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ValueLine: Your retail form guide

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ValueLine: Your retail form guide

Entrants in Australia’s retail sector range from nippy thoroughbreds to tired donkeys… Harvey Norman, Oroton, Woolworths, Myer, Coles, Noni B, Kathmandu, JB Hi-Fi, Fantastic Furniture, Nick Scali, The Reject Shop and Billabong. Roger reveals his Montgomery Quality Rating (MQR), forecast change in Value.able intrinsic value over the next twelve months and the current safety margin for these well-known Australian retailers in his latest column for Alan’s Eureka Report. Read Roger’s article at www.eurekareport.com.au.

INVEST WITH MONTGOMERY

Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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58 Comments

  1. ron shamgar
    :

    Can everyone please do me a favor and DON’T take up your vocus SPP rights.

    This way i will get my full allocation!

    Thank you in advance. :-)

    • Ash Little
      :

      LOL Ron,

      I have this in 3 accounts and will be applying for the full $45,000 and expect to get a refunded of $30,000.

      See how we go and hope I am suprised on the upside

      • Ash Little
        :

        Hi Nick,

        As usual you will probably be right.

        Again not much joy for the retail investors

      • JustinP
        :

        Hi Ash,

        Would that be like an SMSF account and something else? Just curious if it’s possible for one person to apply multiple times in SPP’s, as I’m in a lot of different stocks and have started to buy some for my SMSF account as well.

      • Ash Little
        :

        Hi Justin,

        Yes I have a SMSF and that is one of the accounts I refer to.

        You will receive the SPP for each individual HIN you have. If you have an account with say Etrade and Comsec you will have different HIN’s for the two accounts and if you hold VOC in both accounts you will get two SPPs

        I don’t have geared accounts but if you have a geared account and a non geared account with say Etrade and had VOC in both you would probably get the SPP for both as well because they would have different HINs

        I hope I have explained this OK

      • JustinP
        :

        Thanks for that Ash! I’d seen some wording in a previous SPP doc that an individual could only apply once for that SPP, but I assume from what you say that it probably depends on the company concerned. Do you know of any instances where an individual has had their funds returned when they’ve made more than one application? (I’ve got two app’s for BCC at the moment, from Etrade and CMC.)

      • Gavin
        :

        Hi Ash

        I’m pretty sure what you are proposing is not legal.

        See attached regulatory guide on SPP and the VOC offer document.

        http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/rg125a.pdf/$file/rg125a.pdf

        You can’t even have two shots via a SMSF as the trustee need to ensure that the beneficial owner is not in breach of the 15K limit.

        What’s legal and what’s possible are two different things, but be careful, by applying you are agreeing to the terms of the offer which you would be in breach of if you apply for more than 15K

      • JustinP
        :

        Well it does say ‘generally’ – I’m not sure what the exceptions might be though:

        Monetary limit
        RG 125.15 [CO 09/425] restricts the value of shares that can be issued to shareholders under our class order relief. Generally, no registered shareholder may be issued shares under the class order relief with an application price totalling more than $15,000 in any consecutive 12-month period (excluding shares applied for but not issued).
        .
        RG 125.16 Subject to particular conditions for some custodians (see RG 125.22–RG 125.25), and for applicants applying via an electronic payment facility (see RG 125.17), registered holders must certify to the issuer at the time of application that the total price does not exceed $15,000 for:
        (a) shares that are the subject of their application; and
        (b) any other shares in the class received by the shareholder under the share purchase plan or any similar arrangement in the 12 months before the application (excluding shares applied for but not issued).

    • Michael
      :

      If Vocus has the right of use until 2025, how do you factor this into the Value.able formula. I find this company difficult to value. Am I missing something?

  2. geoff
    :

    Brad,
    Table 11.2
    62.5% 27.077
    65% 29.058
    67.5% 31.101
    70% 33.204
    72.5% 35.367
    75% 37.589
    77.5% 39.869
    80% 42.207
    That is enough for you

    • JustinP
      :

      Did Roger make his increments 2.5% to save space in his book, or is there some other reason? I’ve put increments of 1% on my worksheet as well as increased the ROE numbers from 60 to 100.

  4. Michael
    :

    Has TRS been discarded as having reached maturity, or would still be purchased if the price is right?

  5. Brad
    :

    You’re going to get me arrested, Roger I’m hanging around mimco, Oroton, la senza stores!

    I might come home one day with a new handbag, bra, bracelet and heals!

    What will the wife think!!

  6. Brad
    :

    Ok Roger, I did some investigating……

    Consensus is the competitor has “lost it’s soul” so to speak – PE ownership ? Price point too high v quality

    Customers not happy with the brand always going on sale (google vogue forum)

    say it again: Gotta own businesses with superstar managers….

    • Roger Montgomery
      :

      Now you are an analyst! Part Graham and part Fisher. What you are doing now is something that benefits all investors. Going to stores, chatting to staff and customers and of course competitors, armed with the information you dig up on line, you begin to get a picture of a company’s position in its competitive landscape. Of course you must, as has been suggested here before, think about who is telling you and what their motivation or incentive might be, but it all helps.

    • Andrew
      :

      Are we talking about Mimco here?

      My fiance (who i think would be the exact target market they are after) is not a fan, her descitption is Ï just don’t get them” i.e she doesn’t understand what mimco is trying to be. Her friend has the exact same thoughts and their stores always seem to be a bit on the deserted side which leads me to believe that this is a widespread problem. Oroton definitley has the better reputation for everything including quality and most seem to think they look better as well.

      • Emily
        :

        OK, boys. After seeing posts from Brad and Andrew about Oroton and Mimco merchandise I felt it my duty to contribute before they start accessorizing. First, I am a LONG time fan of Oroton but do not own shares – but only because I am not comfortable with retail shares (yet). Now, to start, it is important that you understand that Mimco is not a competitor to Oroton. Mimco = fashion and Oroton = style and class. I have thought long and hard about Oroton’s competitive position. For the closest competition I would look off-shore to Longchamp (oh, yes the French also know about style and class). When my four year old daughter is a teenager I will take her shopping to Oroton. If Mimco still exists it will be half the price and targeting the lower end and much younger market. But will be still be second off to the likes of Witchery (fashion stores now accessorising). Oroton has a much larger target market being women.

      • Emily
        :

        P.S. Google Vogue Forum? Very funny – has anyone seen the MadMen episode where they want to come up with an advertising campaign for lipstick? They fill a room full of giggling secretaries and free lipsticks to try and all the men watch behind one way glass trying to analyze them.

      • Dan
        :

        Mark your man.

        I love mad men. Does this make you the Peggy Olson of the blog?

        In any case, I totally agree with your view of segmentation.

        I always thought Oroton = Baby Boomers / Gen Xs / (Conservative Gen Ys); and

        Mimco = Gen Ys / (Young at heart Gen Xs)

        But the Daria campaign tilted that perception slighty.

        In any case, Super Sally has positioned the brand above Mimco and below the italians. She’s very big on margins and bigger margins = bigger ROE at constant asset turnover and gearing. I think the market is pricing the ORL ex. big Asia sales growth.

        PS: I think Witchery and Mimco are actually both owned by the same PE firm. Gresham??? They should be coming to market in the near term, and I noted a “rumour” article re: ORL and Mimco…
        Super Sally has mentioned she likes brands with a history that she can take costs out of. I think she’d be after Mimco seperately, as I’m sure Witchery would be a lower ROE business than ORL, especially with a Zara entry only weeks away.

        Cheers,

        Dan

  7. Jane
    :

    Hi,
    Am new to this so please bear with me. (Thanks a lot to Andrew and Nic for their response to my question on this blog a few days back). Am having a go at applying Roger’s formula to my existing holdings and it’s producing some alarming results and I’m not sure if it’s due to poor initial purchase decision (prior to reading Valuable) or poor application of the formula (or both). Looking at Crown (CWN) tonight. I have 2010 ROE 8.5% (was negative 2009). POR ~ 100%. RROR (being generous) 12% and even calling ROE 10% for the sake of making it fit with a line in Roger’s table, I get IV of 59c? Incidentally I am using 2010 numbers just to keep things simple for now because I can’t immediately source reliable earnings estimates (if such a thing exists for this business). Where have I gone wrong? Thanks for any guidance.
    Jane

    • Roger Montgomery
      :

      Hi Jane,

      I am getting $3.26 which should give you a marker against which you can compare your work. Not a recommendation. Do your own research and seek and take personal professional advice.

      • Jane
        :

        Thanks a lot Roger and Andrew, really appreciate the help. I had another go and I had mucked up the equity per share due to an incorrect entry – this time got $4.51 dividing average of beginning and ending equity by shares on issue per annual report (3,427,817,500/758,394,000). But with an RROR of 12 and assuming a 100% payout ratio and using a multiplier of 0.68 somewhere between that shown for the 7.5% and 10% ROE lines in Roger’s table (as I had 2010 ROE at 8.5%), I got a IV of $3.07. At least closer to your numbers. I will keep practicing. Agree with your comments Andrew, the competition seems to be getting tougher, particularly at the high end.

      • Andrew
        :

        Remember Jane, the trick is to come up with a valuation you are happy with using a rational process. As you will see on this blog, very rarely do people have the exact same valuation as the others. 20 cents here and there won’t make a difference, remember big margins of safety. Thats the most important part. When you are trying to buy at a discount of about 20-30-40% then the extra 20 cents difference between yours and anothers valuation will be insignificant.

      • JustinP
        :

        My numbers are from Etrade, using RR’s of 12 and 14:

        Code: CWN
        Price: 7.88

        INPUT:
        ……….. EqPS .. Shares … DPS … EPS … RR
        2012 … 4.66 .. 758.40 … 0.370 .. 0.480 .. 12
        2011 … 4.55 .. 758.40 … 0.370 .. 0.410 .. 12
        2010 … 4.51 .. 758.40 … 0.370 .. 0.385 .. 12
        2009 … 4.53 .. 758.40

        OUTPUT:
        ………….. IV .. .. ROE . NPAT .. POR .. MOS
        2012 … 3.71 … 10 .. 364.03 .. 77% .. -112%
        2011 … 3.32 … 9 .. 310.94 .. 90% .. -138%
        2010 … 3.34 …. 9 .. 292.30 .. 96% .. -136%

        Code: CWN
        Price: 7.88

        INPUT:
        ……….. EqPS .. Shares … DPS … EPS … RR
        2012 … 4.66 .. 758.40 … 0.370 .. 0.480 .. 14
        2011 … 4.55 .. 758.40 … 0.370 .. 0.410 .. 14
        2010 … 4.51 .. 758.40 … 0.370 .. 0.385 .. 14
        2009 … 4.53 .. 758.40

        OUTPUT:
        ………….. IV .. .. ROE . NPAT .. POR .. MOS
        2012 … 3.08 … 10 .. 364.03 .. 77% .. -156%
        2011 … 2.81 … 9 .. 310.94 .. 90% .. -181%
        2010 … 2.85 …. 9 .. 292.30 .. 96% .. -176%

    • Andrew
      :

      Hi Jane,

      Disclaimer to start off with: Please do not take this as advice, i am offering you no advice and just my own thoughts. I could and are quite frequently wrong about such things so get some good advice and make any decision based on your best interests.

      Helping you out with the calculation, i get with a RR of 12% $2.80
      What equity per share figure were you using and shares on issue? I get $4.51 (3436330/758394.185)

      I also kept the POR at 100% but that wouldn’t cause such a huge discrepency so i think it might come down to something on the equity side.

      As per the company, when you think about it, Casino’s should always make money. The odds, maths and statistics are on their side. But it takes a lot of money to operate a casino with frequent large capex programs needed to stay ahead of competition. Casinos are a highly competitive industry and capital intensive industry. Also, read about Tabcorp buying some new private jets to ferry players to the casino and you can start seeing even more operating costs you might not originally think of.

      Split the industry into two markets, the local market they are a monopoly but in the premium player market they have to compete against all casinos in the world including MGM, Sands and Steve Wynn and this is where the big money and big margin potential are.

      I posted a quote on the selling MCE blog roger posted, a couple of quotes from J.Packer which i thought she dsome light on the nature of the company. One was james saying they are spending more money on capex programs than they are making in profit and they are also paying more dividends then they earn in profit. This is not sustainable to me.

      Casino’s are big cash generators but they also need a lot of cash piled into them to get them there and competition is only going to increase.

      • Andrew
        :

        Sorry when i say locally they are a monopoly i mean they don’t have other casinos in their local area apart from interstate. They still have to compete with any place that has their own poker machines (not a problem for Burswood in perth but is in Melbourne). Poker machines are a huge generator of revenue as they are the most reliable bringing in of revenue. They are less likely to have people win on them than the table games.

        If a casino was a fashion designer, the local grind market is the accessories that you grind out revenue and profit from whilst waiting for the coture business which fluctuates a great deal but has the potential to bring in the big money.

  8. Paul
    :

    Hi bloggers,

    This is way of topic as has nothing to do with the retail sector but a company called GR Engineering Services caught my eye. They are offering an additional 30 million shares at $1 each.

    I had a look at their prospectus and there seems to be a reasonable MOS at around %50. They have only been around for 5 years but the people behind the scenes have worked together for over 20 years.
    A steady increase in revenues and profits according to the prospectus over the years but I could not find any past annual reports.
    Prospectus can be found here.
    http://www.gres.com.au/sites/grescomau/assets/public/PDF/gres_prospectus.PDF

    Interested in fellow bloggers view about this company.

    Paul

      • ron shamgar
        :

        my only issue is their contracts are all expiring this year. also no escrow on shares held. could be an opportunity if u could get in pre float.

  9. Andrew
    :

    What are your thoughts on Thorn Group (TGA). I have them as being at a nice margin of safety, with some good looking and consistent ROE’s avergaing about 24%. I would be interested to hear your MQR thoughts on this company?

    Andrew

    • Michael Horn
      :

      The below TGA figures for YE 31/03/2011 and YE 31/03/2012 could be improved, because TGA should come out with the formal YE 31/03/2011 numbers soon, and provide a better basis for YE 31/03/2012 than my guesstimates below, where I guesstimated:

      31/03/11 equity by adding for H2 the increase for H1;
      31/03/12 equity by adding 50% of the estimated earnings;
      31/03/11share # by adding the performance rights # to the 30/09/11 #
      31/03/12 share # by simply adding a further 1.5 million shares
      YE 31/03/11 earnings by taken the mid point of the forecast $22M to $23M; and
      YE 31/03/12 earnings by adding $3M to YE 31/03/11 earnings,

      and I assumed the payout ratio is a consistent 50% and an RR of 10% was suitable for TGA (an A1 company), plus I arrived at the Montgomery factor for zero dividends by primative interprolation from the table on page 184 of “Valuable”.

      YE 3/2009 YE 3/2010 YE 3/2011 YE 3/2012
      Earnings YE 31/3 $12,320,000 $19,495,000 $22,500,000 $25,500,000
      Equity – start of year $66,162,000 $69,262,000 $81,767,000 $94,791,000
      Equity – end of year $69,262,000 $81,767,000 $94,791,000 $107,541,000
      Average Equity $67,712,000 $75,514,500 $88,279,000 $101,166,000
      Earnings/Av Equity 18.19% 25.82% 25.49% 25.21%
      Shares 128726000 129441000 130737000 132237000
      Av Equity per share0.5260
      0.5834
      0.6752
      0.7650
      EPS
      0.0957
      0.1506
      0.1721
      0.1928

      RR – required rate of return
      10.00%
      10.00%
      10.00%
      10.00%
      Assume Payout Ratio 50%
      50.00%
      50.00%
      50.00%
      50.00%
      Montgomery Factor if DPS=EPS
      1.8195
      2.5816
      2.5487
      2.5206
      M Factor if no dividend
      2.9447
      5.5210
      5.3929
      5.2833
      Average Factor
      2.3821
      4.0513
      3.9708
      3.9020
      IV = av factor x av equity per share
      $1.253
      $2.363
      $2.681
      $2.985

  10. Jonesy
    :

    Thanks for this article Roger and thanks also for putting us on to Eureka, I have taken out a subscription and think it represents good value for money.

    It was also quite reassuring to find that the intrinsic values i have got for companies I hold or have been looking at are in the same ballpark as your current valuations. Makes me more confident in the work I’m doing so thank you. The only one that was more than 5% out was TRS – my last valuation was about $12 but haven’t had a close look at that company for a while, I’ll stick it on my list if “To do’s”

  11. Brad voigt
    :

    Thanks for another great article was interesting to compare my valuations( using value-able method) and margins of safety with yours most were pretty close . Only problem i have is when ROE is above 60% eg. oroton you cant use table in book. Maybe thiis could be update in the next edition. An article using examples of what would be suitable RR for certain compaines would also be useful. I finallly feel after ten years of buying shares i am investing instead of speculating. Still have a lot to learn but will never be a qantas or telstra shareholder again.

    • Michael Horn
      :

      Hi Brad

      I have have on occasions engaged a plumber called Brad Voigt, so your blog posting caught my eye, particularly an earlier posting on TGA. I have been buying TGA shares for years, so I thought that I would toss in my hapence worth on TGA.

      The figures below for YE 31/03/2011 and YE 31/03/2012 could be improved when TGA comes out with the formal YE 31/03/2011 numbers soon, and the report should also provide a better basis for YE 31/03/2012 than my guesstimates below. I guesstimated:

      31/03/11 equity by adding to H2 the same increase that H1 enjoyed;
      31/03/12 equity by adding 50% of the estimated earnings (retained earnings);
      31/03/11share # by adding the performance rights # to the 30/09/11 #
      31/03/12 share # by simply adding a further 1.5 million shares
      YE 31/03/11 earnings of $22.5M by taken the mid point of the forecast $22M to $23M; and
      YE 31/03/12 earnings by adding $3M to YE 31/03/11 earnings,

      and I assumed the payout ratio is a consistent 50% and that an RR of 10% is suitable for TGA (an A1 company), plus I arrived at the Montgomery factor for zero dividends by primative interprolation from the table on page 184 of “Valuable”.

      YE 3/2009 YE 3/2010 YE 3/2011 YE 3/2012
      Earnings YE 31/3 $12,320,000 $19,495,000 $22,500,000 $25,500,000
      Equity – start of year $66,162,000 $69,262,000 $81,767,000 $94,791,000
      Equity – end of year $69,262,000 $81,767,000 $94,791,000 $107,541,000
      Average Equity $67,712,000 $75,514,500 $88,279,000 $101,166,000
      Earnings/Av Equity 18.19% 25.82% 25.49% 25.21%
      Shares 128726000 129441000 130737000 132237000
      Av Equity per share $0.5260 $0.5834 $0.6752 $0.7650
      EPS 9.57c 15.06c 17.21c 19.28c
      RR required rate of return 10.00% 10.00% 10.00% 10.00%
      Assume Payout Ratio 50% 50.00% 50.00% 50.00% 50.00%
      Roger’s factor if DPS=EPS 1.8195 2.5816 2.5487 2.5206
      Roger’s factor if no dividend 2.9447 5.5210 5.3929 5.2833
      Factor (average) 2.3821 4.0513 3.9708 3.9020
      Intrinsic value – that is:
      Factor x av equity per share $1.253 $2.363 $2.681 $2.985

      If I wanted to be less elaborate, I would simply assume that a share of this quality should have a PER comparable to similar companies (say 14.5, which is an average PER), and I would arrive at 17.21 cents x 14.5 = $2.50. TGA is better than average, which is why Roger classes it as an A1, so one could use a higher PER and get a higher value – e.g., 17.5 would give $3.01. In my view, TGA is worth somewhere between $2.50 and $3.00, which reconciles to the earlier conclusion.

      I will not buy more TGA, because I have 285,000 of them, but I am in no hurry to sell any until the price gets about $2.50, and then I may sell some to diversify into something that has a similar value proposition, because my portfolio is far too TGA heavy.

  13. Paul Kloeden
    :

    Interesting article but surely some of your Margins of Safety are wrong.

    WES – you have a MOS of 49%, yet you say it is expensive
    NBL – MOS 41% but expensive
    KMD – MOS 44% but expensive

  14. Greg Mc
    :

    G’day Roger,
    I commented last week that I thought the ORL offering would be well received in Asia, as you noted in this week’s ER contribution. Despite the somewhat less than overwhelming recent report from ORL, I still feel that this will be the case. I suppose this requires a certain amount of faith in the management, but I don’t think this is unjustified.

    I must say that my holding is ORL is somewhat smaller than some other things I own, and hasn’t changed in the last 6 months.

  15. Scott T
    :

    An excellent article, and I thank you for being so generous with all the vital details, the MQR and MOS for every stock mentioned PLUS your view on future value change.

    This information is a great start to help people do their own research and then go further and seek professional advice before making an investment decision that is appropriate to their needs.

    All the best

    Scott T

    • Kent Bermingham
      :

      Scott for those of us that don’t want or have access to Eureka can you list the companies MOS and IV please

      • Rici Rici
        :

        I think you will have to wait a while. Eureka is a subscription based site, so it has to provide content that is not available to non-subscribers otherwise nobody would subscribe to the site.
        Roger is a regular contributer to Eureka, so i think if one is seriously interested in the value line articles just take out a subscription. Just look at it as a small cost of doing business.

      • Craig
        :

        I’m guessing Scott is forking out hard earned for a subscription. Seems an unreasonable request to me.

      • Scott T
        :

        Hi Kent,

        Sorry, but I dont think that would be fair to Alan or all the other subscribers who pay for the service.

        All the best

        Scott T

      • Michael
        :

        Kent,

        Go to the Eureka Report website and sign up for a 21 day trial. You will then be able to read the article. If you like the report, you can decide to sign up, if not, it won’t cost you anything.

    • Michael
      :

      Is everyone really getting professional advice? Ask those who went to Storm Financial if advice is the way to go.

      My view is learn to do it yourself, or put your money in a bank account and leave the sharemarket alone. Then if it goes wrong, you have no-one to blame but yourself. Just my view. Of course, obtain professional advice to see if your advisor agrees with me.

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