. Roger’s methods of value investing abrogates risk in many different ways and leaves room for all of us to accommodate the level of risk we are comfortable with. Even between Buffet and Munger there are differences in the levels of risk they enjoy.
Some of those ways are debt levels, RR, levels of ROE, Safety margins, level of capital expenditure (eg airlines), cash flow, ROE should be rising and the no go zone of resources stocks. The one I like the best why would he want to buy the 3rd or 4th best stock in a sector when he can buy more of No.1 or 2. I like that one best because it’s just so sensible.
Anyway, back to my point. Each one of us is able to alter their own level in any one of those items to suit their level of comfort. Indeed, this is necessary, otherwise we all do the same thing and it would be so boring. We all have differing levels of understanding about various sectors of the market based on our own personal history.
Some will not entertain a resource stock at all, some will be happy with BHP, some will look at whether BHP or Rio is the better option. I haven’t yet heard of anyone knocking back MCE even though it does have some reliance on the resource sector.
I have been value investing in junior miners since 1998, I have done well and am comfortable in that sector. A caveat here! I’m not the researcher, but like all of you am responsible for the decisions I make.
Now..yes I take more risk but and this is the important part.. I use fundamentals and value invest. The story has to be good, management has to be good, I monitor the stock and I only sell if something changes.
As I read Roger’s book, especially Part One, I would repeatedly shake my head in wonder at how often his points would strike a chord with me. Anything other than using fundamental analysis to value invest is pure speculation. Using the knowledge Roger has given me I intend to strengthen my portfolio with stock other than resource ones. As to resource stocks I hold, there are some that I will hold for a good while yet.
The key I believe is finding your own level of risk and Roger’s guidelines will stand any investor in good stead.
Cheers
Rob
Andrew
:
Nice post Rob, i will put my hand up to knoocking back MCE though and it basically re-inforces your viewpoint. I won’t buy MCE as it is an industry i have absolutley no knowledge on and without that i can’t make decisions on the future or interpret their results.
We all use a very similar method but i find the suttle differences very interesting. Some put more weight on a specific set of financials, I myself weight it much towards the competitive advantage side.
Some use a 10% RR for any business that they or Roger considers an A1 where as some change it to take into account industry risks as i do. My view is that the RR is equivalent to an insurance premium. Everyone has a different amount they would like as a margin of safety. One of my fav’s is currently at a 17% discount to imy 2012 forecast but that is not enough for me.
Your exactly right, everyone needs to come up with their own style based on whats best for them and focus on that. You may lose some opportunites this way but you should not kick yourself about it as if it doesn’t fit into your strategy or criteria than you are correct in leaving it out.
it also saves a lot of time and effort as you don’t need to look at every single listed company and only those that meet your criteria, you can then learn as much as you need on those and become an expert in them so you can make even better informed choices.
Kerry P
:
Hi Guys
Think Smart (TSM) full year results presentation was out today, did anyone else notice that the share price jumped 14% today?
How far will they go in the next year or so?
They look well placed for a bull market environment.
Kerry P
:
OOps must have scrolled rite past those previous posts.
ken fraser
:
Is anyone interested in commenting on TSM. It`s full year result seems ok. I have IV around $1.10 at RR10%. I bought more today on the result.
Ash Little
:
Hi Ken,
I like TSM but I actually have declining ROE. And IV
I am just trying to get my head around the UK expansion.
If I have a light bulb moment I will let you know but at this stage I am a bit indifferent to the results.
From what I have seen they have not made the UK stuff easy to understand and that is the Key.
Plus they have a very big FX loss booked to equity that I think is likely permanent given the state of the European community
I own them so I am having a bigger look but atm the management have not made it easy.
Greg Mc
:
G’day,
If you exclude the capital raising, cashflow was zero. Sure, they’re expanding. However, they are paying a 3.5cps dividend out of their accounting profit of 6.29cps but the EPS profit figure is based on the volume weighted average of shares on issue, so their payout ratio on the final number of shares on issue is around 65% (based on EPS on the final number of shares of 5 and a bit cps. I don’t have the exact figure in front of me) which is higher than first glance. My guess is that they have tried to ‘make up’ the skipped interim div with a larger final div – which is only partially franked mind you – but if that is not the case then their dividend will be unsustainable. In any case, it seems strange to me to pay such a high final div with zero cashflow having just had a capital raising and trying to expand overseas.
While they are talking up their UK plans, they didn’t contribute much….sure it’s only a newish thing for them so maybe it will produce the goods in time. Still, even if I assume a slightly higher ROE than they had at 22.5% and a 12%RR (which I think is generous) I only get an IV of 63c. I figure it will take 2 years or more for that IV to reach the current price, and as such I have sold. FWIWWINM (for what it’s worth which is not much), I think TSM does not deserve a RR of 10%, only the creamiest of the cream deserve a 10%RR. I actually think that at least 13% should be used.
Ash can probably provide more useful input than me on TSM after a closer look – and Lloyd too perhaps.
Ash Little
:
Hi Greg Mc
Your are spot on but I am holding because the key is the UK and I am trying to dig up better data on that
Vishal Hargovan
:
Hi Roger, Ash and others,
I was a little concerned by the massive debt facility they have taken on last week. 40m GBP in a revolver and $100 in a securitisation facility. This seems like a lot of debt relative to their asset base. Am I missing something?
Regards,
Vishal
Ash Little
:
No Vishal,
You are not missing sonething
The Uk figures are the Key.
Does anyone have figures on this
Joab Soh
:
Hi Ash,
I got curious about TSM after you comments and started digging. Below are the things I have found so far:
– Europe revenue represent 35% of total revenue (per Operating Segment note in latest result). This tells me that UK is not just a growth story, a decline in that segment actually affects revenue significantly.
– I glanced through Dixon Plc interim report 2010/11 and at high level, it’s not a JBH equivalent. It’s making losses for the period; there are debt; there was an equity raising in 2009; and there are high level of goodwill. That said, I have not even step foot in UK, so I can’t comment on whether Dixon does have competitive advantage.
Will keep digging and see what else I can find. Hope I am not being too negative here since it did post a good interim result.
Ash Little
:
Hi Joab,
Negative is good,
I lived in the UK for awhile and Dixon’s were pretty big back then. The UK is a bit of a mess ATM so not really sure.
The fog will clear one day soon and the we can make a rational investment decesion.
William Gill
:
Hi Ash.
Not sure if this is what you are after.
Actual 2010$Am
Australia /NZ 11.5 change+34%
UK 5.8 change-19%
Spain 0.3
Italy (0.1)
France (0.1)
Corporate Development (2.6) +24%
Corporate Costs (1.5) +36%
EBITDA 13.3 +12%
EBITDA 2009 11.9
If you need full report contact me
Good Luck Luv your work
Gavin
:
Hi Lloyd
Not Roger, but I did notice that the management had this to say in the 4D, which may be helpful.
“The net cash flow from operating activities is typically an outflow in the first half due to the timing of receipts and payments around 30 June. The traditional May/June sales peak produces higher than normal collections pre-30 June that generate temporary cash surpluses which subsequently reverse post-30 June when the associated supplier payments occur.
In addition to the seasonality of cash flows, the temporary cash surplus at 30 June 2010 was inflated by the receipt of approximately $21million in customer prepayments prior to 30 June 2010 (reflected as movements in unearned income), contributing to the $66.8 million operating cash inflow in the second half of 2009/10 and the $64.3 million cash balance at 30 June 2010. The net operating cash outflow of $54.8 million in the current period includes the payments associated with the temporary cash surpluses at 30 June 2010.
Cash flow from investing activities was a net outflow of $3.6 million reflecting payments for property and equipment, of which $3.4 million related to the fit-out of the new Brisbane office.
Cash flow from financing activities was a net outflow of $5.1 million composed solely of dividend payments.
The key trade receivables indicator of average days’ sales outstanding (DSOS) remained ahead of target and lower than in the previous corresponding period. This result demonstrates that our additional investment to strengthen our collection resources has effectively countered the tendency for customers to extend their payment cycles in the difficult current economic environment.”
Currrent liabilities have decreased by 60.675 Million over last 6 months which supports management’s explanation.
I have watched DTL for a long time and can confirm the cyclical nature of their earnings. Reported EBITDA over the longer term (last 13 years) has been 108 Million whilst Operating Cash Flow has been 96 Million. So the profits have been more than adequately backed by cash. The extra cash is explained by the increase in “unearned income balance” over that time.
Gavin
:
oops – meant to say EBITA for last 13 years was 96 Million whilst OCF has been 108 Million.
Ash Little
:
Nice post Gavin,
Well said
Lloyd
:
Gavin,
Thnaks for the comment. Yes I was aware of the explanation in the 4D and take some comfort that the business leadership saw fit to try and explain the issues involved. More than can be said fro MCE management, who may be struggling with the transition to public ownership (see my comment on the prior post in response to Ashley). That said I am still struggling to fully understand the magnitude of the cash flow volatility in the business and the implicit business risk that this entails…. clearly not all A1’s are created equal!
Regards
Lloyd
Lloyd
:
Roger,
I’d be interested to get your take on the Data #3 Limited (DTL) Cash Flow statement for the six months to 31 Dec 2010.
It started the period with $64 million cash in the tank and ended it with $0.8 million cash due largely to -$54.7 million operating cash flow. In contrast, reported earnings rose 66% to $7.9 million.
Big swings in operating cash flow are apparent from half to half, making it tough for the non accountant to determine what the real picture is. Your thoughts on the subject would be most welcome.
Regards
Lloyd
Ash Little
:
Hi Lloyd,
I am accountant and I had trouble with this,
The large fall in cash raised an eyebrow for me.
Most of it went to reducing trade and other payables.
They do things on very low margins and have fairly big contacts so cashflow and profits will vary helps.
I think this is a good business but outrageously expensive.
Lloyd
:
Ash,
At least they tried to explain it in the 4D as noted by Gavin below.
This is more than can be said for MCE. I think the management and board of the latter have to yet come up a steep learning curve in terms of investor relations. That is the most worrying part for me in the MCE business at this time, because it is a big leap from running a private company to one that is publicly listed. The distraction and pitfalls for publicly listed management (versus that when they existed in a sheltered private entity) are large. I hope Aaron B. and co. have their antennae attuned to the requirement, resource accordingly and in doing so won’t be distracted from the main game of running the business. I have seen plenty come a cropper at this stage of business evolution!
Regards
Lloyd
Roger Montgomery
:
CFO is ex FGE. Also, met with the company this morning and very happy. Order Book:
– Quote book stated at $425m (this may be as high as $500m).
Regardless, Aaron ‘sees’ this being circa $900m in the next 6 months (65% of order book is buoyancy risers, which they aim to win 33%)
So expect order news flow soon and up until June 30 2011.
– Gulf/Deepwater Horizon has resulted in regulatory change / tightening (more frequent maintenance). Coupled with improving access to capital post GFC and age of
rigs / infrastructure, prospects strong.
– MCE have 40% market share in new builds.
Henderson:
will save on costs
Transportation alone between current sites costs $350k per month, will
rollover within march.
– Some slight cost overuns. Additional $4m.
Capital Management:
– Currently undertaking capital management review for board. Nothing
formal just yet. Modelling suggests $50m free cash flow in 2012. They
have investment opportunities for 10-20% of this cash. The balance????
Dividends, repay debt, buybacks. CFO uncertain about what will
transpire here at this stage.
– Acquistion unlikely – all of their competitors are miles behind
Henderson in terms of fitout and also efficiency. Has concerns about
just acquiring ‘intangibles’ which can just be written off later (some
bad experience with Raptor tool recent writedowns?).
Pricing Power:
They are the low cost producer. Can
go lower on tender pricing and still make an attractive margin while
other competitors are running at break even.
Ash Little
:
Hi Roger,
Not sure if it was Kath or Kim who said this but
NOICE!!!!!!!
Lloyd
:
Roger,
Thanks for sharing the results of your meeting with management. That is very Value.Able insight….. and comforting for the investor!
Regards
Lloyd
RobertD
:
Roger, thanks for the update. Really appreciated. But I do wonder how the average retail investor can get the insights into companies that knowledge is able to command due to his professional and business. Roger has managed to get a gainful insight into the business and through this gained knowledge apply it with confidence to his investing endeavours. There is nothing like speaking to the horses mouth!
Greg Mc
:
Noice indeed. Thanks for posting that, Roger.
Pity they’re going to have trouble reinvesting all that cash in the near future, assuming nothing changes. Good to see that they are not keen on acquisitions, we can only hope that the cashflow doesn’t burn a hole in their pocket.
Maybe they should just buy the block next door at Henderson and get really serious about their organic growth and production!
Pat Fitzgerald
:
Hi Roger
I would like to echo others and thank you for sharing your insights from your meeting with MCE management. I am glad I sold my ANZ shares to buy MCE.
Graeme
:
I tried find it, but could not, but when is the Henderson plant surpose to be up and running?
Thanks Graeme
Gavin
:
“have investment opportunities for 10-20% of this cash The balance????”
What does an 80 or 90% payaout ratio do for MCE’s Valua-able IV’s????
michael s
:
Hi Roger,
Thanks for the update on MCE after your meeting. Certainly sounds like the company is in a “sweet spot”. Interesting to see the points you ask them (an insight into your analysis of their business). Thanks for allowing me and others to learn from you with your track record and experience.
Regards,
Michael
Adam
:
Hi Roger,
In your post last month, “What does my 2031 crystal ball predict?”, you said you’d be putting up a blog post of all your current valuations, and quality ratings for the companies bloggers mentioned. Are you still planning on giving us your valuations of these? (Not meaning to hassle you roger, just really look forward to your blogs!!)
PS, Is there any future plans of the Montgomery Investment fund excepting investors with more modest amounts than $1M? Id’ be a very willing customer if I could afford it!
fred
:
Hi room,
Stuart Petroleum Limited ( STU ) friendly merger with Senex Energy (SXY) doesn’t seem very friendly to Stuart holders in my opinion.
Ash Little
:
Hi Fred,
Both myself and Lloyd have made comments about STU in the past.
Don’t know about the merger but STU has not been shareholder friendly in the past so it is no suprise the future is the same
Roger Montgomery
:
Not cheap. Not a merger really either. To wit “Senex will make an offer to acquire all the issued shares of Stuart (ASX:STU), with Stuart shareholders to be offered 2.5 Senex shares for every one Stuart share (the Offer). The Offer implies a value of AUD 1.1375 per Stuart share or approximately AUD 77.8 million for the whole of Stuart’s issued capital. The Offer is subject to the following key conditions: Senex obtaining a relevant interest in at least 50.1% of Stuart shares; any necessary regulatory approvals being obtained and remaining in full force and effect; no regulatory action adversely affecting the Offer, the acquisition of Stuart shares or the operation of Stuart’s business; and no Stuart prescribed occurrences, Stuart regulated events or Stuart material adverse changes occurring. Stuart and Senex have entered into a merger implementation agreement to progress the Offer. The agreement restrains Stuart from soliciting competing proposals and provides for a AUD 700,000 break fee payable to Senex in certain circumstances. There is also a AUD 500,000 reverse break fee payable to Stuart in certain circumstances.”
Lloyd
:
Very generous on the face value of the paper. But what is the Senex paper really worth? If I held STU (God forbid!) I’d take the opportunity to sell on market into the bumped price of STU….. cash is king!
Ash Little
:
Lol Lloyd,
God forbid
Lloyd
:
Thankfully he did on this one, although he has let me down on a few others!
Graeme
:
Hi all,
Look like Western Australia Newspapers (WAN) is buying Sever Media Group. I have not had a chance to go though the prospectus yet as I am at work. Will try and do some calculation tonight and try to work out if WAN is paying to much. But I was just interested in if anyone here had any thoughts on the deal?
Graeme
Andrew
:
I haven’t looked at it but i would like to hear others thoughts as well. My belief is that any acquisition or merger involving Kerry Stokes is designed to benefit one person. Seven shareholders must have a great belief in Kerry.
Got no idea if the shareholders have benefited from any of his other deals (Westrac etc).
Greg Mc
:
I’m with Andrew on this one. I prefer to stay away from Mr Stokes playthings.
Ian Bowditch
:
Hi Everyone,
For what its worth (and thats not much) I have MIN @ $10.64 .EQ $2.85, payout @37.5% ROE @ 27.5 and RR @12%. However if we go one year on ie 16 Months from now then EQ @ $3.28, Payout @ 43% ROE @ 35% and RR @ 12%. Then Iv is $16.92, which is 27% above todays price or 20% pa.
Forge is cheaper.
Regards Ian Bowditch
Gail
:
Hi all,
Not being an accountant, I have a hard time reading the fin reports. Has anyone a straight forwarward publication I could read to help simplify them.
Matthew R
:
there are a lot of resources available for free on the web
Google “interpretating financial statements” and/or replace financial statements with balance sheet/income statement/cash flow statement etc
you may also be able to pick up a high school accounting text which will provide a beginner’s introduction to financial statements
Andrew
:
I am very much in the same boat.
Value.able is the best thing i have read in regards to the cashflow statement, everything else i have picked up by myself through all sorts of different places. Just need to dig around, i actually bought a reading financial statements for dummies book but i can’t remember if i read it. I think i have since offloaded it at a market.
Once you understand what each report is trying to say then it becomes a lot easier.
The Statement of comprehensive income (otherwise known as a P&L) measures the performance of the business. Start with the sales and follow it down to see how much is left over after all the expenses are paid to see what the Net Profit is. Here you can measure the profit margins etc.
The balance sheet is a picture as to what the overall business health looks like. here you can see how much debt the company has amongst other liabilities. How geared up the business is.
The cashflow statement lets you see how the cash flows through the business. This is my weakest one and maybe accountant ash or someone else can give a better analysis of this. But to me it basically shows you how the cash (which is the lifeblood of a business) flows through the organisation. Whether the businesses operations, plant, equipment and financial obligations are able to be funded by the revenue coming in or if the company is relying on debt to keep going, whether more debt or a capital raising may be needed in the future etc. I think Roger spends a great deal of time on this.
As for reading them, i just keep practicing and put my thoughts on here, if i get it wrong someone will usually tell me and help me out. There are some great minds here who love talking about accounting practices and financial report analysis etc.
Rob
:
Hi Gail,
Roger’s book is excellent for that purpose. Read the book, follow the blogs and do the exercises using the full financials from the asx link given in one of the blogs.
It doesn’t take long and you feel more confident each time you do it. The maths is simple and it doesn’t take long to build confidence.
Cheers
Rob
Peter Kruckow
:
Hi Gail
If you type in ‘Have you done your homework?’ into the search bar just above recent posts and do the tasks on TRS set by Roger you’ll find the places in a finance report to gather all of the info you need to calculate IV. Some companies use slightly different terms in their reports but once you’ve sifted thru a few and keep reading the blog , especially entries from the guy’s who work in finance ( Ash , Greg and co) you’ll learn heaps. Sorry there’s no easy shortcut , but thats what makes it fun and rewarding. I chase cows for a living and until I found Roger , Value*Able and his blog I didn’t know a thing about this sort of stuff and if I can get a handle on it anyone can. Hope this helps
Cheers
Pete
Ash Little
:
Hi Gail,
You have received lots of good advice on how to interpret financial statements.
As usual Matt’s advice is very good.
Please don’t feel Inferior because you have no financial background as I can attest that most accountants just don’t get ROE investing.
I have been at my current job in an accounting firm for nearly 12 months and it is just now that the boffins are getting lightlulb moments about capital intensive businesses.
I spent over an hour today with a college today trying to explain how a merger with another firm would be terrible for our client. (I live in regional Qld so the figures are much smaller but the principle is the same)
Also, there is so much more to it then knowing the figures.
Competitive advantage….Future prospects etc……These are not what an accountant can tell you about.
I would like to wish you well Gail but I just know by the questions you ask that you will do well
Hope this helps
glenn matheson
:
Hi ALL
I have produced my future IV for FGE using the half yearly report.
The figures are presented for critisism (promise I wont sulk long) as I and others appear to be having problems with future IVs.
SHARES = 82.924 (from the latest 3B in announcements.
E/S = 24.64c *2=49.28c assuming continued growth rate.
NPAT= .4928 *82.924 = $40.864
DIV = 7.463 (.09 * 82.924) 9c yearly div
EQUITY = LY 93.375 + NPAT 40.864 – DIV 7.463 = EQUITY 126.776
AVE EQUITY =93.375 +126.776 divided by 2 =110.075
BV =EQUITY 126.776 /SHARE 82.924 =1.52
PO% =DIV 7.463 / NPAT 40.864 * 100 = 18.26% (18%)
ROE =NPAT 40.864 divided by AVE EQUITY 110.075 *100 =37.12%
using 12% RR and table ROE of 35%
2.917
6.867
BV 1.52 * 2.917 =4.433
BV 1.52 *6.867 = 10.437
POR 18% * 4.433 = .797
POR 82% * 10.437 =8.558
adding = $9.35 IV for 2011
I hold shares in FGE. My improvement in investing is due to the knowledge imparted by roger and the people of this site. Thank you just doesn’t seem enough.
Glenn Matheson
Ash Little
:
Hi Glenn,
You are so right………….The knowledge on this Blog is exceptional.
Re FGE i can see where you get you figures from but I have it a bit lower.
They have loads of cash ATM and I am, expecting the POR to rise a fair bit in the next few years.
RR might be a bit low as well
Just my view and I hold as well
glenn matheson
:
HI ASH
Thank you for your reply, totally agree with you. people might find a discussion point in my method of RR. Firstly I calculate a range from 10% to 14% eg.
FGE
10% RR =$12.84
11% RR = 10.88
12% RR = 9.35
13% RR = 8.15
14% RR = 7.17
As I want to buy much lower than IV and sell much higher than IV I use 12% mid RR to alert my spider senses and insert this number into my comsec custom portfolio as the buy price. Then the two colours (red or green) is an easy method of checking what is where.
Regards Glenn
Ash Little
:
Hi Glenn,
Nice range,
Not disagreeing at all,
Do you have a range where POR changes as well?
david martin
:
Hi Glen i have based my 2011 numbers on the following.
I have estimated equity to grow by the addition of estimated NPAT less anticipated dividend.
Therefore equity at Jun 2010 was circa $93 mill. ROE is around 27.5% therefore NPAT is likely to be around $25.5 million – of this around 84% is retained – $21 million – add this to equity at start of $93 million and you get around $114.
I’ve rounded this down to $110 million and with shares on issue of 82,844,012 you have equity per share of around $1.32.
My calcs assume ROE of 27.5%
Div payout ratio of 16%
Required rate of return of 10%
Estimated value in June 2011 is around $7.46
Estmated value at Jun 30 2010 was $6.07
Naturally assuming a higher requred rate the numbers change but i picked them up at $4.30 back in November so i will be keeping them for some time yet.
Regards
David
Naturally you can use any required rate.
Chris
:
Hi All,
Just trying to gauge people’s thoughts on MCE’s half yearly performance. While the comapny’s NPAT performance was fantastic, the operating cashflow deficit of $6,200,932 compared to positive of $7,381,346 for the half year ended 30th Dec 2009, which was essentially the profit for that period.
Looking at the balance sheet it appears that the $19M profit is largely caught up in Financial Assets and the reduction in Progress Claims and deposits and not sitting in the bank. This indicates to me that the company is not generating large amounts of free cash-flow which one would normally associate with an extraordinary business, and that the profit is largely creative accounting based and not cash driven.
Clearly the business is in the growth phase, but it is still something to be a little concerned about in my opinion.
john
:
Hi All
I have a valuation of ARP around $6.20 would appreciate some feed back from fellow bloggers to see if my calcs are way out …seems low to me.
Thanks
John Watson
:
Hi All,
For ARP I have a 2011 IV of $8.24 rising to $12.89 in 2013.
I have based the valuation on the 31/12/2010 NTA of $1.47 and assumed that the reported 24.79 eps for the Dec 10 half is maintained in the June 11 half.
I have assumed 35% ROE and 50% POR (ARP has a track record of paying out special dividends with the last one in Dec 09 so I am guessing that there could be another one in FY 12.
I hold shares in ARP.
Stephen
:
John,
What figures are you using?
Stephen
:
John,
I have an est 2011 IV of $8.50 based on the following figures:
Est 2011 Equity: $131,126,000.00 (Av/Eq used for calcs = $121,266,000.00)
Shares on issue: 72481302
Equity/share: $1.80
Est NPAT: $35,000,000
Est Divs: $14,620,000 (POR = 41.7%)
ROE 28%
Est 2011 IV = $8.50
I use the average ROE which is 28.36% then round down to 27.5% for calculations. I also use an RR of 10%. I believe ARP deserves an RR of 10% because of it’s steady ROE over the past 4 years and constant increase in earnings and NPAT. It is a very stable company.
I therefore believe that ARP is trading at a discount to current IV.
john
:
Hi Stephen and John,
Thanks for your help,i think my mistake was because i was using figures from commsec 6/10…and not checking up to date financials…still learning.
thanks again
John.
Slide
:
Hi Stephen
You’re I.V for ARP looks spot on to me. This company is now on the verge of a next phase of significant growth, by investing in product development -THEIR COMPETITIVE ADVANTAGE. They built up cash reserves in 2009/10 for this very purpose, and now the 2010/11 Interim Cash Flow shows this investment is now being made. No sign of growth by acquisition, just pure organic growth that we love! The markets for the company’s products are vast, I believe they already sell into 80 countries.
What I am impressed with most about ARP is the lack of fanfare from the directors. We don’t see the slick Media Presentations with the release of the results that come from virtually all companies. What we do get is a letter in the mail to us .. the shareholders. Directors have sizeable holdings, pay themselves well below market salaries, and act in shareholders’ best interests 100% of the time. Other comapnies in this category are hard to come by!
ken fraser
:
Rob and Craig, Thanks for RMS. What is your IV on it for your forcast 2011 result. I`ve looked at it quickly and it seems very underpriced to the IV. These companies are hard to value because who knows what the gold price will be in the future. It certainly seems to be underpriced at the moment.
Rob
:
Hi Ken,
I’m not ignoring your blog, I’ve been away and have a fair bit to catch up on but will post when I get the chance. BTW, I’m seriously an undergraduate so my stuff won’t be great.
In the post above, did you mean the POG is underpriced or RMS?
The POG is a story all on its own. There are so many factors that influence it, real and imaginery.
There are so many varied opinions as to why it should be higher or lower. Then there is market manipulation which may or may not be real. There’s an excellent article in a Rolling Stone back issue, by Matt Taibbi, on naked short selling that could make your head spin.
My own opinion is that gold will hold a strong price for some time. I think it was suppressed for many years and did not keep pace with inflation or the then strengthening US dollar.
Gold’s main uses are industrial, cosmetic and as a safe haven against weakening currencies, particularly the US$. It is unique in this latter regard.
As long as the US national debt is 14 trillion and growing I don’t see the US$ strengthening real soon. Obama’s recent budget aims at reducing the budget deficit by $1.1 trillion over ten years. This years fiscal budget will spike at a record $1.65 trillion deficit.
India is the world’s largest consumer of cosmetic gold and with the rapid rise of their middle class, demand is looking good.
For the short to medium term, I really don’t see a collapse in POG.
I intend to write a post on risk and resources in a post further down.
Cheers
Rob
Manny Sorbello
:
Hi All, (Transurban) Using data sourced from Commsec I get an IV of $0.0, is that close to your valuation Roger? if I am generous and use an ROE of 5% I get an IV of $1.37. Some other figures I found amusing, its PE ratio is 97, its payout ratio is 525. At current price its dividend yield is only 5% so its certainly not a dividend play either. BelloWood
Andrew
:
I get a value for Transurban of NN2V (No Need To Value).
Basically to save myself time and effort when analysing companies i have a series of steps and the valuation comes close to end. The first steps is a ROE of over 15%. So my analysis of Transurban ends pretty quickly and finds its way to the end of the queue that i can do when i am really bored.
Matthew R
:
NN2V – i like it
Ash Little
:
Lol Andrew,
You will have to be really bored to look at that one
Craig Hanson
:
(RMS) It does look like a good investment! i would also love to hear Roger your opinion on this . Has anyone else have had a look at this company ? Craig
Grant Duggan
:
If I may ask Roger, as I understand you hold AGO, would you be willing to share with us what you found to be their competitive advantage? I must confess this is an area I still struggle to dig up on most companies, but not from lack of trying and have read that chapter several times. Many thanks for all your contributions. If it was not for you I would probably still only be a couple of hundred bucks up on my boring blue chips.
Roger Montgomery
:
In Australia,
there are hardly any companies that have sustainable competitive advantages the likes of which are available overseas. What we do have are companies that have some for a short time or none at all. Commodity businesses usually have none at all. At a stretch you might say a regional monopoly and may be switching costs but thats all. They tend to be price takers generally.
ron shamgar
:
hi roger, just wondering what IV you come up with for AGO considering their new shares on issue from their recent giralia acquisition? thanks ron
Manny
:
Peter
You mentioned you own CCV. What is your IV for it? I had an IV of $0.81 going up to $0.88 based on 06/11 forecast.
It has had a mega week. Just today it has gone up by 6.5%.
I used to own it but sold it recently when it fell on high volumes from 79cents to 70cents. It has picked up again after that.
What is your IV and views on it? Comp advantage etc?
Cheers
Manny
Peter
:
Hi Manny,
I had intrinsic value around 80c (2010), closer to 90c (2011) and closer to $1 (2012). This is based on 10% RR.
On that basis, I wouldn’t buy them now (insufficient margin of safety), but I did buy them last year at 58c (30%+ MOS), so that has worked out OK, and I am happy to hold them given IV is still forecast to grow from where they are now.
In terms of my views of them as a company:
o They have a defined growth path around buying up their franchised stores, which they seem to have been able to do quite cheaply;
o Their recent performance has been good – increasing profits, slowly increasing ROE (although at around 18%, ROE is not fantastic)
o No debt, and cashed up to execute their strategy
o A big partner with a 30%+ stake
o Anecdotally, their stores appear to be keeping busy!
Peter
Peter
:
PS: RE: your comment about the recent price fluctuations …
I’m trying to get better at ignoring that sort of price movement (although I find it’s easier to do when my position is +40% and it drops to +30%, than when I am +2% and drop to -15%). Something for me to keep focusing on …
Manny
:
Thanks Peter
I agree with your competetive advantages for CCV. The only negative I can think of is probably competion from lot of on line second hand goods web sites, (ebay and others). Also potential regulation changes in terms of what they can charge for micro (small amount) loans.
Anyway I will keep an eye on this as overall I think it is a good stock to be in but maybe it needs to consolidate a bit as it has risen too quickly in the last 2-3 weeks.
Cheers
Manny
Stephen
:
I read with pleasure the other day the results of ARB (ARP) for the previous 6 months.
A 17% rise in sales and NPAT was an outstanding result for what would have to be one of the best run businesses in Australia.
The average ROE over the past 4 years has been a very respectable 28%. No wild fluctuations, just a dependable increase in all metrics including equity or share and earnings per share.
I noted in the comments there was no playing up to currency variations, just an acknowledgement of the issue, and quietly confident earnings guidance.
I also noted extra money for R & D and some reference to new product lines.
Earnings guideance is in tact and this is one company I believe deserves an RR of 10%.
I am the happy owner of ARP shares and with it still trading at a discount to its 2011 IV (my est $8.50), I think I may just buy some more.
Andrew
:
Shame I have already used up my trial subscription and I am on a tight budget as I would not have minded reading this. I frequently have some heated discussions about transurban with my dad who is a shareholder. My thoughts are that they are a high risk company and are over-burdened by debt, unwilling to just sit still and instead go off looking for another road they can buy as well as not making a profit for a large number of years. I like my companies to make a net profit, I don’t think I am too radical in my thinking here. I think having a npat is quite an important thing in business.
I have heard some people say that “the accounting doesn’t matter”. But I just can’t fathom it. I understand what they mean but it is still a business and if accounting matters for other businesses than why not this one?
Needless to say they seem to be popular because of their dividends and always seem to be mentioned as a top stock which has made me realise that in order to be classified an expert or business journo you just need to look at the dividend amount. I can see why they would be popular with pension funds, the canadians can have it. I’ll just sit back and wait for orl, rea, coh, sek, cba and wow to be affordable.
Ash Little
:
Hi Andrew,
As you know I am an Accountant but cashflow is the more important metric with Transurban.
Cashlow ATM basicly equaly divy’s but debt needs to be repaid at some stage. They hope future cashflow will be able to do this.
It is really weird and this is not in Roger’s acticle but as they have to hand back the roads at some stage the acquistion model is a way of continuing their exsistence.
Lol about heated arguements with parents..
Your Dad sounds very much like mine.
Just relax, Time will be be the best determiner of value.
Just a word of advice…..Don;t put down you dad’s stock.. Just keep telling him of the good returns that you get when investings on a ROE basis…….Eventually he will get it.
He just won’t get it if you tell him he is wrong.( It’s a pride trhing).
I know this from experence
Kent Bermingham
:
I was absolutely suprised yesterday when a well known Macquarie Bank Analyst said that BHP went down 2% after announcing a record profit because Investors were not happy with the dividend payout!
Firstly how could he call them Investors (why would someone not want to leave their hard earned in such a magnificently managed company and get this type of ROE), Secondly his career prospects must have taken a dive for making such a statement on national TV and thirdly have any graduates calculated the new IV for BHP.
Andrew
:
Us value.able followers are in the minority when it comes to our thoughts on dividends. I am sure it might have been more behind the fall than just the dividend payout but it could definitley have been a facotr. Just visit the asx on bridge street if you are in sydney and take a seat there, you will see a bunch of guys with a notepad in front of them and most have BHP written on it. It is a popular stock with retail investors who are very likely to invest based on dividends.Personally I stay away from all miners as they just seem to much of a hassle. I’m no geologist and I could not be bothered worrying about commodity prices and the aus/us$. BHP is a huge company but they are a miner so I stay away. I don’t think they are as magnificent as some and I think their management actually has some explaining to do as to the amount of money they have spent on failed acquisitions.
Clint
:
Great comment Andrew, I couldn’t agree more!
Paul Middleton
:
I’m a little frightened to calculate BHP’s intrinsic value now. I calculated I.V to be at a reasonable discount for the company on conservative estimates PRIOR to this euphoric result. I.V can only have surged higher. Yes, commodity prices are difficult to forecast, but with a large discount in the offering – it is awfully tempting to take a very meaningful position.
Peter
:
When I screen my companies, I usually filter all resource companies out. I may be at odds with much of the room, but BHP is the one resource company that I do leave in. Although they don’t have control over commodity prices and hence their revenue (and margins) are always at potentially at risk, there are a number of compelling reasons which keep me interested.
o They have demonstrated high ROE over many years;
o Their capital management approach has been good over the past decade;
o They are now net debt free;
o Their major assets have a 50+ year life (Olympic Dam; Potash; Iron Ore; Coal) and are relatively low on the cost curve
o They give some exposure to oil
o They are diversified and not hostage to a single commodity
o I have them at a discount to IV based on forecast 2011 numbers.
On the basis of this, I do have them as the only resource company in my portfolio (alongside MCE, CCV, FGE, TGA, SWL and a few others).
As always, seek and take your own advice …
Kent Bermingham
:
Thanks Peter and other repondents, You certainly don’t want to listen to the markets, prices are at a record! so are exchange rate! production and infrastructure is growing rapidly! China are raising interest rate!
Let those that want to “bury their heads in the sand” keep on digging for something else that can come even close.
D-bone
:
Hmm – if you’re valuing a mining stock how do you estimate future ROE?
Well – NPAT is driven by production volume x (commodity price – cost of producing volume Y)
To understand volumes and cost of production it helps to have a degree in geology / engineering, c.2-5 years experience in the mining industry or mining finance. Or access to someone who has this things.
To understand commodity prices you’ll need a crystal ball. Lots of people model mines with commodity prices which will become irrelevant in the near future.
Understanding book value equity requires an understanding of capex requirements which necessitates the above.
EV / Resource can show you how one the market value of resource compares to another, but you also need to understand the quality of the resource for to spot a bargain.
Rob
:
Hi D-bone,
I agree that understanding mining stocks can be daunting but I thought the same way about financials before I picked up Roger’s book.
Ramelius upgraded their estimates of gold deposits in February 2010. Their resource is high grade 21-25g/t. They have a low cost of production of $482 an ounce. They backed up their estimates with their announcements on Thursday. I’m waiting with interest on their their half yearly reports. Just as scientists are great, in biotech stocks, for researching and developing new products and drugs, geologists are great for finding stuff.
I do agree with your second “crystal ball” statement however, and this is a question to Roger…Roger because of the nature of commodities, the fact you can’t predict their prices you say you would rather own the commodity than the stock. The weakness, in say, Ramelius is, if the price ever fell towards the cost of production then it would be unviable to mine. You also say the same thing about Mr Market but it doesn’t stop you investing in good companies, with good prospects, ROEs and great management. Why wouldn’t you invest in a mining stock of the same ilk?
My point here is not to have a go at Roger. Roger’s strategy is all about abrogation of risk and as I’ve stated before in other posts, I don’t think anyone else does it anywhere near as well. Err…he’s the only one who’s prepared to share it with us, anyway.
His book and this blog has been the best education I’ve had in the past 15 years of investing in equities.
W hat makes it even better is the valuable contribution made by all the posters on this site.
Cheers
Rob
D-bone
:
RMS does look interesting.
Be aware that RMS’ resource is not all at 18g/t. Wattle Dam only makes up a small proportion of their resource, which in total grades 2g/t. Not bad for a junior underground Aussie gold play. That $480 historic cash cost might creep up when they start producing from Mt Magnet. You could argue they deserve a better EV / Resource rating, given the valuations seen in West African gold.
The reason you don’t see mining stocks discussed on this blog is because they are v.difficult to value with the ROE method. Volatile commodity prices = unpredictable future ROE – especially for single commodity producers. Given most miners are price takers – with the exception of the bulk exporters, competitive advantages have to stem through low cash costs. Scale and finding a deposit with the most economic geology are key. There are other sources of C.A.
Horses for courses.
Yes, you can get gold exposure through RMS, but you also get development, exploration, production and sovereign risk.
You may get the returns associated with those risks – which built this country and the fortunes of Lang Hancock (bless his soul), Twiggy, Tinkler, Professor Palmer inter alia. I think you might find that the risk return relationship of the majority of this site is slightly lower on the curve.
I think ROE is the best way to think about business. Mining stocks just aren’t a nail you can hit with the ROE valuation hammer.
Dan
Lloyd
:
Mark Twain – “A gold miner is a liar standing beside a hole in the ground”.
Ash Little
:
LOL Lloyd,
Had a chuckle at that one
Lloyd
:
Its too true from my bitter experience (c.f. the Bendigo Mining story – BDG)!
Rob
:
Hi Roger,
I’ve been meaning to post on Ramelius Resources (RMS) for some time now. This is the second time I’ve invested in this stock. This last time at 44c.
I’ve seen it move from exploration into a producer.
They have $86m in cash and gold.
They saw their first decent profit last year on production of 91,700oz of gold and a net profit of $20m.
They anticipate doubling production this year through Wattle Dam and Mt Magnet. This will be funded by cash flow not from reserves or borrowings.
They have no debt.
They are unusual in the mining industry, I have benefitted from two capital returns (this last one of 5c per share) since I’ve owned them. With miners you are usually putting your hand in your pocket.
They have excellent management a very low EV per ounce compared to their peers.
They have just tentatively reported a pretax profit of more than 3 times for the same period last year $47m compared to $14.3m.
When I was first going to post the were trading at a discount to IV but has moved up somewhat from there.
Have you looked at the company? I know it’s resources and wouldn’t normally get a look but have you rated it?
Cheers
Rob
P.S. Great book and fantastic blog.
Emily
:
Roger,
I missed your recent references to AGO but I see lots of posts about them. I recently brought into AGO – can you please do a quick re-cap of your comments or post a link?
Appreciated as always.
Greg W
:
Emily
Atlas have exceptional growth prospects and will increase prodution significantly over the coming years. They are debt free and have a high ROE so I expect them to perform very well.
I have conservative values based on ROE of 35% and RR of 14% at:
2011 – $4.74
2012 – $7.26
2013 – $11.03
While they are no longer at a substantial discount to 2011 valuations I am happy to keep buying them on the knowledge IV is increasing at a significant clip over coming years.
Hope this helps
John Watson
:
Hi Greg W,
Re: AGO – my valuations are somewhat lower as I assume that at some point in the future AGO will pay dividends. Using a 13% RR; 35% ROE and a conservative 40% POR I get a 2013 IV of $9.27 – still one of the best discounts to 2013 valuations in my investment grade universe.
Aaron
:
HI guys,
MCE has being doing so well ever since Roger first brought it to light.
I’m curious however he valued it at around $6 – $9 quite some time ago, has it now gone too far above its intrinisic value?
Any thoughts on what is current value able price is at?
Matthew R
:
Firstly what do you think it is worth? (include your inputs)
Ash Little
:
Hi Matt
With the new forecasts out yesterday I think it’s worth $13
Nic Arena
:
Hi Guys,
I think the new value is $12.23. Roughly in line with Ash’s value.
Peter
:
Only if profits are continually reinvested ad infinitum at high ROE. Is this realistic?
Tiago
:
Matt and Ash, what RR did you use it to arrive at that IV?
Thanks
Tiago
Ash Little
:
Hi Tiago
15% using beginning equity for ROE
Pat Fitzgerald
:
Hi Ashley
MCE’s equity has risen $24.6m in the 6 months from 30/6/2010 to 31/12/2010, and that equity is being used to increase revenue and profits, I do not understand why you use beginning equity, can you please explain.
Ash Little
:
Hi Pat,
I understand the approach to using average equity for ROE but I like using beginning equity.
If you have a mythical bank account that pays a 15% return and you have $100 in the account on 1 July 2010 you will have $115 in it on 30 June 2010. I call this a 15% return. Not a 13.95% return using average equity.
Roger gives me a C minus for my valuation process I think but it has been working a treat for me for awhile now. I am not trying to push the beginning equity argument onto other people. This is just how I do it and I don’t what anyone else to copy me. I have found it approximately right and that is the important thing. I try not to get to tied up with precision
Plus Pat I am far too lazy to change my spreadsheets.
Real value slaps you in the face and whether you have $12 or $13 on MCE. I want to buy it at $6 or $7.
Hope this helps Pat
Pat Fitzgerald
:
Thank you Ashley
I think of a business as being more like a bank account that pays interest each day and then interest on the interest etc (daily compound interest ?). I will continue using ‘average equity’ to calculate the ROE.
Roger Montgomery
:
..And thats how I explain it in Value.able. Don’t try to be too precise – thats a mistake.
Ash Little
:
Hi Peter,
They are doing all this without Henderson
So they are achieving this ROE with one hand tied behind thier back. It is a unbelieveable performance really. A fair bit of equity has been used to finance this facility.
Nothing is forever but they will do it for quite a bit longer yet.
Especially when they are can use the new facility.
Pat Fitzgerald
:
Hi Aaron
What do you think about MCE’s prospects ? Do you think its sales are decreasing ? Is it losing market share ? Will its products still be in demand over the next few years ? There are many questions we should be asking about each business we own and depending on our answers we make a decision to hold or sell. I think its IV is increasing at a good clip and there is not a better opportunity elsewhere. Some analysts have NPAT increasing by more than 30% in 2012. My IV for 2012 is above $12 but this can change depending on company guidance etc. MCE has been exceeding forecasts, hopefully this will continue.
Ash Little
:
Hi Pat,
I have had a look at the half year and can confindently say they will smash the forecasts.
This is not in my IV though.
I have been investing since the mid 1990’s and I have never seen a business in Australia with such bright prospects with such honest and competent management and still not expensive.
This is just what Warren Buffet is looking for.
I must disclose that I own MCE shares
Pat Fitzgerald
:
Hi Ashley
MCE estimates that it now supplies about 40 per cent of a global market for new build buoyancy equipment worth A$400- $500 million annually. It is rare for Australian businesses to be so dominant in a global market.
Matthew R
:
Hi Pat,
I just googled for the source of your comment and came up with this: http://www.dmp.wa.gov.au/documents/December2010_February2011.pdf
Is that the article you are referring to?
Very interesting read
Pat Fitzgerald
:
Hi Matthew R
Yes
Matthew R
:
Thank you for sharing it Pat
Ash Little
:
Hi Guys,
That is for Newbuilds,
It is estimated they have 25% of the overall Market
See below
http://www.matrixap.com.au/files/article.pdf
40% for newbuilds but 25% for overall means growing Market share to me
David Sinclair
:
Hi Pat,
Having 40% of the global market is good for their ability to maintain the high ROE but it does suggest that increases in market share will get harder to come by in future, which suggests that their rate of growth will soon be limited to the growth rate of the industry. The industry they operate in has good prospects for growth, so being limited to the growth rate of the industry is not bad but I suspect that they will soon slow from phenomenal growth to just outstanding, which should be factored into valuations.
Still a great business.
David S.
Greg W
:
Hi Aaron
MCE is a great company that is only going to get bigger and stronger in years ahead especially if oil prices continue to increase which is highly likely. The benefits to come from their new Henderson facility will be significant.
I am a little more conservative than most as I am an accountant but have IV based on updated earnings guidance of $10.92 for 2011 increasing to $14 in 2013.
I see today’s knee jerk reaction to the result as a big buying opportunity and have already topped up on my shareholding. Like most other companies that have reported, I believe the market may have been expecting a bigger dividend especially when you look at estimates provided by Comsec who suggested a dividend of $0.14 in 2011 increasing to $0.23 in 2012. The company will only pay out $0.05 dividend during 2011. I am happy for them to keep the money and reinvest it into operations when they are achieving a ROE of 35-40%. Dividends are nice but growth in EPS and corresponding growth in capital investment is far nicer.
Hope this helps.
Ash Little
:
Hi Greg W,
I Agree,
Keep the money I say.
I cant get these returns if they pay me a divy.
If henderson needs expanding in the next few years then cut the divy to Nil.
Hopefully this will tank the share price.
Aaron and Max you are very welcome to keep as big a share of my profits as you can reivest back at these great rates.
Greg Mc
:
G’day Ash,
I get the feeling that they are paying the dividend – meagre as it is – so they can be seen to be paying a dividend. Apparently it is what Australian companies are supposed to do. Companies that are increasing their profits are supposed to increase their dividend – which they also did, but by the barest amount.
There seems to be a stigma associated with not paying a dividend, people assume that the company is running out of cash and is in trouble….run for the exits! Personally, I wouldn’t mind a few people running for the exits.
Ash Little
:
Hi Greg Mc,
I Agree Entirely,
Luckily stigma don’t get a vote in Ben Grahams weighing machine
Emily
:
So you brought at $8.50? I brought originally at $5.50 and held off buying more as the price rised … Only to keep kicking myself all the while as the price continued to go up.
Greg Mc
:
Hi Emily,
If you kick yourself when you buy something and it rises 60% in 2 months, what do you do when you make a loss?! The mind boggles.
Judging from Fridays market response to the half year results there is either some ‘buy the rumour, sell the fact’ effect or some people are unsure about some aspects of the accounts, particularly with regard to the cashflow. There may be some short-term softness in the price while people try to work out what’s going on prior to next week’s conference call. Personally I will be watching closely for an opportunity. As well as clarifying the half year accounts though, the conference call may provide some guidance on the order book as well – the half year accounts were light on commentary.
Peter Kruckow
:
Hi Emily
Don’t be too hard on yourself. just remember the IV has only really risen above the current price since the half year report last week
Cheers
Pete
Emily
:
Thanks for the reality check. I actually had to top up my mce today. I couldnt help myself. Sorry Roger! Up until today I’ve actually done a good job and practiced patience for the past three months since reading your book.
Matthew R
:
I didn’t interpret the 1H report as a perfect result, but maybe I was expecting too much… the profit forecast a week or so ago was great, but the full picture in the 1H report wasn’t so pretty
Sorry to ruin the party guys :)
I think we might be better served if we started a discussion on what was wrong with the result. Remember the risks!
First of all, the -ve operating cash flow, combined with the increase in interest bearing debt and the equity raising – not a great combination. I know it is a result of Henderson, but consider there is still a fit-out of the facility to come in these six months. Therefore I don’t expect we will see much of an improvement in these figures at the end of the year.
This is a business going through a dramatic evolution and period of growth, but it isn’t without it’s risks.
Thoughts?
Invert!
Ash Little
:
Hi Matt,
The Cashflow is just a timing thing.
When you sell very expensive things the cashflow will allways look lumpy.
This is not like selling CD’s or Toothpaste.
Debt is inline with expectations. I understand the current plan is to Decommision Malaga then sell it. This will of course reduce debt or maybe used for a Henderson Expansion.
They have spent 64M on something that is earning zero. Given this fact the Balance sheet looks terrific.
Just my view
Matthew R
:
thanks Ashley, I hoped to provoke some critical discussion of the topic and you, Roger and others have provided
I focus strongly on capital preservation in my personal investment and so I critically assessed the above
you and others have provided a positive and probably correct assessment – backed up with sound reasoning
I’m not sure unless I was to believe that Matrix is having difficulty collecting on it’s debtors that I could alternatively explain the results. (note: I don’t believe that they are having difficulty)
But dissent is what I was hoping for! :) Any dissenters?
I expect more clarity will be available post-teleconference
Peter
:
I am a dissenter. The nature of the business involves lumpy and huge orders, and I suspect this underpins the current high ROE. Some posters have commented that they are doing this great results without Henderson, which is exactly what you should expect (I will be greatly concerned if it was otherwise). Historical ROE has been 7%, then 15%, then 45%. Using the IV calculations involves a postulation that principal plus profits can be reinvested ad infinitum at current ROE. The implied leverage in the calculations due to high ROE means that the IV can go up as fast as it could go down. Is this realistic, especially considering that for this to happen, you need continuing high expenditure in deepwater exploration/activities, and that such expenditure is channeled towards MCE at the expense of its competitors in Scotland, Sweden and the USA?
We should be careful of confirmatory bias. Look after the downside, the upside will take care of itself.
ron shamgar
:
this company will experience significant growth in the next couple of years, but mr market already realised it and pushed its shares higher. i have doubts whether their market will continue to grow at this rate for the foreseeable future and therefore i believe their IV will flatten.
it is my suggestion that some bloggers here should consider lightening their holdings if the price goes north of $10….
just a thought.
Ash Little
:
Hi Matt,
I agree we should allow look at both sides.
I am luckily to have a few friends who are analysts so I got the Info re the timing thing fairly early.
I must say though that my initial thoughts re cashflow were the same as yours.
Nice work Matt I love reading your posts
I still can’t get my head around a surgeon being so financially literate.
When I talk to Docs (or my ex wife who is a nurse) about ROE investing I usually get the same response that they get from me when they tell me about Knee replacement surgery….. I just have no interest in how they reattach things.
But they are equally as pasionate as I am.
I am glad you are passionate about two things.
Thanks again
Emily
:
Ok Ashley, your “homework” is to diversify your passion – paint a picture or write a poem!
P.s. This non-accountant enjoys your passion for valuing.
Ash Little
:
Ok Emily,
Do you know where I can buy paint by numbers for a Buoyancy Device?
Greg Mc
:
Yeah, Matt can really cut to the heart of the matter.
(sorry)
But in all seriousness, Matthew R, Lloyd and you, Ash, provide some of the most useful and thought provoking input from non-analysts that I’ve seen anywhere. In fact, the comments are frequently more useful than that of many analysts. Thanks chaps!
Ash Little
:
Hi Greg,
I like our comment very much, they are much appreciated.
Plus the humour.
I still think your comments re Sally selling ORL was the best,
Not exact quote but something like “Hi Roger I hope your mate Sally is renovating her house”
I still chuckling at that one
Matthew R
:
lol Greg – you should be sorry :)
I’m glad others find my out loud thinking helpful. I think I get more out of writing than others get out of reading it.
I’ve found that sometimes my brain can lazily lead me down a thought path that doesn’t actually stack up to well considered argument. Writing it out helps me move closer to a well fortified path of thought.
and I think writing a book would be the ultimate test of that!
Gavin
:
Hi Mathew.
I am not a MCE holder as I assessed it as having too much earnings risk for me. I simply don’t have the information or knowledge to be in front of publically announced earning changes. Making the decision not to invest has seemed like a mistake, so I have reviewed the earnings result to see what I could learn.
One issue I simply don’t understand in the accounts is the reduction in “Progress claims and deposits”. Balancing this item off against Inventories has given MCE a negative Inventory Value in all publically available financials until this report. This report the net figure is $14,463,646 as opposed to (16,664,321) for June 10 that’s $31 million increase in working capital funding required.
Why do MCE now have inventory for which they have made no progress claim or received a deposit? There are a lot of possible answers to this question – both bad and good. Possibly a change in mix between contract and purchase order work could have changed revenue recognition timing (with implications for reported revenue and profit numbers) or it could indicate a lull in current firm orders. (or it could be one of many different answers – I just don’t know, but I would like to know rather than have to guess if I was invested in this company)
I can see they have plenty of capacity coming on line and I can see that they are making good margins at the moment, both of these are great if the demand continues but have large negative implications if demand dips/declines. Especially as debt builds
I’m still in the same boat – To put it in Buffett’s terms – Estimating future demand for MCE’s products is outside my circle of competence. My gut wants to get me on board this one, but I just can’t get the information/understanding I need.
When is the conference call? I can’t find anything publically about it. Is it by invitation only?
Dabas
:
Roger’s webmeister:
Others have commented on this too.
Can something be done so that when one clicks on “Latest Post” it actually takes you to the latest post?
If, for example, I click on it while having the page open on the previous post, it still takes me to the previous post.
I (and others) have tried different tricks to refresh the history cache, but it just does not work.
Thanks!
Marion
:
I just use the Feed button. that shows you the latest posts and the time of posting. it will show you all the latest responses from ash and the gang with the topic they are responding to and their opening sentences. you click on the more and that takes you to that page.
cheers
Pat Fitzgerald
:
Hi Marion
For me the Feed shows the latest post but it does not show me ‘the latest responses from ash and the gang with the topic they are responding to and their opening sentences’.
I get ‘Comments (6)’ which I select to view all comments. Is there a setting I need to change to have it display the way you mention ? I use IE8.
Marion
:
Hi Pat
I use Safari and there is a RSS button in the line where you type the web address (sorry but my technical skills and vocab are limited). Not sure about IE. sorry.
Greg
:
Hi Marion,
I’ve been after a way of following the latest posts on different Blogs.
What does “use the Feed button” mean?
I see no Feed button (where is it), maybe my browser displays things differently?
Many thanks Greg
Kev Sep
:
Thanks Marion I have learnt something about my IE web browser. Has made use of the web site much easier. In the reply area what info is required for the web site input?
Marion
:
Hi Kev
sorry but I have no idea, I never use it.
ray Poole
:
I got out of Transurban a few months ago. I totally agree with you Roger. Thanks for advising MCE. I’m up 20+% in a couple of months.