What are you cooking up Roger and team?
I am working tirelessly to generate superior returns for the Montgomery [Private] Fund. That is the number #1 goal. But stay tuned, because I am also writing a post for next week that will list some of the companies you should be seriously watching this reporting season (and there may be a few gems). Stay tuned and keep checking in.
Today’s earlier post (What if the sell off is just a Flash?) lists some out-of-favour A1 companies.
If you have a company that you believe investors should be watching this reporting season, please start posting them here. Check in next week to see if they’re on our list too.
Posted by Roger Montgomery and his A1 team, fund managers and creators of the next-generation A1 service for stock market investors, 23 June 2011.
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.
Darrel
:
Following are my calculations for TGA for 2012, based on a required return of 10%:
ROE M1 M2 POR EPS IV Last Sal
25.6 $1.02 $2.29 52% $0.85 $3.31 $1.925
I find the ‘Company Wrap’ via Commsec a valuable tool for my calcs.
With long term debt $M36 (38% of equity) before the capital raising of $M30. TGA appears a sound investment. Comments please.
Brad
:
For the AIR followers,I’m looking past the solar pv business to the solar hot heaters and kitchen / bathroom accessories distribution business
Well run importer / distributer with good stock control and new MD ex davids should see roe’s of > 25% @ 60% POR
No broker covers this stock that I’m aware of although one is close to the co with a good understanding of the business model
Mark
:
AIR has me thinking as well.
You can’t ignore the solar business; it represents about 75% of their revenues!
I’ve read numerous articles stating that these solar panels can’t be ordered in and installed fast enough right now through Q3/4, with the July one rebate going down.
I personally think this will heavily impact the businesses who’s only operations is buy and install, yet AIR only imports the things with demand and flicks off to builders and retailers cheaper than anyone else. AIR has very small stay in business costs, nearly no fixed assets, but instead great supplier agreements and a price advantage in the industry. Once demand for these falls, I can see some of these businesses riding the boom fall over with AIR picking up a significant chunk of the remaining demand.
AIR has used this solar boom period to add attachment products which relate to Solar. These are growing significantly and see no reason why they won’t continue to do so. I don’t think they will offset the reduced demand for solar in the short term, but could easily in the long term. The other thing to note here is, AIR don’t need to understand these products to well, AIR is in the business of importing/supplier, in years to come they have potential to tack on all sorts of items which would really drive that scale.
Anyhow, AIR doesn’t need to continually grow its sales at its current rate to justify an attractive valuation. Isn’t it operating at an ROE in the 40% range?
Very good value, but probably not high on RM’s quality rating. This FY result will be big, I have no doubt we will see a dividend increase, dividends will always be high in this company which has no capital investment. For those same reasons, they have a weak competitive advantage.
RM – if you still read these old blogs, please add your AIR valuation to your year end lists.
Cheers
Roger Montgomery
:
Thanks Mark. WIll put AIR down.
Ryan
:
Hi All,
Based on the great information in this blog and assessing companies based on their strategy, competitive advantage and finally value I have identified a number of companies I am interested in adding to my portfolio which are ANZ, JBH, MCE, CCP, and ZGL. I currently have an index fund and some direct shares including WBC, BHP, FGE, REA, CCV, DCG, DTL, and EZL but having gained confidence from Rogers book and the shared views of people in this blog I have decided to liquidate my index fund and invest directly.
While I like the banks (particularly ANZ’s expansion into institutional banking in Asia) with their competitive advantage within the Australian sector, their low valuations and the large franked dividends I would like to ask a question about an area of a concern I have with the banks.
With property prices still experiencing some declines and the prospect of future rate rises and cost of living pressures the increase in mortgage defaults is likely to continue in my opinion. Banks and finance journalists argue that this isn’t an issue for a variety of reasons, one of them being lenders insurance. I did some quick research on lenders insurance and found that there are two big players, QBE and Genworth, but that Westpac, CBA and ANZ also have their own lenders insurance. Having read about the mortgage crisis in the US this makes me question whether the Australian banks really do have any protection against mortgage defaults or whether they have just been using the fees from lenders insurance to increase their profits while keeping the risk of the loans on their own books, albeit it hidden away in some subsidiary.
Can anyone offer some insight on this concern and explain which companies will suffer in the case of high mortgage defaults?
Thanks
Ryan
Ash Little
:
Hey Ryan nice post This is notno mortgage default but my current thoughts and I could be very wrong but I would not buy a bank at the moment.
Just rough figures but the banks return over 10 or 20 years pre GFC was around 10% including divy.
The problem I have is that during that time credit growth was far far above the GDP growth of the Australian economy.
Actually when you think about it ………………..Given the credit growth and the increase in fees the Australia Banks actually did very badly. A perfect storm and 10% return
Smarter people than me may shout me down in flames but I personally think that credit over the long run can’t grow by more than the GDP of a country (Lots of people thought it was different this time pre 2007 but less are saying this now)
The result of this is that in my view over time the best you can get from our local banks is GDP growth (2-4%) plus a nice divy.
That is the best.
If credit growth goes negative then it all goes horribly wrong. Given the savings rates and lack of willingness to lend to small business it look very much like credit growth will be negative to GDP going forward in my view.
I can see why Roger is investing in ANZ (an A3) as opposed to WBC (an A1) because ANZ is more leveraged to Asia and this will reduce the negative credit growth problems that may occur in Australia.
Banks are no no no for me
ron shamgar
:
i totally agree Ash. the banks are not getting my money!
Rici Rici
:
Smarter people than me may shout me down in flames but I personally think that credit over the long run can’t grow by more than the GDP of a country (Lots of people thought it was different this time pre 2007 but less are saying this now)
I would add inflation, so in the long run it should correlate to GDP+ rate of inflation.
However i would add a further word of caution, its dangerous to use GDP + rate of inflation after 15years of great credit growth. It might be prudent to consider a period of sub GDP+inflation credit growth to restore long term equilibrium (or return to the long term mean).
On the positive side, given their barriers to entry, the bank majors could still generate reasonable returns if they can increase profits through cutting costs.
Lloyd
:
What I am watching. Plus the day (prelim report due) I will watch a little more closely than usual:
ARP 17-Aug
BHP 24-Aug
BKL 18-Aug
CCP 16-Aug
CMI 24-Aug
COH 9-Aug
CPU 10-Aug
CRZ 17-Aug
CSL 17-Aug
CSV 16-Aug
DCG 25-Aug
DTL 22-Aug
DWS 15-Aug
FGE 16-Aug
IRE 24-Aug
JBH 8-Aug
LYL 22-Aug
MCE 8-Aug
MLC 31-Aug
MND 16-Aug
MNF 23-Aug
MTU 29-Aug
ORL 23-Sep
PTM 18-Aug
REA 18-Aug
REH 29-Aug
SEK 23-Aug
SWL 23-Aug
VOC 29-Aug
WPL 17-Aug
WTF 24-Aug
ZGL 29-Aug
Ash Little
:
Thanks Lloyd
Nice list BTW
Stephen
:
Thanks for putting in the time to put that together Lloyd.
Stephen
Ron F
:
Hi Lloyd,
Thanks for your effort compiling the list.
I found dates for some other Companies on the list Roger posted 1st of July
ACR 26-Aug
ANZ 3-Nov
CBA 10-Aug
CCV 16-Aug
FMG 19-Aug
WBC 2-Nov
WOW 5-Aug
For the remaining Companies on on his list, the date is not stated on their web sites. The companies are,
ANG BGL CAB CST FLT HSN MGX MLD MML NVT RKN TGA TRS TSM
Regards
Ron F
Roger Montgomery
:
This a good list and it will be useful for all readers of the blog to see it grow. If you have any additions go right ahead and post them here.
Lloyd
:
Quick tip for those with E*Trade access:
Open the “Quotes and Research” tab… then down the page find and open the “Market Calendar” tab.
Here you will find scheduled reporting and announcement dates; dividend dates, etc. You can either scan this through jumble for the stock specific event data (e.g. prelim report), or better still enter into the search box the stock code for which you are seeking info, and the month in question, and the search will pull up all scheduled events for that company in that month.
No need to visit a plethora of company websites. Do it all from one page!
Craig B
:
Lloyd,
I hadn’t seen this post before now. I rang Forge last week to ask the question and Peter Hutchison kindly emailed me back later with the 17th to 19th as possible dates.
UXC announced today that the 26th of August is their reporting date.
regards
Prasad
:
Hi Roger,
Could you please write something on US company valuations and cover where to get data from as well. Looked at Google Finance, but they did not have everything I wanted, appears EPS is called Book Value (BVPS), or correct me if I am wrong
Thanks
Prasad
Roger Montgomery
:
All coming soon Prasad.
Andrew
:
Hi Prasad,
I assume you mean forecast valautions. I have only performed valuations on the annual reports of 3 US companys. had trouble finding information let alone accurate sounding information to do forecast valuations.
As for you EPS is Book value. I am not sure, book value per share to me sounds more like it could be the EQPS figure we use. Perhaps look for forecast profit and then divide by # of shares.
Phil Crossan
:
I haven’t started seriously on US companys yet, but I find that the Nasdaq site has pretty good information stored including financials for the last few years and so on. This applies even if the compnay is a NYSE listed company, like Coca Cola. Way better than our ASX site in my opinion.
Darrel
:
Finishing my blog:-
Share ROE M1 M2 POR EPS VI Last Sale
FPS 27% 0.89 0.79 70% 0.51 $1.68 $1.34
NCK 45% 0.90 1.55 66% 0.305 $2.45 $1.70
ORL 70% 5.34 3.20 86% 0.795 $8.54 $7.70
I’d be most interested in comments on the accuracy of my calc’s.
Cheers,
Darrel
Andrew
:
Hi Darrel,
Without wanting to get to stuck into the detail of differences between everyones calcs, you are on the right track from what i can see. Without knowing the required return you are using and the year you are calculating for in your calculations it is hard to tell
Your ORL one looks pretty close to ones i have had rpeviously and have seen elsewhere. My one currently is a bit lower but i increased the required return a while ago which made it a bit lower.
Craig B
:
Hi Darrel,
I think your Nick Scali IV is too high. I use a higher payout ratio of 80%, as that’s more like the norm for them, and I also use 55% ROE. I value them at $1.76 for a 12% required return.
With Silver Chef I used the starting equity and a ROE of 25% to get $3.04 for a 12% RR.
And again with Fiducian I have them at a lower IV of $1.17 for a 12% RR, but I only used a 22.5% RR.
So my valuations come in under yours a little.
Thanks for introducing Fiducian and Silver Chef. Although I’m sure they’ve been mentioned previously I hadn’t taken much notice until this exercise.
regards
Darrel
:
I am a recent 78 yo graduate with a pension from a SMSFwho has had trouble sumitting a blog; OK now (I hope!). We only invest in shares with a minimum F/F yield of 4% and the prospect of protecting our capital. Shares that I am currently watching on which I have calculated IV’s for 2011 are:-
SHARE ROE M1 M2 POR EPS IV LAST SALE
SIV 19% $1.71 $1.68 64% $1.34 $3.39 $3.46
FPS 27% $0.89 $0.79
Roger Montgomery
:
Well Done Darrel, it worked and welcome to the blog community! Delighted to have been the first to welcome you. I am glad to see SIV pop up and its certainly a company worth discussing. Regarding your minimum 4% FF yield, I have no problem including it in your tool kit as long as its not the first and last thing. At much higher prices than now, TLS has offered such a yield as has Qantas.
Macca
:
Hi Darrel I’m n a SMSF and being in the pension phase pay no tax
One point IN MANY you may need to consider
Over 5 years SIV has grown from a 25M cap to 80m Share price is up as well
FPS is still at 20m cap with share price about the same
I”m n a bit slow in some areas whats M1 & M2 stand for
Best regards
Macca
Ann
:
Cant do any worse then my pathetic fund managers
Grant Duggan
:
Hi Roger,Darren re NOE i looked at this one some time ago, and as i have no idea how to find old posts sorry i cant point you in the right direction. I have recently looked again at them and at first glance 70% debt/equity seems a bit high. I do like the business they are in and believe they have potential,just how easy it is for someone to copy what they do i am not so sure as it appears to be a fairly costly setup.
Not sure if i have my figures correct but i have them close to 60cents,but if memory serves Ash,Jonesy and maybe Ron gave some feedback on them and were waiting on the next annual report before taking them any further.
By the way Roger any chance of giving us a ball park on when we can expect our 2nd most Value Able gift.Thanks for everything so far it has been a joy and new hobbie for me.
Roger Montgomery
:
Hi Grant,
The timing is Classified! Embargoed! TOP SECRET! Can’t tell you but stay tuned. I do think it will take the podium as the new MOST Value.able offer. I am delighted to hear how much you are enjoying the journey so far.
Rob
:
Hi Grant,
You just do a search in your favourite search engine like this
noe site:http://rogermontgomery.com
and it finds three links and to save you the time here is the first one
http://rogermontgomery.com/who-makes-your-a1a2-small-cap-list/
When you click on the link, search the page in your browser for “NOE” and it will take you straight there. The first link has a couple of different mentions.
Grant, if you want to do this to find other posts just substitute NOE for what you want to search eg “Ash site:http://rogermontgomery.com” will give you all of Ash’s posts.
Cheers
Rob
Rob
:
Grant,
I originally put in all three links but Roger’s site said I was spamming. I guess because of the number of links ‘cos I took the word Google out and it wasn’t that.
Cheers
Rob
Mike Mennell
:
Hi Roger
I am mainly a top-down analyst but in these fragile times i am paying more attention to company financials. I also feel that growth is not everything, and have mainly selected stocks with reasonable/strong dividend stream which i feel is sustainable.
IMD – Growing top and bottom lines along with ability toincrease margins due to weak competition. In the right sector e.g. mining services.
WOW – Under $27 still a buy. Has pricing power along with dominant position in retail.
ASL – Has debt but strong cashflow allows me to include company. Has expanded rapidly both organically and by aquisition. Recent boom in drilling allows ASL to increase margins.
DTL – Bit expensive but fanatstic IT company. Buy below $11.60 if it ever gets there.
DWS – IT company with excellent ffr dividends. It making gains into banks and government sectors, both of which have antiquated IT systems and deep pockets.
ZGL – Roger alerted me to this excellent small industrial. At 50c still good value imo.
CPB – Doing everthing right but mkt well aware of this. If it falls below $38 I’ll be buying.
RQL – Coal mines still have water problems. Not likely to pay a dividend until FY`12, but has excellent macro along with weak competitors.
MML – Had to include at least one gold miner. Has fallen recently and good buying below $6.50.
Good hunting and look fwd to Roger’s list.
Roger Montgomery
:
Hi Mike,
Thank you for sharing your list of stocks to watch. Guys, just a general comment and abservation; Please remember – as I have said previously – I may change my mind on any stock at any time and I am under obligation to keep anyone updated about this. DTL is an example of such a situation in the past. Also keep in mind, that I may come around to liking something again without mentioning it.
Marc Stymes
:
Hi Does anyone know when the very first company will report? Can they report on the 1st of July or must they wait until August? Does any website have dates that certain companies will report on? Thanks.
Kathy
:
Firstly I’d like to say that I am in awe of the posters who contribute to this blog almost daily. I am learning a lot but I feel like I am lagging behind with my stock analysis! My turn to contribute something…
On that note the list of stocks I am watching are:
FGE/MCE/MND
I wonder how retail stocks are really fairing given that consumer confidence is low right now. For that reason I am looking at JBH & TRS. I’m interested to see how TRS is going after their set of results last year.
CCP – I believe they are in a good space given how much debt a lot of people are in. It is good to see the business improving again over the last few years.
DTL – Ash what do you think of this company? I have always liked them and being a shareholder, they’ve done well for my portfolio but I don’t want to get too side tracked. This is where things can go wrong
WOW – Still beating Wesfarmers in my opinion.
COH
CSL – Did anyone hear about the FDA 483 warning letter that CSL received? This is a big problem! It is a good way for a pharmaceutical company to lose money due to product recalls and lawsuits if people get sick. It is also a good way to lose potential clients (esp in third party manufacturing). For example, where I work we do some manufacturing of active ingredients for third parties. We get audited by potential clients (including the TGA) to ensure we are up to scratch. Auditors look for many things including cleanliness, and they check through our documentation. They also like to see that procedures are followed as stated in Standard Operating Procedures. Any deviation from procedures is looked down upon. If a client does not like what they see, then they simply find another manufacturer!
I am not implying that the CSL has totally gone down the gurgler. However, they do have some work to do to rectify things. Most companies go through a bad audit at some stage and in the majority of cases, problems are rectified.
Also I like to keep the following facts in mind:
CSL employs over 10,000 people in 27 countries. This means they have many facilities world wide. Just because one site is having quality issues, it doesn’t necessarily mean this is the case across the board.
FYI the link below is where you can read the FDA letter.
http://www.fda.gov/ICECI/EnforcementActions/WarningLetters/ucm259888.htm
Kathy
Roger Montgomery
:
Excellent insights Kathy. Really usefull and thank you. We should add…and unlike many smaller companies they have the resources to rectify and recover quickly.
Peter M (Mully)
:
In my view, scale and size can be both an advantage and disadvantage in these unfortunate circumstances. On the one hand, the larger the organisation the greater the resource to assist with post event recovery efforts. On the other hand, the larger the organisation, the more difficult it is to effectively manage strategic, operational, financial and hazard risks. One of the most difficult risks to treat (as in avoid, transfer, finance etc) is reputational risk especially in the food, pharmaceutial, medical and similar industries (think Kraft Foods, Pan Pharmaceuticals and a smallgods manaufacturer whose name escapes me). In this context, the publicity and potential reputational damage flowing from the FDA 483 warning letter recently received by CSL does not bode well for them in the short term.
Peter
ZORAN
:
I WANT to tell you this: it never was my thinking that made the big money for me.It always was my sitting.My sitting tight.It is no trick at all to be right on the market…I’ve known many men who were right at exactly the right time and their experience invariably matched mine.That is they made no real money out of it.Men who can both be RIGHT and sit TIGHT are uncommon.–Jesse Livermore.
BEST ADVICE YOU CAN GET:
Get your A1’s from Roger’s website,wait for correction, BUY THEM and SIT TIGHT.
Cheers
Zoran
Macca McLennan
:
Good advice Zoran
But you should also evaluate how long they may take to return to value
A mature company with growth likely to level out may never return to value (JBH ??)
A young growing company may reach it very quickly (MCE)
Regards
Macca
Daksha
:
Hi Roger,
My pick of stocks are,
ANZ – Asian expansion attractive strategy trading around 2011 IV
BHP – Diversified miner trading at a discount to 2011 IV, also share buy back positive for stock price and value particularly when the buy back done at a discount to IV
ARP – Consistent ROE over a long period of time, sitting on lot of cash which can be used for share buy backs in future, excellent management
LYL – Consistent ROE over the long period of time, got almost zero debt
BKL- Consistent ROE over long period of time, debt is on high side but Asian expansion strategy will be positive for the company, expensive compared to IV
DWS – Trading at a discount to 2011 IV, sitting on cash, recently announced purchase of assets of Taten Pty Ltd, great dividend yield
ZGL – Good future prospects particularly oil and gas products
TSM – New infinity product launch in UK with major retailers
TRS – High $A good for importing cheap products for the company, internet shopping by consumer no threat to TRS,
COH – Excellent competitive advantage but expensive compared to 2011 IV
Regards,
Daksha
Roger Montgomery
:
Thanks Dashka. ANother good post. Thank you again.
Craig B
:
Some good firms there Daksha, but only one cheap one. ZGL.
fred
:
Hi Roger,
( MONTGOMERY FUND ) is a holder of ANZ you have claimed but not only ANZ but it seems all bank’s increase in share holders every year. Can you explain this? Yes Roger I did really highlight your fund at the start of the question to make you take notice. Thanks
Roger Montgomery
:
Not sure I understand the question Fred?
Peter M (Mully)
:
That makes to of us :)
Lloyd
:
Makes three of us! Here is my take on it:
Having pondered the question, if that is what it is, I think fred is stating that the Montgomery Fund holds banks others than the ANZ and that the fund has increased its shareholding in said banks over time. He then asks whether Roger can explain this, inferring I believe that it places Roger in some sort of conundrum given his expressed preference for ANZ over the other banks.
I see no problem in respect of the latter, in so far as a preference does not necessarily mean all bridges are burned that don’t fit the preference.
Andrew
:
HI Fred,
Like Roger, i am not 100% sure what you are asking. Are you trying to say that the amount of shares on issue increase for the banks every year?
If so, most of the banks operate a DRP which will mean that new shares are created with every dividend payment.Then you have things like options etc that may be exercised and cause more shares to be created as well.
Darren
:
My list of stocks that I am watching is very similiar to most (one area where a value investor is not so contrainian!). They are FGE, MCE, ZGL, NOE, SWL, MGX, MIN, MTU, MML and from the big end of town ANZ, BHP, WOW, ORL.
I quite like the look of NOE which hasn’t been mention that often here as a stock that also benefits from the rise in the price of oil as although they make polypropylene fibre-based products which are usually derived from crude oil they make PP products from post-consumer polypropylene waste materials (recycled materials) which give them an advantage over current competitors. PP is an energy efficient plastic that is lightweight and flexible yet tough and strong – think kettles, ice cream containers, carpets, rope , ag & construction twine, laptop bags etc etc Current capacity levels of 45,000 tonnes per annum is set to be accelerated to 75,000 when its new production facility comes online in the second half of 2k11. The new facility is also likely to generate greater operating efficiencies thus driving a possible greater margin.
Risks i hear you ask, yes with its operations based in China, visibility for the local aussie based investors could be an issue for some. The chairman and Managing Director appears to be a key man for the company. Not only is he the majority shareholder (approximately 64%), he is the co-founder of NOE and the driving force in the running of the business so this could be considered a key man risk. Also currency plays as a risk as with many other stocks on ASX
Cheers
Darren
Roger Montgomery
:
Thanks for sharing Darren, appreciate the contribution.
Andrew
:
Roger, a quick theory qeustion if i may.
If a company buys a company for $500 mill and sells it for $20 mill a few years alter it has obviously made a loss. Does this loss get shown on the P&L and there for affect the companys NPAT? Also, would this also cause write downs in specific values on the balance sheet?
I am guessing it would under the abnormals or loss due to sale of a subsidiary and that if the values haven’t been written down already will see a change in various aspects of the balance sheet including intangibles, property etc etc.
Roger Montgomery
:
Hi ANdrew,
while it owns the company, such a business would produce losses along the way for the group. The treatment will always be a loss but the precise treatment will depend on what tangible assets were purchased at the time
Ron shamgar
:
Very interesting article regarding NBN:
http://www.smh.com.au/business/nbns-assumptions-just-dont-stack-up-20110628-1gp48.html
If south Korea is anything to go by, than wireless is the future!
Cheers.
Roger Montgomery
:
Don’t think I agree with your conclusion Ron.
LTE/4g (Telstra is full IP network and faster than some of the offerings you may be referring to – and TLS can turn it on at any moment in a trial to cover 10 million people (just need handsets) so that might be why Telstra may have no interest in players offering their own fixed wireless backhaul especially of they don’t own their spectrum, which makes reliability an issue). Getting an ACMA licence like the one some wireless companies have has zero barriers to entry – with a bit of tech savvy you can put in a high speed wireless link for a few hundred dollars. Just a different view and what makes a market.
ron shamgar
:
my conclusion is the NBN will be the biggest flop in the history of Australia’s infrastructure investments! consumers will choose their internet connections based on price rather than fast speeds they don’t necessarily need.
mobile wireless is different to fixed wireless, and is not a reliable connection for businesses.
fixed wireless is very hard and not as cheap as ‘a few hundred dollars’ to establish a wide coverage network, as i explained in my BGL UPDATE post.
but, i agree different opinions is what makes a market.
Roger Montgomery
:
I think the point might be that fIxed wireless is not as reliable as ‘owned’ spectrum. Banks for example won’t have a bar of it. Of course none of this means it won’t be taken over to get rid of a competitor. Also doesn’t mean I wouldn’t own it.
Ash Little
:
Thanks Ron,
I am a firm believer that the NBN is a total waste of money and wireless will be the future. I am just not sure who will be the winner if any as non fixed wireless looks like a commodity business to me
Brad J
:
I agree the NBN will be a flop and will probably take longer than expect and cost way more than expected. This is normally the case with these types of ventures and with a project of this size and the Govt involved it is almost a certainty. As investors we then need to make sure we in vest in companies that will profit and grow regardless.
Ron shamgar
:
Hi everyone,
I thought I would share with you a couple of issues to watch out for going forward in regards to JB HiFi and lynas Corp. These issues are my own perspectives of what may happen, and at this stage are merely speculative.
JBH – I believe Apple products are a substantial part of JBH sales going forward whether directly or indirectly by luring shoppers into their stores. My gut feeling says, in the not too distant future, Apple will cease selling any of it’s products through any retailer but it’s own flagship stores and online website. As an Apple addict, I do not see any difference buying their products from their stores or their website, since there is quite a price uniformity between most retailers. This could have a material affect on JBH sales in the future.
LYC – I mention this stock since I know Roger has mentioned it on YMYC program on tv. They are currently waiting for malaysian government approval at their advance material processing plant in Malaysia.
Again my gut feel says, the Chinese government is calling the shots here behind the scenes, and are instructing malaysia to make life difficult for them and ultimately delay the approval sighting health concerns etc.
I could be wrong but it’s in china’s best interest to keep supply tight. Something to watch closely.
Cheers.
Rob
:
Hi Ron,
Like you I’m also a bit of an Apple nut but sorry, I disagree with you on this one. I see absolutely no reason why Apple would cease selling through retailers. Apple’s margins to retailers are the skinniest in the industry and they have always been so. I remember back in the 90s a friend of mine was an Apple dealer and he made less than $100 on an $1800 Mac. His profit was in warranties, service, peripherals and accessories.
Apple know the strength of their brand and selling through retail is a good deal for them. It’s about marketshare and they want as much of it as they can get.
They used to be very tight in this regard. They would only sell through their own dealers or high end retailers. Now you can some of their products from KMart.
My thoughts anyway.
Cheers
Rob
Ron shamgar
:
Hi rob, thanks for your feedback. Your response does make sense, but then again there are some things with apple that never make sense! (adobe flash,etc) It was just a long term theory I have about apple, but I could be wrong. Seems like I got the lynas call correct. Take care.
matt
:
Wasn’t the apple ditching retailers a rumour started by Kogan back in March?
ron shamgar
:
he mentioned it will happen by 2015. helped reinforce my gut feel. obviously he has a hidden agenda. my concern with Apple started about a year ago when i heard Apple was opening their stores right near their specialist resellers. these resellers who invested a lot of money in setting up their shops exclusively for apple products and repairs got burnt!
not a good sign!
Matt
:
ron, thanks for the extra info
Steve
:
Hi Ron,
The Chinese would not be calling the shots on this one. The local Malay community had problems in the past with a Japanese group and chemical processing so they are wary of Lynas. However, the Malaysian government is very keen for the project to succeed so I expect the plant to commence after the local community is satisfied that the plant is safe. Of course there will be some who believe that the plant will never be safe.
There is an expected shortage of heavy rare earths (as opposed to the light rare earths) around 2015 and the Chinese are welcoming of other producers. The reason why is that the Chinese has stated that they only have enough heavy rare earths for their own use. And understandably they are not that interested in sharing their limited supply with the other nations. They are also consolidating the industry and believe that they have sold their rare earths too cheaply so countries and companies can expect higher prices in the future.
China came to this monopolistic situation because the US essentially let the market forces reign and closed their own supplier (Molycorp) because they could get them from China cheaper. So fast forward 20 years to when China is developing and the US now is slowly understanding that rare earths are critical metals.On the demand side, thanks to technology and research, the uses for rare earths has expanded. 20 years ago there were none if any iPhones, Ipads, wind turbines, electric cars and solar energy. The Chinese understand that there are 1.5 billion Chinese (not to mention the same numbers of Indians) all seeking the western lifestyle and there is considerable shortage of the rare earths so the race is on to secure current and future supplies. The mistake people make with rare earths is to treat them like other commodities. Increased demand simply brings more supply. The failure is to understand that it takes 10 years to get these mines producing and that the issue with rare earths is not supply but availability. While I hear people say “rare earths are not rare” the availability at a reasonable price is the issue. Imagine a whole industry trying to get limited resources and only now understanding that they are 10 years too late.
Roger’s rough valuation of $4 a share for Lynas is the same as mine if they get the earnings they have projected. The question is will they reach that. I think so given the industry dynamics (a shortage of producers outside China and the fact that Lynas has already sold all their production); the supply and demand (not expected to be in balance till at least 2015 and then there are continued problems for the heavy rare earths) and the strategic nature of these elements (imagine telling Chinese, Indians and others that they cant enjoy the same lifestyle that the developed nations have).
I have owned Lynas for some time and I expect to own them until supply and demand meet and I expect that to be around 2015 and longer is China turns down and the demand for rare earths declines. And if that happens I will happily purchase more.
regards
Steve
ed types of resources
Roger Montgomery
:
A very good post Steve. Thanks. They may still get the earnings but delays appear to be the issue. I thought failing to recommence trading on the last day of the financial year, even though the announcement had been made, was odd, if not wrong and only served to allow a handfull of fund managers the opportunity to report higher performance figures for the year. If any fund manager should boast of their returns, ask whether they owned Lynas on the last day of the financial year…
Ron shamgar
:
Hi steve,
Very good post indeed. I wasn’t questioning the potential of rare earths and lynas, but the short term risk about getting approval for the Malaysian government. It seems my gut feel was right, and we will never know who REALLY calls the shots for the Malaysian government.
Though lynas at under a $1 would be attractive as a punt on them getting approval or building their facility else where.
What I want to know, is who was the genius at lynas that came up with the idea of building the plant in Malaysia without doing further due diligence??
Cheers.
Steve
:
Hi Ron,
I prefer rational analysis over gut feelings so..
1. The CEO Nick Curtis originally wanted to establish the plant in China but the Chinese Government would not guarantee that Lynas would be allowed to export their processed product. Thus Lynas started to look elsewhere. This also shows that the Chinese are serious about restricting exports because they understand the shortages in the rare earth field and the lag time (10 years) it takes to get new products to market. As I stated, they are happy for other producers as this means they can get to keep all their own rare earths. In addition to this, the price of rare earths has skyrocketed, so if the Chinese wanted the whole field to themselves, they would have simply kept a low price. The reason why they have allowed huge price rises is because they understand the industry dynamics and the shortages.
2. The Malaysian government offered Lynas a 12 year tax break to establish the plant there. This gives an indication of the level of support that the government was prepared to offer to get Lynas to Malaysia as they understand that there is a world shortage of rare earth producers (not to be confused with the rare earth miners). The “value add” part is in the downstream production not just digging it up as both the Malaysian government and Lynas understand. Gaining an understanding of how to separate, purify and built to customers individual requirements is the “competitive advantage” in this field. Thus Malaysia will learn from there Lynas experience and then set about getting more facilities there as they can then tout that they have the knowledge required to develop rare earths further.
3. As a former political adviser, I can say that the best method of dealing with discontent in the local community is to get an “independent body” to assess the project. As the report is now out, it appears that there are some minor issues for Lynas to address. If Lynas was to leave or the Malaysian government was to shut them down, there would probably be compensation to Lynas but the more serious issue for Malaysia would be that the foreign investment dollars would come to a sudden halt.
5. All in all, I think it is no different to any other mining project where some of the local community have concerns..as the saying goes, the squeaky wheel gets the oil. There is also considerable support for the project at the local level because of the creation of jobs but you wont here about that.
Roger, price eventually meets value…so let the poor boys play their games………
regards
Steve
Roger Montgomery
:
Hi Steve,
Thanks and nice to hear from you again.
ron shamgar
:
hi Steve,
thanks for this information. Lynas is not a company i would invest in usually and therefore i haven’t done complete research about it as you have. what you say makes a lot of sense, and i hope you are right.
i presume you own shares in this one from your response, so i hope you will do well from it.
Luckily for others who contemplated buying shares this week, i SAVED them a lot of money from the recent share price fall, and in my opinion more downside to come, with future developments/bad news/investors losing patience etc etc.
if the price gets cheap enough i might have a good hard look at this company, as i do agree about prices staying relatively high for a few years.
Different Opinions Is What Makes A Market!
take care.
Steve
:
Hi Ron,
I agree there is probably more bad news to come and so I use the Templeton philosophy…..buy at the point of maximum pessimism.
I agree it is not a traditional value investment but I like to think of it as Ben Graham’s intelligent speculation – I bought them between 25 and 50 cents 3 years ago:).
Good to chat with you.
Steve
Matty
:
Did everyone see the news flash of a big find of rare earths located in the pacific at a depth of 3000 to 6000m? Just shows how desperate they are getting to find resources.
I would hate to think what extracting this material from the sea floor would do to our oceans when they are already in such a sad state.
Begs the question what MOS we put on the planet being fit enough in 50 years to provide us all with 40% ROE. Not saying that this stock in particular is so bad (how else will we enjoy our electric vehicles) or anything about the ethics of the business, just that ethical investment doesn’t seem to get banded around much here. I always try and imagine a business I would love to own 100% of and a big hole in the ground of heavy metals doesn’t rank up there, no matter how expensive they get.
Roger Montgomery
:
Any discussion about environmental impact? Whose seas? etc
Gady Manor
:
Hi everyone,
SAMSUNG Electronics said Today that it expanded its legal tussle with Apple by filing a complaint with the International Trade Commission seeking to stop the sale of key Apple products in the US.
Samsung also said it filed another lawsuit against Apple in a Delaware district court in the US, alleging violations by Apple of patents Samsung holds on telecommunications technology, as well as lawsuits in Britain and Italy.
The two steps are part of a broader strategy by Samsung to counter a product-copying lawsuit that Apple filed against it two months ago.
In the original case, legal analysts say Apple is moving toward seeking a preliminary injunction that could force Samsung to stop selling its flagship smartphone, called Galaxy S, in the US, its largest market.
It has taken unusual prominence because Apple and Samsung, while competing in consumer products, have a relationship in which Apple is the biggest customer of Samsung’s component manufacturing businesses, which make logic chips, memory chips and liquid crystal displays for gadgets of all types.
The fight has prompted speculation throughout the electronics industry that Apple might try to end its supplier relationship with Samsung, a move that would prove costly to Samsung’s chip business, which has been yielding the company’s highest profits over the past few years.
Roger Montgomery
:
Thanks Gady. Fascinating…
PeterB
:
It’s incredible! I go skiing for the weekend only to come back to an enormous amount of homework: reading and digesting the latest list (137) of great posts and getting up to date on the current thinking, views and opinions – contained in these posts.
Well done to all “Posters” for providing such rich and thought provoking ideas and analysis. And shame on you for providing me with a lot of catchup homework :-)
PeterB
Edward
:
One that is on my watchlist is COU – Count Financial
I am looking forward to watching how Barry Lambert and his team tackle the Future of Financial Advice reforms. Patience will be required with this company as considerable uncertainty has been produced within the financial services industry by the reforms. However, there is a lot to like, as the company has historically earned high ROE and the executive chairman who founded the company 30 years ago is paid an annual salary of $1. The executive chairman also happens to own 91 million ordinary shares (34%) – talk about having some serious ‘skin in the game’. Time will tell :-)
Roger Montgomery
:
I am also keen to see whether the mass exodus of financial planners ahead of the reforms has been premature. Thanks Edward.
Mark Ab
:
I’d like to add my two bobs into this subject as I have observed this stock frequently over the last 5 years (as an ex-shareholder). COU has been slowly transforming itself and becoming more diversified by adding other strings to it’s bow (CountPlus/DKN/Lonsdale etc.). The biggest risk with COU and the FOFA reforms is that COU’s current revenues are heavily made up of volume payments (approx. 35%) from platform providers and as these payments are in the process of being legislated out (subject to the FOFA Bill being passed) this is likely to impact on COU more than any other AFSL Holder, unless than can re-position their business in time (which they currently are attempting to do). Their acquisitions over the last 5 years have proven in real terms to decrease their IV and this has been reflected in the share price (along with impact on Funds Under Management fees due to the GFC). COU’s financials were fantastic when they were smaller (I owned a nice parcel back then) but the jury is out as to whether Barry Lambert & Co. can position this business back to the efficient operation it once was. My personal opinion is that if they can, it will be slow and while I’m waiting for that to happen, better opportunities have whizzed by. The other point is that these types of stocks (COU, PPT, BTT, PTM etc.) tend to move in line with market values (Index rises/these stocks rise proportionally) as they are heavily leveraged by market values due to their FUM. What is the ASX 3 year outlook? As Roger makes note in Value.able – what is the opportunity cost?
Regards
Mark Ab
Roger Montgomery
:
Good insighst Mark. Thanks for sharing. That 35% figure…where did that come from? Was it the 6 May announcement?
Money Magazine wrote:
Count Financial will restructure its business model in response to the banning of volume related payments in the Government’s Future of Financial Advice reforms (FOFA).
Among the changes, the group will apply for a second Australian Financial Services Licence (AFSL) as it aims to become the investor-directed portfolio services (IDPS) operator for its strategic platform offerings, Count chief executive Andrew Gale (pictured) said.
The group will also apply to the Australian Prudential Regulation Authority (APRA) for a licence to become a registrable superannuation entity (RSE), also with regards to its strategic platform offerings, which will bring the group under the regulatory umbrella of APRA.
The group will await further detail on the grandfathering of platform contracts but would prefer not to use grandfathering with regards to its strategic platforms, but will use grandfathering arrangements for other platform offerings, Gale said.
Under this arrangement, the intention is Count will source platform infrastructure and administration services from a couple of key platform partners and replace its current arrangements with platform providers, although Gale would not at this stage clarify how many of the current platform partners providers would be affected.
The total implementation costs of the changes are currently estimated as being less than $500,000, and as a rough estimate Gale said the additional ongoing costs were likely to be somewhere between $1 million and $1.5 million.
Gale anticipated the majority of the reforms would be beneficial to Count.
Larger licensees such as Count are able to transform their businesses to ensure they continue to receive revenue essential for service provision and financial liability but smaller groups will find the changes more challenging, he said.
The reforms would also create financial pressures on many groups and lead smaller licensees to seek consolidation, which would also favour larger licensees such as Count, Gale said.”
Investor Daily wrote:
Count Financial (Count) expects to incur more than $1 million in costs as it repositions itself as the investor director portfolio service (IDPS) operator and responsible superannuation entity (RSE) of its platform suite.
At an investment briefing yesterday, Count chief executive Andrew Gale revealed early estimates of the commercial impact the listed financial services company is likely to face as it begins its Future of Financial Advice (FOFA)-driven restructure.
“There will be some implementation costs as we change and transform the business model. The current estimate is that it will be less than $500,000,” Gale said.
He said the company is likely to also be hit with additional ongoing operational costs of between $1 million and $1.5 million per annum due to its application for an additional Australian financial services license for product and service offerings and registration as the company’s RSE.
“It’s a moderate increase in our expense structure but not hugely onerous. We expect our revenue margins in that change to be resilient,” Gale said.
“So in that model obviously where we are the operator [IDPS] and RSE the margins paid by the clients come to Count, we source services by platform providers and we pay a margin through to them.”
As part of the move to become its own IDPS, Gale said the company would review its current platform providers though he would not comment further.
Gale said to counteract the restructure costs Count may take advantage of any FOFA related consolidation opportunities.
“One of the impacts of these changes [FOFA] we expect is that it will lead to some consolidation in the market, especially in the small to mid-size licensee sector and as one of the stronger players we would expect to be in a position where we are one of the consolidators along with some other larger organisations in the market,” he said.
“If that is the case, we only need roughly an extra $400 million in incremental funds under management to offset the additional costs.”
Edward
:
Mark Ab and Roger,
The main driver for my interest in the financial services industry follows my reading of an article in the Economist about the Australian superannuation industry and the sheer size of it- $1.3 trillion dollars! People pay a lot of money for the services of fitness instructors, plumbers, decorators, car mechanics and so on, which if we are all honest, any able person could do if they applied themselves. Financial planning is no different – people will pay for the service as they have no time or interest in doing it. I agree that the reforms could affect the future profitability of financial planning companies and create industry consolidation, thus leaving certain companies with a competitive advantage. I am happy to sit on the sidelines and watch at the moment, keeping an eye on acquisitions, revenue and operating margins.
Point noted about opportunity cost.
Ash Little
:
Good call Edward,
Interest in seeing a financial planner though will be directly related to market returns, ie if the Market does 20% then the lemmings will want to pile in for next year’s negative return. When this happens they will blame the planner for being hopeless. It is a tough game and likely to be very tough over the next few years. Just my view.
Grant Duggan
:
Nothing out of the ordinary for me,FGE,MCE,TGA,MTU,CCP and VOC all in my SMSF. The ones i would still like to add if a reasonable MOS appears are SWL as i think they are well managed and in the right space for the forecast boost in the economy for the QLD state. And JBH at the right price as they are and i think will remain the best for some time yet.
Roger Montgomery
:
Thanks Grant
Ron F
:
Hi Roger
Thanks for creating this topic
And thanks to everyone who posted their interesting thoughts on the companies. The comments have helped me to refocus on the important criteria required for analysis and intrinsic value.
Though, I am a bit confused when considering the margin of safety (MOS). I use 25% MOS on current IV before investing, or should you include the Year 12 projected IV increase into the MOS?
Using an hypothetical example,
A company has passed the selection criteria for investing and is currently trading at 15% MOS on the year 11 IV and projected to increase by 10% for year 12 IV, equals 25% total.
My understanding is that only the year 11 IV 15% MOS should be considered and the Year 12 IV 10% increase is the financial year 12 ending calculated price which is used to assess the future prospects – longer-term investment. However, as I previously stated I am not sure if my thinking is right.
Regards Ron F
Roger Montgomery
:
Hi Ron,
There is no right or wrong here. Everyone will adopt their own rules as part of their process and you are very welcome to have a listen to what everyone else proposes here.
Ron F
:
Hi Roger,
Thanks for the reply.
I had another read about the MOS in your book and I do understand now why people have varying methods.
PS I forgot to thank you for the nice letter you sent me regarding my photo for the graduate album. I feel privileged to be part of it.
Looking forward to your A1 company offer
Regards Ron F
Andrew
:
Hi Ron,
As Roger says there are no hard and fast rules as to the correct Margin of Safety to use. it is something you are going to have to think about and come up with as well as your thoughts as to which IV’s to pay attention to whilst working out the MOS.
My MOS is a minimum of 20% however this changes from company to company with certain companys i am looking at needing to have a minimum of 30%. Some people on here look upwards from 40%.
What i do for forecasts is whack an extra 5-10% on top of the required MOS for that company as i can only use comsec forecast figures and i am yet to be fully convinced that they are an accurate enough. Due to this i tend to use them as more of a guide as to future years and whether i would be better off waiting even though the margin of safety is there against the IV derided from the last annual report or if it is a good time to buy.
For example, a companys is trading at a discount ot my IV that is better than the required MOS so i am thinking about buying, however in the next year my forecast is for the IV to drop and then rise again in 2012. In this scenario i would wait however if the IV was forecast to rise year on year than i would be happy to buy.
Even though i question the accuracy of the commsec data i suspect with at least the bigger companys on my watchlist that are covered by multiple analysts it will be a decent enough guide as to whether IV will drop or rise.
As i said, appropriate margin of safety is up to you, just as is coming up with an appropriate required return. Have a think about it, what you want the MOS for and why you want it and it should help you find your appropriate level.
For example you may wish for the MOS to act as another risk buffer taking into account things like liquidity and industry risk, you may just want a MOS below your IV equal to a capital gain you would be happy to achieve if the company was to hit its IV after you bought it.
Hope this helps
Ron F
:
Hi Andrew,
Many thanks for the reply and the effort you put into it.
I can now understand why there are individual preferred methods.
Your comments contain thorough information, written in understandable – layman terms and have alerted me to consider the different options for MOS – the risk a similar important component as the RR.
Like you, I am not confident with the forecasts on Commsec or any other site and I use the same method as you, or decrease the projected earnings to calculate the IV, or like Ashley increase the RR for future IV calculations.
Just in general and not saying you don’t do it, I think it is important to regularly review forecasts and note the date of checking and ensure they have been updated after a significant event, e.g. announcements on share issues profit upgrades and downgrades etc. I have often seen, for an example, companies issuing a large amount of new shares and the analyst’s EPS forecasts are not updated.
I have had a self appraisal of myself and have considered,
1. As I said I don’t have confidence in forecasts.
2. I feel confident enough to recognise future bright prospects, but my future IV calculations I am not confident with as yet….though I will try to enhance my skills.
So, at the moment I will concentrate more on MOS to current IV and certainly use your suggestions for varying MOS for companies.
Many thanks again Andrew for your reply, your effort and sharing your methods you use. I will also take this opportunity to say thanks to your terrific contribution to this site, I have sincerely enjoyed reading your blogs.
Kind Regards
Ron F
matt
:
Broker target prices are not necessarily only updated on news directly attributable to the company. An end price may be decided on, and the inputs then ‘fudged’ to meet the target price. For forecast eps/dps figures i look at the implied growth this produces and then think about whether this looks ok.
Ray H
:
As always I will be watching the result for CST. I am expecting very good revenue and profit growth (>30%) at continued high ROE (>30%) to be tempered a little by costs associated with the attempted take-over by Qiagen and the high Aussie dollar. I expect the proposed scheme of arrangement to fail at the current offer price and a good buying opportunity may then present itself.
I will also closely watch results from ANG, MCE, FGE and FWD (all held). On the watchlist RKN, MTU, SWL, and ZGL results should all be interesting.
A proper market crash would be nice to get in at decent prices.
pat
:
Yes its wonderful how many small Australian developed bio company’s that become cash flow positive are deemed by management to be ripe for sell off to any bidder. I hold/held shares in ACR, SRX, CXS, CST all showing good potential and paying dividends but just as they are about to bloom they are cherry picked from overseas. Yes they need to tie up with bigger overseas companies but you dont have to give them away when most of the hard work is done. This is the type of management that regard themselves as the kings with shareholders as their vassals.
Allan
:
Hello all
Of the gorillas I will be watching JBH, WOW, CPU, CSL, FLT, QBE, ANZ & BHP with great interest as they are all superb companies trading slightly either side their current IV in my humble view.
FLT is of particular interest as tradtionally they have generated greater cashflow in the 2nd half of the year and their corporate travel offering is very well run and an ongoing threat to AMEX who are starting to lose market share. Noty knowing much about Corporate Travel Management I assume they are also in the same space.
Other smaller companies (the majority courtesy of Roger and the wonderful contributors to this blog) that I will be watching closely with competitive advantages and trading at discounts or slight premium to current IV are:
FGE
MCE – Particularly update on Henderson Stage 2
TSM
VOC
ARP
MYE
MTU
BGL
CCP
Trading above IV but also of interest are:
TRS – Wonderful company. Expecting poor 1st half due to Queensland production which may well give us an opportunity if sold off
NVT
RKN
SEK
WTF – A friend who works for a competitor highlighted to me just how hard it is to inifltrate the advantage this business has
Regards
Allan
Roger Montgomery
:
A very nice list Allan. Thanks for posting it.
fred
:
Hi Roger.
Credit Corp Limited ( ccp ) Brad I am always extra careful when dealing with companies in the diversified financial sector but I do agree that it looks OK I have not work out intrinsic value but I would imagine that you would be in the ball park. good luck
Brad J
:
Hi Fred,
RE – CCP
They are very cheap in my opinion and with the director buying shares it is also a good sign. As Roger says there is no evidence that a director selling shares is a negative sign but a director buying shares is usually a good indication of sentiment and confidence.
Roger Montgomery
:
We should say ‘often’ rather than ‘usually’. Remember Eddie groves bought shares in ABC Learning…
fred
:
Hi Roger,
I would like to add 3 to watch for 2011 / 2012 Tassal Group ( tgr ) Mcphersons Limited ( mcp ) Retail Food Group ( rfg ) check the sector’s to see if they suit you, I don’t hold any of these and I don’t know if I ever will. see ya
Nevada
:
kcn mml tbr my gold picks for 2012 .
gold price has held up nice so far. but gold stocks have
gone down, lyc my only spec stock rare earths not making money
also political risk with lyc so is mml kcn
Roger Montgomery
:
Thanks Nevada, Nice to hear from you.
Brad J
:
Isn’t it interesting to see the market sold off again today giving us great opportunities to pick up companies with great prospects and discounted rates –
My pick for today is CCP which others have mentioned. I value this company at $7.73 for 2012, so it is trading at a huge discount to my IV.
With consistent results over the last couple of years it looks to be compelling value. And if interest rates go up further there will be more business for companies like CCP. The Greek crisis won’t affect the profitability of this one in my opinion, but we can take advantage of Mr Markets peculiar personality disorder.
BTW I purchased CCP today so please do your own research.
Peter J
:
I too have been following CCP but then saw a reference to outstanding litigation that needs to be considered. I havn’t had a chance to look at it in more depth – have you satisfied yourself there is nothing to it or is it factored into your price?
Ash Little
:
Hi Peter
No need to repeat it. Ron has posted on this in the past
John W
:
My view is that once this issue is resolved, removal of the uncertainty could well benefit the share price.
Rusty
:
Dont forget – the CCP litigation amount is fully covered by their insurance. Any reaction to this is an opportunity.
Peter M (Mully)
:
Is it? I haven’t been able to find any confirmation to the effect that their insurer(s) have admitted liability and agreed to fully indemnify CCP in terms of any insurance policies they have in place to cover this claim (damages & costs) against them. Would appreciate it if you could point me in the right direction.
Peter
Michael
:
My concern with CCP is that the profit in the last annual report (2010), was less than the profit made in 2006. While return on equity looks to be forecast to rise, I like to see a good track record. I can see why people would see this stock as below intrinsic value, but the track record is of concern.
Roger Montgomery
:
Hi Michael,
May I suggest some deeper digging. Read all the announcements regarding earnings between 06 and now.
fred
:
Hi Roger,
You wrote to Grant about Blackmore Limited ( bkl ) that its debt was construction related. What is the increase in short and long term debt due to with Zicom Group Limited ( zgl )? Thank’s Roger
fred
:
Hi Roger,
Bigair Group Limited ( bgl ) Yeah your right Ron Shamger that explains the working capital , thanks. GOOD PICK UP
Grant W
:
One of the companies I have been following that does not appear to have been covered in this blog is Blackmores (BKL). My first reaction to this company was it reaching maturity so “where’s the future growth.” Digging a bit more deeply think I’ve found a lot of potential.
BKL is expanding in Asia. It currently has four major Asian retail partners distributing its products. About a year ago BKL entered into an alliance with Eu Yan Sang, one of Asia’s leading healthcare companies, with a strong presence in Chinese traditional medicines. BKL’s products are the first Western dietary supplement brands to be carried in Eu Yang Sang’s retail outlets.
A new facility has been opened in Warriewood to provide sufficient capacity for the Asian expansion and to cater for 80 new BKL products.
The December interim results showed 25% growth in revenue from Asia – despite the strong dollar. Asian revenue represented 17% of total revenue for the 6 months up from 15% in June.
BKL has a solid track record of 35% to 40%+ ROE over last eight years with a steadily growing IV – I make it $7 in 2004 to around $20 currently. Unsurprisingly the share price has followed. Debt:Equity is a bit high at around 40% but given strong cash generation – owner’s cash of $20m to June 2010 and $9m for the six months to December 2010 – and multiple times interest cover – this is not too much of a worry.
I’ll be interested to see the results for 2011 and any revised guidance. If BKL can make serious inroads into the Asian market it could be a wonderful growth story.
Roger Montgomery
:
Good spottinG Grant,
Debt is recent and construction related, and will continue to decline now.
garry
:
Another great forum subject and a great piece of work by Ron and Mamos on BGL(i am a holder). I noticed a selection of identified stocks becoming a template of the same “spoken of” stocks we have all on our watchlists, or stock holders of, as valuable graduates.
You will probably recognize these aswell,
LYL,MTU,TSM,HSN,SMX,VOC,BGL
Here”s something new to research,IPP(i bought at 70c)
This company has basically poached Real Estate.com management team. There market is Asia, not Australia this time and they are just coming into profitablity 2011-2012.
I can’t find too much wrong with it.What does everybody think?
Can i ask you roger for your rating and iv on IPP,please.
Mark Ab
:
Hi Roger,
felt compelled to put this on the blog this morning, more as a case of what to avoid than purchase. It has just been announced that IFL have made a revised offer of 80c per share for DKN (a 55% premium to it’s June 6 price). DKN’s ROE at last report was 4.9% and trading 22% above it’s IV before the offer (based on my calcs.) Just how can a board justify the purchase and if I was a shareholder in IFL, I would be selling in disbelief. These M & A’s across the financial services companies history shows (as you have reported here before – AMP/AXA) that more often than not they fail miserably to produce any significant financial benefit to shareholders simply by paying way too much, all in the name of bigger is best? Caveat Emptor…
Regards
Mark Ab
Kent Bermingham
:
Roger and fellow bloggers, Companies with a significant MOS to be looking at for this exercise:-
AIR, ANZ BHP CCV CPU DWS FMG IDE JBH KAM MCE MGX MLD MML MOC NAB NFK ORL TGA TRG VOC WBC ZGL
But beware I do not know what Rogers Quality Rating is for all these companies and I am looking forward to his list and views.
fred
:
Hi Roger,
Bigair Group Limited ( bgl ) I had a quick look and it seems that bgl’s working capital is a worry. Just my view!
ron shamgar
:
Fred, please refer to my post below regarding the trade payables. cheers.
Andrew
:
Hope all the community had great weekends. It seemed to be a productive one as i am pretty sure htis post only had about 30 odd posts when i last looked on friday.
What am i looking at over the financial reporting season?
Overall, a lot of my companys appear to have forecasts of resulting in a drop in Intrinsic value and then rising again the next year.Will be interesting to see if thei turns out to be reality.
Some more specifics:
ORL- Want to see whether my expected drop in profitability has happened.
DJ’s- Will be interested to see the revenue figures to see what hit if any the high aussie dollar and growth in online retialing has caused. (Could say the same about Myer but i am not particularly interested in that company at the moment)
WOW- How much has the resurgent Coles hit the Woolworths top and bottom line figures.
JBH- What does life as a mature company look like for this business. How does the IV look based on these figures due to the buyback.
Also, i look forward to being able to cull my list of 35 companys of multiple sizes from large cap to micro cap in regards to warranting further investigation. I have seen something in these companys so far that have made me find them worthy of getting to know but want to see further evidence of them being great companys before i get to know them further.
Andrew
:
Also Roger, may i congratulate both yourself and team at Montgomery HQ for the effort they have been putting into this fourm. It appears we are back on track and discussing insights again, fingers crossed it stays this way as the quality has definitley increased and i can only imaginine how much time and effort both physically and mentally it has taken to do that. Needless to say I and i am sure most other graduates appreciate it.
Roger Montgomery
:
Thanks Andrew,
Its popularity however is a function of the very bright, though-provoking and insightful contributions made by all of you. All I can do is jump in when I see some logic going awry. You are all getting up to speed quickly. Apologies I will never be able to give all the herbs and spices but happy to share the results of all the hours in the kitchen.
Macca McLennan
:
Franking Credits & Intrinsic Value
The tables VA Graduates use to calculate IV are based on the US where Div’s do not have Franking Credits (FC)
IE if you take a Company over 5 yrs
Which finish & start with the same % of IV
You need to add the FC to get a comparison
You cannot compare a 0% FC 100% FC
The Challenge Roger VA Graduates
How do we overcome this??
Roger Montgomery
:
Hi Don,
I don’t do it. Plenty of reasons why. All the best.
Frank
:
Hi Macca,
I see FC as a bonus and therefore do not include FC in calcs. Its no different than leaving out personal taxation in your calcs.
In our calculations, the value of each company will ultimately vary between investors depending on their own personal tax circumstance.
nonetheless I think franking and personal taxation should be taken into consideration.
Andrew
:
I think personally as i am valuing the business i don’t take it into consideration as it does not make a company any more valuable or not.
In fact most of us would prefer that the type of companys we own would pay no dividends at all sometimes (especially if they can sustain that high ROE) and there for franking credits would just be sitting there anyway. in this scenario, franking credits don’t matter as they don’t get used.
At the end of the day, to me it is all about valuing the business, if it doesn’t affect the business (which i think franking credits do not) than i won’t bother with analysing that part of it and focus on areas i think are more important.
Scott T
:
Hey Macca,
Franking Credits are worth a different value to each person who holds them. I have never taken them into account as part of my investment decision making, as I am always looking for businesses who’s value value rises over time at a consistent and respectable rate. I just make sure my accountant has her hands on the franking credits when she needs them. Deciding the right business to buy and complying with tax legislation are two different parts the investing adventure for me.
All the best
Scott T
Brent
:
So the general consensus is that franking credits are irrelevant? I can’t agree with this. It is easier to leave them out, yes, but more accurate? No. Franking credits have a tangible value.
Particularly in Australia, where as companies grow bigger, they tend to pay out a greater % of profits in dividends. Whichever tax bracket you fall into, they have value.
The level of franking directly corresponds to the after-tax return, thus the business value.
Brent
Roger Montgomery
:
I agree they have value. Now, you can remove them and use an after tax required return to establish a value or you can add them into the dividend component of the valuation (and use a pre-tax required return) then you will also need to use a pre tax profit number for the growth component. We have put a huge amount of work into the establishment of the appropriate discount rate that works really well, it is however adopted as an after tax rate. You can search for perfection from theory or an answer from the practical experience of those who have succeeded before you (now who said that to me?) I have seen the way Buffett has made some of his investments and the simplicity would shock you.
Macca McLennan
:
Macca Here
I agree for simplicity ignore FC’s when calculating IV
However when selecting what shares to buy you should take FC’s into account.
Lets say we have two shares of equal IV & price, one FF the other NF. Priced at $10
Over 3 years say each were paying about 5% div’s & price increasing about 5% per year.This is roughly what an average All Ords share might do.
After 3 years both will have a capital gain of $1.57
Div income NF $1.55 FF $1.55 + $0.66 = $2.21
So when you sell at the end of 3 years your profit will be
NF $3.12 a simple return of 31.2%
FF $3.,78 a simple return of 37.8%
All things equal i’ll buy a FF
Now to those mixed up about tax
You can apply your own tax situation
It doesn’t matter if you pay nil tax or 30%
Thanks for all your comments
Macca
Peter M (Mully)
:
Hi Roger
Outside the circle of the 65 companies whose investment grade and performance I monitor on a regular basis, I’ll be paying additional attention to MMS, CPU and ACR when they report.
Roger Montgomery
:
Good stuff Peter. I will start a results post and you can drop your findings for them in there, if you like.
Matty
:
Hi Peter,
CPU recently lost the contract for MCE share registry services. Not sure if that is a sign that the competitive advantages of CPU are starting to be eroded?
Regards,
Matt
Roger Montgomery
:
Hi Matty,
Big conclusion from loss of one client. The right conclusion may be that they don’t really have one at all?
Peter M (Mully)
:
Hi Matty,
CPU is a company that I’m yet to fully research and which I will do after I’ve have an opportunity to review their 2011 fye results. However, having spent 37 years in the professional sevices industry (insurance broking), I am only too well aware that despite one’s best intentions, clients come and ago for all sorts of reasons.Provided the loss of MCE as a client is not part of a larger systemic issue, it wouldn’t concern me in the slightest. On the other hand, if it was one of many account losses during a relatively short period, it would. At ths stage, I don’t have a viw on CPU’s competitive advantage(s) which will be a key element of my forthcoming research.
Peter
Roger Montgomery
:
I believe they enjoy the benefits of high switching costs. Perhaps not as high as we would like.
Matty
:
Hi Roger,
You are right, that is not enough evidence to draw that conclusion, however it was a relatively short relationship and it really jolted me into thinking deeper about the extent (or existence? How about page 125 and 127? Already time for a 3rd edition?) of CPU’s competitive advantages. I do have a small holding of CPU and to see evidence of losing customers from one of the few customers I monitor was an amber light on the information highway. Obviously I would have to investigate CPU results themselves for evidence of a competitve advantage. I noticed the decreasing ROE with increasing debt in the last few years. Will be interesting to see what happens with the takeover bid. I am currently reading “Competition Demystified” by Greenwald and Kahn as suggested by a fellow blogger a while ago, (thankyou blogger and Roger for providing the medium). I must say I am thoroughly enjoying it and can recommend this to anyone wanting to expand on Value.able part two and help identify businesses with competitve advantages.
Roger Montgomery
:
Thanks Matty, A good book indeed. Porter’s “Competitive Advantage’ is still a must…
mike
:
Hi Matty,
Just for your interest, CPU service more of the ASX Top 100 stocks than they did 10 years ago. They’ve obviously lost a few over the years, but have gained more than they have lost. Seems to me they still have their competitive advantage (although I’m not exactlyt sure what it is).
Cheers
Mike
Sean Saul
:
Hi all
An area I watch with interest is in the credit provision and recovery space. The purchasing of debt ledgers is increasing and someone has to clean up the credit crunch mess.
Banks want to move doubtful debts loans off their balance sheets, small businesses want something rather than nothing from their debtors and retailers want to continue selling to people that can’t afford to pay for it now (interest free finance).
Food for thought: Australian taxpayers alone owe the ATO a reported $14 700 000 000 alone. I love writing all those zeros; has much more impact than saying $14.7 billion. The ATO utilisies the services of Dun & Bradstreet which itself has about 10% of the debt recovery market.
For this reason and others I like:
FXL, CCP, TGA, TSM. CCV worries me with short term lending and changing legislation regarding this area. The recent rights issue that will dilute share value with TGA concerns me but if they can add another stream of income from their purchase of NCML to existing business it will auger well. Like others here I am excited and looking forward to the upcoming reporting season.
Disclosure: I own TGA and FXL.
Roger Montgomery
:
Great work Sean. Really appreciate the contribution on behalf of everyone here.
Jeff
:
No time to delve too deeply yet but AJJ looks interesting. Part of the Asian growth story, no debt, prestigious hospital, newly opened Vietnam clinic, and strong write up in Straits Times recently. My first comments, so thanks to RM/team, and bloggers who with Eureka Report make me feel that at least I have my fingers on the investment pulse which is no mean feat here in Riyadh. Jeff
Roger Montgomery
:
Hey Jeff,
Welcome and thanks for writing from Saudi Arabia. I think one of the Princes there actually has a copy of Value.able! if you get the time to look at AJJ more closely, we’d love to hear from you.
John Stern
:
Roger,
Why not make your podcasts available through iTunes? It’s too much trouble to sit in front of the iMac to listen to them. Much more convenient when you can download them.
Cheers,
John
Roger Montgomery
:
Thanks John,
Good thought! I appreciate the suggestion.
Craig B
:
Some of Roger’s presentations at the ASX are available as podcasts on iTunes.
Steve PL
:
John you can also download Your Money Your Call into itunes from the skynews.com.au podcast site.
Jason D
:
Hi Roger
I emailed you a few months back thanking you for your book which I purchased immediately upon release. I am as a blogger once described a “lurker” who reads each of your posts but has never contributed. Do you have a date, even a quarter, for when your subscription based A1 investment offer will be available? It sounds great for the time poor.
I should again thank you as I sold WPL, TLS and MAP after reading your book and doing my homework and switched to value based shares. More importantly than anything else for me I feel like I understand exactly why I am now making investment decisions and I no longer feel bound to investing in Top 50 only companies to feel like I have “blue chip” shares.
Kind Regards
Jason
Roger Montgomery
:
Hi Jason,
Thanks for the supportive comments. I am delighted to hear value investing is working out for you. Keeping the launch date under wraps.
Gary Burns
:
Hi Roger, I believe Hansen (HSN) is 15% below its intrinsic value. I also like Cardno (CDD) although its debt equity ratio is a little higher than I like.
Roger Montgomery
:
Thanks for those suggestions Gary.
Nigel
:
I looked at CDD too, because I had some. As you say the D/E is a little high, but also the ROE is less than 20, but what alarmed me was the drain on cash, if you use the calculations in VA, page 155, you see that despite great profit increases they are constantly raising capital or borrowing every year, not a great cash earner to me. I sold all of them, and bought MCE and LYL.
LYL my IV looked good, has a low D/E, 5%, creates cash every year and has a robust ROE see below
Yearly cash generated $mil, ROE
2006 7.2, 0.34
2007 4.8, 0.35
2008 2.5, 0.44
2009 3.7, 0.45
2010 8.7, 0.40
ron shamgar
:
BGL UPDATE:
Hi Roger and Everyone,
Recently I met with the CEO of BGL, Jason Ashton, and discussed his business, its industry and its growth prospects going forward.
Before I list some of my insights, I would like to mention that after meeting Jason I’ve never slept better at night knowing my largest investment is run by him! Jason is very knowledgeable about his industry and you could say a real pioneer of the internet in Australia. For more about his achievements read here:
http://www.crn.com.au/Feature/25999,fine-tuning-the-wireless.aspx/1
Anyway back to my insights:
BGL is made up of 2 divisions:
1. Fixed wireless for business with a wholesale focus and absolutely no reliance on Telstra. This focus enables them to acquire new customers for very low cost because they deal with fewer bigger customers. Example of customers are Optus, NTT etc.
Growth options in this division will be both organic, with several million dollar a year revenue growth, and growth by acquisitions which will come from acquiring their regional competitors where each one has about $3-$7million in revenue.
2. The second division is broadband for communities with 30% market share in student accommodation. The internet is accessed by students with pre paid credit card accounts so there are no bad debts! Also they are exclusive with long contracts and own their own infrastructure so no other player can get in! A monopoly!
In terms of growth in this division, they still have at least another 100 campuses around Australia and with a very motivated manager (previous founder of this division which they acquired last year) to execute this growth. They are also talking to mining companies to offer these services at mining sites around Australia and defense forces bases for the soldiers. There’s a lot of free time on your hand at night and not much to do in these remote locations!
BGL has no competition in the major metropolitan cities around Australia and since they have signed exclusive long term contracts in all the best access point (i.e. roof top buildings etc) no other competitor can come in without spending a long time negotiating access to new buildings and establishing a wide enough coverage, if it’s even possible!
It would be a lot easier to just buy out BGL then doing that. :-)
In terms of NBN, BGL will have a lot of opportunities in growing in the under serviced specialist corporate area and quite possibly getting work off NBN for wireless/microwave backhaul links. Funnily enough the NBN is creating awareness among businesses for the need of high speed connections which increases the demand for BGL’s services. They are also looking at the up coming analog spectrum that might be auctioned by the government.
In terms of financials, I believe BGL is poised to earn at least $10million in EBITDA next year which will translate to about $4million net profit with revenue in excess of $23million. My FY2012 IV is north of 40cents.
I asked Jason about whether they are planning to pay a dividend next year, and he said that since they will be in a very strong cash position they may decide to use that for complementary acquisitions rather than dividends. I also asked him about the balance sheet deficit at the half year report, and he made it very clear that the large trade payables related to the outstanding share payments to the Clever Communications shareholders and that these payments were all completed back in February. Therefore their cash position is strong and they are debt free.
TAKEOVER SPECULATION:
As we are all aware there has been much talked about speculation regarding Vocus (VOC) being interested in acquiring BGL.
Fortunately, I managed to listen in to James Spenceley, the CEO of VOC, at a conference last week and was able to ask him about that.
James made it very clear that any acquisition will need to satisfy two criteria:
1. It needs to own its own infrastructure and not be reliant on Telstra – BGL ticks all the boxes here!
2. It must fit in with their total network solutions strategy – BGL fits in perfectly with providing a redundancy or backup connection to businesses in conjunction with VOC fiber network.
In addition, since BGL buys their wholesale internet data from VOC and 2 other carrier wholesalers, VOC could divert all of BGL’s data through their own undersea cables.
There can also be other interest from suitable acquirers such as AMM, MAQ, Optus and TPG to name a few.
In my opinion VOC and BGL are a match made in heaven! And since Jason mentioned publicly any takeover offer needs to be very compelling, I believe there is plenty more upside in this hidden little gem!
Cheers.
Roger Montgomery
:
Hi Ron,
…for balance, did you look for any other negatives? What do you think the risks are for them (NBN et al.)
ron shamgar
:
the NBN is an unknown that will take 5-10 years to fully roll out, if it ever does – if the coalition takes office in 2013 good chance they will freeze roll out.
in the meantime, its a net positive with media coverage creating awareness for the need for fast, secure and reliable internet/cloud connection for businesses. not to mention the other opportunities the NBN will create in back haul links etc.
lets assume the NBN does get fully built, by that time BGL will be a lot bigger business and i doubt it will stay independent.
other risks though include:
– technology risk – which these guys are at the forefront of changes.
– being in a niche market, but a growing one.
– normal business execution risks including acquisition integrations – though i think Jason is the right person to deliver these.
i also may go as far as to say that, if china’s property bubble collapses and bad loans start showing up everywhere, and in addition the US falls into another recession than in my opinion MCE, FGE etc are a lot riskier investments in the short term than BGL.
No matter what happens to China or the US, students will still be downloading movies and games at night, and businesses still need reliable connection to the internet/cloud.
lets wait and see. cheers.
Roger Montgomery
:
I wholeheartedly agree with your last point about usage volumes increasing irrespective of global economic events (notwithstanding a depression of course). But otherwise lets build a list of ‘knowns’ rather than ‘hopes’ based on ‘ifs’. A solid start though. Why do you think Jason is the “right person to deliver” integration. How old is he? What is his track record? etc etc… Not disagreeing with any of your analysis thus far Yaron, just want to see evidence-based conclusions.
Ron shamgar
:
The NBN is a ‘big hope’ based on plenty of ‘big ifs’. It is an unknown.
In regards to Jason’s track record: he is a pioneer in his industry and has already setup and sold one business and it seems he is about to do that again. There is no doubt that BGL is already a success story.
Regarding his age; late 20’s or early thirties. CEOs in their 50s and 60s have destroyed plenty of investors money!
His knowledge of the industry and his success in building BGL, leads me to believe that he is capable of delivering the integration of their acquisitions and so forth.
Roger Montgomery
:
Great stuff Ron. Good digging. Having spoken to many industry players, I agree NBN is an unknown but while it will take many years to roll out, if it does, Big Air’s offering may only prove to be a backup/redundancy proposition. Having said that they are growing rapidly because fixed line investment has stalled ahead of the NBN. I edited your post and retained what was fact-based. Question: Re: “Pioneer in the industry”? Had fixed wireless not been done anywhere before 2002?
ron shamgar
:
he is in his late thirties for the record.
ron shamgar
:
pioneer in the industry, im referring to his first business which he sold for $20million 10 years ago. they were the first to connect businesses to the internet! please read the link to the article in my post above. cheers.
Mamos
:
Thanks for the summary. I have heard similar from Jason. Have a large holding too.
Few other points to add:
Corporate
1. BGL are seeing significant growth in the redundancy market, some of their partners like Bluefire who offer Cloud services actually specify that two links are required for all their customers accessing their cloud based services.
2. Current focus is on growing BGL’s Channel partners since this represents the easiest path (lowest selling cost) to grow the number of business and corporate customers that utilise BGL’s network. I would expect that BGL will start to increase the focus on direct selling in FY12 once BGL have completed their integration work.
3. BGL also get asked to extend their coverage almost every other day to service locations which are poorly serviced by fibre today. Often fibre is available but the cost or the contractual terms under which it is offered are prohibitive. Wireless has a huge advantage since it is relatively inexpensive to install and the Capex is largely portable.
4. BGL has opted for the wholesale approach because it is too costly to replicate the sales and marketing that the channel partners offer.
Student accomodation
1. It is a protected market with barriers to entry as BGL have the exclusive right to use infrastructure within the student accommodation building. The contract terms vary from longest being 8 years down to 3 year contracts.
2.Even if broadband or fibre is available to the student accommodation the students are not able to use it directly as BGL owns the rights to use the infrastructure within the building.
3. As all student sites are migrated to BGL fixed wireless network will save on carrier costs. Currently pay about $1m to external carriers.
Technology
1. The availability of spectrum is not really an issue. BGL take advantage of higher frequency of 2GHz-120GHZ which is suitable as they provide point-point links only. The lower frequency spectrum for use in mobile networks which can go through walls etc is what is really sought after by the Telco’s.
Risks
There will be an impact from NBN but will not be felt for 3-5 years. Fixed wireless usage as a redundant link will increase as the use of cloud computing and fibre becomes more prevalent. Furthermore, as all copper is being de-commissioned there will only be one alternative link to wireless which is fibre.
Biggest risk in business according to Jason is execution risk.
He specifically mentioned someone may try and replicate their network or they get taken out cheaply by a Telco.
There will always be some regulatory risk. Doesn’t see technology risk as an issue.
Outlook
“Run-rate is increasing every month”
Currently 67% margin and margin will improve as integration completed. Core fixed wireless margin 80%.
Catalyst
FY12 guidance to be given in 1Q FY12.
Roger Montgomery
:
On your point 3: …and it takes much longer to install cable! I wonder, is there an OH&S issue for companies with wireless as there may be now with mobile phones? The momentum behind communications is enormous so stopping it with health warnings will be like trying to hold back the tide, but I do wonder if many wireless offerings/mobile phone companies are selling the cigarettes of the future. Also wonder if mothballed wire networks will one-day be recommissioned. Thinking very very long term of course…
Phil Crossan
:
The International Agency for Research on Cancer released a press release classifying radiofrequency electromagnetic fields as ‘possibly carcinogenic to humans’ (Group 2B). They group agents into 6 main categories with 1 being ‘carcinogenic to humans’, 2A being ‘probably carcinogenic to humans’ and so on.
Alcoholic beverages are classfied as a 1 by the same organisation.
In my opinion it is important to maintain a sense of proportion about these things.
Roger Montgomery
:
Good clarification. Thanks Phil.
Lindy Lu
:
@mamos
“1. It is a protected market with barriers to entry”
Is this really true, really? Why wouldn’t a student just use a prepaid 3g Telstra wireless plan vs the BGL prepaid service?
I can’t see BGL monopoly pricing if substitutes re available.
Kisses,LL
Ron shamgar
:
The answer is simple lindy, try downloading 10gb of movies and games in one day on a 3G wireless plan! Good luck to you if can do it and it will cost you a fortune to have that kind of download limit on a 3G plan. I suggest you do further digging. Cheers
Roger Montgomery
:
Or just wait for 4G…
Rob
:
HI Ron,
Love your work.
Here is a transcript of david Thodey talking with Alan Kohler on the ABC’s Inside Business on Sunday.
http://www.abc.net.au/insidebusiness/content/2011/s3253732.htm
and here is a link again to Alan for his take on it.
http://www.abc.net.au/news/stories/2011/06/27/3254012.htm
What’s interesting is one set of payments to Telstra are contractually guaranteed for 30 years. This could make any coalition attempt to unwind the NBN very expensive.
Also note that Thodey is very specific about restrictions on Telstra’s ability to compete wirelessly with the NBN. Basically it boils down to specifically promoting wireless in lieu of the NBN
Thodey “…The only constraint, and it’s a very, very minor constraint, is to directly put a little pamphlet in someone’s house that says, “Do not buy NBN-fixed broadband, buy our wireless broadband instead…”
Both articles note Telstra’s new warchest for buy backs, dividends and acquisitions.
Vocus should look over their shoulders, they may not be the only ones looking at Big Air.
Cheers
Rob
ron shamgar
:
Hi Rob. Thanks for your feedback.
Also BGL was mentioned in today’s fox business channel – press the red button and scroll to NBN headline.
It would be funny and a bit ironic if Telstra were to buy BGL.
BGL prides themselves on being independent to Telstra :-)
So as long as Telstra pays an expensive price, i’ll let them have it! :-)
cheers.
Stephen
:
Company: Corporate Travel Management
Code: CTD
MQR: Not known
Corporate Travel Management listed on the ASX in December 2010 after conducting an IPO to raise $20M.
The company itself was formed in 1994 and is involved in arranging and coordinating business travel for corporate Australia on a fee for service model and includes bookings, ticketing, travel management data and ancillary services. The funds raised were used to settle the purchase of Travel Corp at the end of 2010 and to repay debt relating to previous acquisitions. The company has a market cap of approximately $70M.
The Company has reported annual 30% compound growth in EBITDA over the past 5 years albeit with a dip during the GFC.
Corporate travel in Australia totals about $7 billion dollars (total transactions) per year and is forecast to grow at about 4 % over the next 2 decades (Bureau of Infrastructure, Transport, and Regional Economics). Recent passenger travel reports released by Melbourne and Sydney Airports this current year support those figures. Corporate Travel Management has about 7% of the market with offices in Melbourne, Sydney, Brisbane, Gold Coast, Perth and Auckland. It is won numerous travel awards over the past 7 years. At the time of listing it had 611 clients, 11 of whom were within the ASX 100. No one client contributed more than 5% to earnings. Client retention rate was 97% which is a testament to the strong relationship it has with its clients.
Competitive Advantages:
CTD maintains a personalised relationship with its clients which are demonstrated by the high retention rate.
Business costs are at the lower end of the scale as the business does not need to keep a large number of expensive shop fronts such as those required by leisure travel agencies. Plant and equipment is kept at a minimum with investment skewed toward electronic infrastructure which is not as expensive as bricks, mortar, and machinery.
CTD has been in operation for 17 years and has won numerous awards in the travel industry which has been recognised. In May this year it released two new technology programs called assist-u and u-track. Assist-u delivers messaging to a traveller’s phone including itinerary and booking details and changes, whilst u-track allows for global positioning of all its travellers so as to enable instant communications in times of natural disasters or other large scale disruption. From a business perspective for clients, these new products are invaluable to companies HR managers and travel compliance managers allowing instant messaging and tracking.
CTD has no debt.
The company is focussed on further technology investments allowing it to develop streamlined booking assistance to clients without increasing the physical cost of running the business. The model allows CTD to receive payments for service immediately from a client (corporate credit cards) and before booking travel meaning there is little chance for outstanding client debt to accumulate.
Outlook:
In June 2011 the company lifted its profit guidance (NPAT) to $8.5M. This is above previous forecasts. The company also stated that there had been no downturn due to the Japanese Tsunami and Queensland floods.
It will be paying a fully franked dividend of 5%
When viewing companies such as CTD many believe that systems such as Skype will decrease the companies balance. What needs to be understood about corporate travel is that it is not the top executives of companies jetting around for meetings. Corporate travel involves moving whole portions of a company’s workforce from one location to another. For example a company may have management attending conferences or travelling to Asia to conduct various business activities. An insurance company may move its assessors around Australia at various times. Miners move large components of its workforce regularly to conduct operations. My own company moves many of us interstate regularly to undertake our work. None of this can be done on Skype and is factored into the cost of doing the business.
I believe Corporate Travel Management is an outstanding company which has the capacity to grow its earnings over the next few years. I currently own shares in the company.
Stephen
Roger Montgomery
:
Thank you Stephen for sharing your thoughts about CTD. Will cover it next week too.
ken fraser
:
MLD is one that has an increased order book of $1.3 billion so their prospects look good for 2012 and for 2013. Trading at a good discount to IV for 2012. Thanks for this one Roger and for MCE, FGE, VOC, SWL, NCK, MTU, ORL, CCP, ZGL, DCG, JBH. Talk about some winners and most are still winning. Also thanks to the blogger who mentioned BGL. TSM full year result and comments from management will be one to watch for me, also AIR. That $50 book you wrote Roger is worth it`s weight in gold thanks again. Thanks doesn`t seem enough but what can you say.
Roger Montgomery
:
Hi Ken,
I am delighted it has been so helpful and profitable! A few considerate and very generous bloggers called to take me out to lunch and I thought that was very thoughtful. Thank you all for your words of encouragement. Without knowing that its helps I wouldn’t bother, as we have plenty to do at the office. Our recent meeting with Transurban’s CFO Montgomery HQ was terrific.
Doug
:
Greetings All;
I’ll throw one into the mix I haven’t seen mentioned.
WLL Wellcomm Group is a company offering pre media services and television production with a strong presence in Asia as well as Australia.As at 30/12/2010 they were debt free and extrapolating out the half yearly figures I come up with Equity per share of $1.25,ROE of 20% and assuming a 60% payout ratio the IV is around $3.00.This is a company that keeps a low profile,is prudently managed and should keep producing sound results.
Thanks to all blog contributors for the great posts.
Regards Doug
PS: I have been a professional investor since 1999 and
fervently wish “Value Able” had been published back then.
Roger Montgomery
:
Thanks Doug,
And thansk for posting too. really appreciate the suggestion. I will put my valuation and MQR up for Wellcomm next week.
Craig B
:
Hi Doug,
I’m fascinated that you describe yourself as a professional investor since ’99, yet seem so welcoming of Roger’s methods now.
I’d love to hear your account of what didn’t work for you over the last 12 years, and also, what did.
If you’ve got time of course.
regards
Doug
:
Hi Craig; My investing philosophy since 1999 was built around Jim Slaters book “The Zulu Principle” focusing on Cash Flow;P/E and PEG ratios.I traded
positive news items especially earnings upgrades as the access to ASX announcements was in its infancy and I found market reactions lagged the news.
Your question prompted me to review my Trading Diaries for those years and recall the big winners [Credit Corp before its troubles;Kresta 9cents to plus 60;
Gunns,Avatar,Campbell Bros and Grimwood Davies,where is IT now??] and the horrors HIH;Pan Pharma,and the myriad debt laden micro caps that sucked me in with a good story but little substance
Vaue Able really brought home to me the dangers of debt and the fallacy of P/E;
my average return for the ten years pre Roger was 11% per annum;the financial year just ending will exceed 25% chiefly because the “rubbish” has been eliminated and I have greater confidence to load up on the undervalued quality.
Now in my early sixties I have been in the market 30 years and still seem to be on a learning curve,battling a “Gamblers Temperament” and an ever present impatience.Those of you fortunate enough to have a long investment lifetime ahead should feel blessed to be exposed to Rogers wisdom.
Good Investing
Doug
Roger Montgomery
:
Thats amazing Doug, Thanks for the encouraging words…
Craig B
:
Doug,
I am a punter myself, and prone to the odd wager based on spur of the moment gut-feel, but I’ve been pleasantly surprised with how I’ve managed the emotional terrain of this investment roller coaster since investing in the share market.
I can only attribute it to pounding the right messages into my head – focussing on the businesses and not the share price wiggles.
There certainly have been testing periods. Seeing your invested capital nearly halve in market value is never the plan, but can be the reality.
I keep my own impatience in check partly through determination, however that wouldn’t be possible without a sound intellectual framework. Keeping in touch with this blog helps keep that framework in place.
Thanks for the history. Very generous of you.
Ash Little
:
I have looked at WLL before and did not swing.
I can’t remember why though so will have another look
Tim
:
Watching some already listed and
ANG
MML
DTL
NVT
Cheers,
Tim.
Roger Montgomery
:
Some good ideas Tim. You are all doing some fine work…
Matthew D
:
My wish list: CAB, JBH, BHP, CPU, LNC, FLT, MGX, NCM, SEK, GUD and ORL. Any thoughts guys?
How did I go considering I haven’t read the book yet? :D
It’s in the mail ; )
Roger Montgomery
:
Delighted to hear it Matthew! There were celebrations at the office, champagne corks popping and toasting all round when we saw you had ordered it.
Matthew D
:
hahaha!!! happy to imbue your office with happiness and merriment :D
Alex
:
Hi Roger.
I thought your book was great.
But if your number one goal is to generate superior returns for your private fund, then just what is your goal for value.able followers? Without declaring what is in the fund, and how you run it, just how do we really know what you are thinking/doing?
Even the great WB opened his BH to everyone (one could buy just one share if they wanted)
I’m real sorry to have to ask the most basic of questions and feel free to remove the post if you want: but surely somebody amongst the value.able disciples has to ask this. Oh and just why is this fund only open to people with capital of over 1M? Or is that what the coming “announcement” is all about?
Again I’m real sorry to have to ask this. And I’m not a financial services stooge or anything. Just a genuine (very sceptical sole investor) One can’t be too careful. Feel free to tare me to shreds if you want :)
Cheers
Roger Montgomery
:
Hi ALex,
Delighted you asked. Your concerns are yours and therefore valid. I don’t allow any ‘tearing to shreds’ at this blog as many had found out already. They have already gone elsewhere and good riddance! Writing is also a very good discipline as it forces me to committ the ideas to print. What better environment to test your ideas than to submit them to peer review? Regarding what we are doing – we aren’t doing the opposite! Of course you are right, I am not going to disclose what I am buying right now and as everyone here already knows I am under no obligation to keep anything up to date or timely. Its all about education here only. The best thing is being part of a community of like-minded investors who previously had nowhere else to share their interest for this style of value investing. Welcome and thanks for sharing your concerns.
Geoff B
:
I am interested to see if CMG (Chandler McLeod) features. Earlier this year they took over Ross Human Directions and late last year Roger rated CMG as a A2 company and Ross Human Directions as a A1 company. To me, the intergration of the two companies appears to be a good mix.
Roger Montgomery
:
Will have to wait for the full year results Geoff. Thanks for bring it to everyone’s attention.
Mark Ab
:
Three of my favourites to add to this list (I currently own all) are ARP, TGA and ANG. I am fairly sure all of these have been on the blog at some point but I thought I’d mentioned them again. They all have strong balance sheets, rising IV’s and importantly all have reasonably strong moats. ARP’s track record speaks for itself, consistently rising IV and expected to continue it’s market dominance as competitors struggle against ARP’s market share and scale. TGA appears to have some competition around the corner and this is probably the biggest risk to invest going forward. ANG’s NPAT was up 31% to $10.69m for the half-year ended 31 December 2010, and their orders are becoming larger. Should be interesting results period.
Regards
MarkAb
Roger Montgomery
:
Thanks again for the suggestions and insights Mark. I will be watching reporting season very closely indeed.
Mal
:
At current prices, I have the following industrials below IV (and investment grade):
DCG
MAQ
MCP
BGL
CCP + HSN just above my calculated IV.
Mining – there are so many undervalued miners, can’t cover them all, but IO and gold miners are cheapest, followed by copper. My favourites at current prices:
FMG, MGX (IO)
CGX, OGC (gold, MML soon if it comes down a touch more)
AVM (copper)
SEA (oil)
Roger Montgomery
:
Good ideas Mal…some decent companies there too. Thanks for contributing.
Hardin
:
A interesting micro cap I have been keeping a eye on is KNH, Koon Holdings.
KNH is a investment holding company based in Singapore with exposure to civil engineering, reclamation and shore protection.
KNH has decent metrics and a large MOS in my opinion. I will be watching with interest this reporting season befare making any investment decisions.
regards
Hardin
Roger Montgomery
:
Good spotting Hardin,
CHeck the accounting assumptions used for reporting on the balance sheet. There may be nothing there but its worth checking for holding/investment companies.
Craig B
:
Hardin,
I’ve taken an interest in Koon myself recently. One thing to keep in mind though, is the class of securities that actually trade on the ASX. They aren’t fully paid ordinary shares, but something called CDI’s. They do map 1 to 1 with shares on the Singapore Exchange, but its still unclear to me how many of the actual shares are available for purchase on the ASX, which will effect the liquidity.
It’s still unclear to me what how CDI’s work, so I haven’t taken the plunge yet. There’s also the matter of Koon’s largest project, a Port development in Vietnam (Sao Bien International Port), which has been postponed.
I might try and read the following referenced material later, (after episode 4,000 of Dora the Explorer finishes, when I might get some time to myself).
“Procedures dealing with CDIs are detailed in Section 8.8 of the CHESS Participant
Procedure Guidelines and the operation and implementation of CDIs is governed by
Section 3A of the SCH Business Rules.”
Craig B
:
Make that Section 19.1 of the ASX Settlement Procedure Guidelines.
Ash Little
:
I also have looked at Koon and It appears cheap well run and in a pretty good space
The BIG BIG issue for me is liquidity.
Exactly 293,500 shares(CDI’s) changed hands in the last 12 Months with 100,000 of these being on the one day.
It is not much more liquid in singapore either.(The company is listed on both exchanges)
Looks like our local bakery changes hands more often than equity in this company
Scotty G
:
I too have KNH as significantly (+40%) under IV but the issue is the sheer illiquidity of the stock. It last traded on the 18th of May!
So it will be hard to get in and even harder to get out if you needed to. Also the price does not really move that much due to the lack of trades.
It does pay a dividend though and would fit if you were happy to hold for a few years and believed that the construction industry in SE Asia, specifically Singapore, was likely to remain solid.
Roger Montgomery
:
Scotty and others,
Regarding KNH and any other company that trades “by appointment”; you need to be very careful unless you can see the company being much much larger in the future. Only then will lqiuidity issues improve, enabling you to sell a large stake to the index managers who might, for example, only be permitted to select from the ASX 300.
fred
:
Hi roger
I would like to add 2 not mentioned yet which are CMI Limited ( cmi ) which could slide down now due to a loss to wind up ( cmi ) and yes Roger I did vote and I voted to close it down. The second is Royalco resources ( rco ) is a little company that has started to pay dividend has no debt and looks pretty good. Yes Roger I did find this one while trying to find your gold pick.
Rom
:
Hi Roger,
I’ve recently become a Value.able graduate and loved your book. About to re-read a number of the chapters again!
I’ve held Vocus (VOC) for some time now and since jumping on your website (after reading your book) have noticed that you too share the long term growth of this emerging business.
A month ago I’d being doing some figures on the growth potential of BigAir Group (BGL) and actually noticed a related article from Vocus yesterady saying they are in prelim discussions for a potential aquisition. See article notes below:
“Speculation is mounting that Vocus Communications will make a formal takeoverbid for Australian rival BigAir. The telecommunication wholesalers have reportedly had preliminary discussions, but BigAir founder and CEO Jason Ashton says talks are in the early stages. Ashton and major shareholder Microequities believe any offer would have to be substantial, as BigAir has strong growth potential”
Any initial thoughts from your perspective at this early stage on intrinsic value?
Roger Montgomery
:
Hi Rom,
There has been some discussion about Big Air and I am certain that there are many visitors who own the stock or want to, so I will let them offer some suggestions first.
Ash Little
:
Hi Rom,
This stock has increased over 50% since I purchased it so the margin of safety has all but disappeared.
It has really suprised me how quickly this stock approached it’s IV.
Very busish forecasts for 2012 need to be met or exceeded for the IV to go much further from my current level.
Ron shamgar
:
Hi Rom,
I wrote a very extensive post on BGL a few weeks ago when the price was 20cents!
It did create a bit of a stir on the blog! I suggest you read it and reach your own conlusions.
I recently met with their CEO, Jason Ashton, and discussed their business and where they are heading. All I can say is, I sleep good at night knowing he is running the business!
In regards to VOC speculation, BGL is a perfect fit for them, but they will need a big equity raising or dilutive scrip bid in order to buy BGL….so watch out!
It is my largest holding and fortunately for me and whoever else bought this company, the current share price is 30cents as of today! :-)
Cheers.
Roger Montgomery
:
Hi Ron,
We met him too; What specific qualities and abilities makes you say “All I can say is, I sleep good at night knowing he is running the business!”?
Ash Little
:
Hi RonnThanks
These comments are on the basis that VOC are interested in BGL as a takeover which is more than speculative ATM
As an owner of both BGL and VOC I am split between a fair price for BGL and VOC not overpaying for acquisitions.
What I will say is any acquistion by VOC will mean an issue of new shares because they just don’t have the cash to buy BGL outright.
The cash to pay for any potential takeover is likely to come from Roger and his fellow fund managers at a nice disount. Further slaping the retailer around.
I am just starting to get the view that VOC will do well but may not be too good for the retail guys like us. After all what we have got in the past looks very muck like a donut.
But there may be a spec of horizon for the reatil guys.
VOC has 57% of shares out of escrow very soon and a high porportion of these guy look like being serious sellers.
So swaping VOC shares that may be under selling preasure looks fairly ordinary in comparision to BGL shares with a MOAT
BGL shares yes VOC in this scenario IS NO NO NO
Just my current view
Roger Montgomery
:
Ash is right, we do like our discounts…
Scotty G
:
Was wondering what future EPS growth people are currently using for VOC?
I can see the obvious growth prospects for the company but am having trouble translating this to an EPS range for the next couple of years that I can use in an IV calc.
Any thoughts gratefully appreciated….
Brad Voigt
:
Hi everyone my suggestions offering a decent MOS( >10%) would be FLT, JBH,ANZ and FGE
An interesting microcap i have found is IDE looks to have good metrics and high MOS . Am trying to ascertain its competitive advantage, would anyone have any research or insights on this company /industry ?
I
Roger, Any chance of an MQR on IDE
Roger Montgomery
:
I can do that Brad. IDE MQR = A1! Good spotting.
Andrew
:
Hi brad, i have just recently found IDE one as well. It looks very promising. looking forward to doing some more digging. As for competitive advantages i have found a few things that get my attention.
One thing i would like to investigate in regards to a competitive advantage is the effort that would be needed for companys to switch to a competitor. I would suspect it would be a bit of a hassle for them. But will need to look into a bit more.
With technology only increasing, i think their will be a good demand from what i have ascertained so far they do. I saw a few mentions in regards to Cloud computing and stuff in some document or page about them.
Will happily share any info i come across about them as i go digging.
Roger Montgomery
:
great Andrew. Thanks for the input.
Nic Arena
:
Hi Brad I first mentioned IDE back on the 28th March (See below)
Posted by Nic Arena on March 28, 2011 at 8:54 pm
Another company is Ideas International (IDE). Good ROE the last 3 years, very low debt, good cash flow and trading at a small MOS. Only problem is its illiquidity. Would actually be interested to know if anyone else has purchased some shares. I own some. Currently at 83 cents.
I didn’t receive any replies so even though I thought it was good company and I bought a small parcel of shares I thought I might be barking up the wrong tree. After seeing Roger grade it as an A1 it has comfirmed to me that I now know I have learnt a great deal over the past year or so. So thank you Roger! and bloggers! The fact that I was confident to purchase shares in this company when there was no one else showing any interest shows how much I have faith in the value.able system (although I do look carefully at most of the companies mentioned here – who wouldn’t!).
From their last Report I get an IV of $1.46 (current price 90 cents). Since Stephen Bowhill started at IDEAS in 2007 (except for the first 6 months) the companies prospects have improved out of sight. I would say this guy knows his stuff.
Roger Montgomery
:
Worth working up some more evidence Nic…keep digging, you are on the right track and well done!
Harley G
:
I bought some IDE shares last September but recently sold as price came closer to IV and I felt there were better opportunities around. From what I recall: Management seems strong, the buyback below IV is a good example of acting in shareholders interests. The strong AUD is an issue. The main motivator for me to sell was that while IDE are in an industry that I see has great potential, the main competitive advantage in my opinion is their management/employees which I think is fine if you have a sound understanding of the industry specifics, what exactly IDE does for its clients and customers, etc, but since I personally am not an expert in that area I felt I was taking the risk that should significant changes in the industry/competitors/product offerings/etc occur, that I may have been unable to react as quickly as I would have liked. So I felt that price converging to IV was a good opportunity to take profit.
Having said that I do believe IDE has potential and that their market will continue to grow. Had the share price been presenting more value I probably would have considered becoming an armchair expert in the industry! :P
Roger Montgomery
:
Thanks Harley G.
APpreciate you taking the tme to contribute your thoughts.
paul
:
Hi All ,
A interesting brief article has appeared in a car industry web site , http://www.autotalk.com.au ( no password required) . In summary it says the Toyota dealer network are establishing a used Toyota inventory site for dealers to display their stock.
It talks of dealers frustrations with paid per lead models as per car sales . The above will be effective , would’nt you take a look if you were looking for a Toyota ? Once up going well these dealers will not dual list their stock .
As i have said before , Car sales is very effective but with this Toyota site and also the Newscorp / Automotive Holding effort – the sharks are circling ( no industry pun intended ! )
I think Roger’s analogy of the blender being on ” pulse ” in terms of these ” list ” type companies is right on .
Maybe the above competition will throw up a over reaction in terms of Car Sales share price , but the variables are increasing .
Roger Montgomery
:
Great stuff Paul, Thanks for sharing that. I thought about it a lot last night and I wonder whether people will be more likely to use the site only AFTER they have made the decision to choose Toyota. WHat is happening is what I refer to as the Blender Effect. You get an industry settling and then someone or something comes along and presses PULSE and everything gets churned up again. Makes sustainable competitive advantages difficult to establish.
Marty
:
They could even allow private sellers to put their Toyota on there too and turn it into a money earner rather than money saver.
If, as Roger said, you’ve made the decision to buy a Toyota, it would make sense to have them all in one place rather than still having to go to multiple sites to see if there is a better deal on one there.
Maybe things like this will make carsales look hard at their model, change it and re-establish their competitive advantage. I don’t know, but it is interesting.
I have a client who sells second hand cars and he HATES carsales (well, their prices anyway) and would jump at an alternative that works and was cheaper.
paul
:
test – i just tried to post and my computer would not allow , so trying a test before i re write
John B
:
Gold equities have underperformed the gold price by circa 30% since April 2011. The recent flurry of merger and acquisition activity in the gold sector has come as share price weakness across the sector creates an opportunity for acquirers.
RMS Ramelius Resources produces gold for less than $400 per ounce – rich ore
I haven’t yet done the RM sums
I expect to get a raspberry from you on this one as you teach us to be skeptical, wary of WA miners !
Roger Montgomery
:
I can put something up about Gold stocks soon!
Ash Little
:
Are you sure Roger,
Last time you did that we all got gold fever
Roger Montgomery
:
Maybe something hypothetical then…
Harold JANUS
:
I liked RMS but they are runing out of gold resources and this may make the market nervous so I sold them for 1.45 on 31 May.
Thank you Rodger for your teachings, I sold TLS {wich I would not have done before] for 3.02 on 2 June and bought JBH with the proceeds at 16.31 and am laughing.
Harold
Roger Montgomery
:
Delighted to hear it Harold. I am pleased the lessons are helping.
Harley G
:
Adding to this, Beach Petroleum have sold their holding of RMS. This in my opinion explains some of the constant drag down on the share price.
“Approximately 20 million Ramelius shares have been divested in recent weeks, the largest parcel being just over 14 million shares on the 22 June 2011, resulting in Beach no longer owning any shares in the company.”
Mark Ab
:
Just for your interest, the chairman of BPT is also the chairman of RMS…
Michael S
:
Hi Roger,
Credit Corp (CCP) is my submission. I am interested to see if they provide a forecast for the next half year and compare it against my guess. I am guessing the IV will rise.
Regards,
Michael S
Roger Montgomery
:
Thanks for sharing Michael. Keep contributing! One that we own.
Kent Bermingham
:
Michael,
If I use an RR of 14% I get a significant MOS downside, what RR are you using to make this comment please.
Michael S
:
Hi Kent (and Roger),
I use 14% also (though I use a slightly different formula to the valuable one). I use beginning equity and factor in franking credits. I have an IV for June 2011 of $5.91 using management forecasts for NPAT. My guesses for 2012 give me an IV of $6.72. I try to be conservative. ROE has risen from 17% in 2009 to 24% for 2011 even though debt has reduced and equity retained.
I hope management provide guidance on NPAT and payout ratios for the next period with the full year results so that I can have more confidence.
Kent (or Roger), what IV have you got on them for 2011? What change do you guess for 2012?
Regards,
Michael S
Roger Montgomery
:
Stay tuned.
Simon Anthony
:
This is my favorite time of the year, where my body clock is set to GMT for the next five weeks and I stay up all night watching Wimbledon and then Le Tour de France (ties in with the above photo nicely don’t you think). This reporting season one company above all others I think analysts are most interest to watch report is QBE.
Our Aussie global insurer QBE has had one of its most challenging 12 months on record trying to reassure nervous investors about QBE’s loss exposures to a series of natural disasters around the world. Its widely believed that Australia’s largest insurer by market value will record a narrower insurance margin after “unprecedented” claims from catastrophes.
Despite putting through substantial price increases in catastrophe affected portfolios a unusually high number of global catastrophe claims over a twelve month period mean that QBE’s first half insurance margin will likely be at its lowest level in seven years.
Its bill for March 2011 alone was at $US550 million after taking into account payouts for the Queensland storms, cyclone Yasi and the Christchurch earthquake(s), the latter of which has seen QBE’s costs capped at $US175 million. Large claims of $2.5 million or more through May, net of reinsurance, rose to $830 million following damage from Cyclone Yasi, floods in Queensland, and earthquakes in New Zealand and Japan. That’s $340 million higher than the first half of last year and compares with $1.08 billion for all of 2010. Additionally the company still has to report the effects of the recent US tornadoes/ hurricane season over the past six weeks.
QBE shares have been marked down 10.55 per cent over the last 12 months. This flies in the face of a large buffer of $US1.1 billion to cover further large losses from catastrophic events this year, including the second Christchurch earthquake after revealed the Japanese earthquake and tsunami was likely to lead to net claim costs of $US125 million and is the result of insurance cover written through the Lloyd’s of London market, specifically through an umbrella syndicate of underwriters of recent gross written premium (revenue) of just over £1 billion ($1.6 billion), of which nearly three-quarters was taken up by two specialised underwriters of reinsurance cover and marine and energy insurance. QBE will pick up a proportion of insurance written by those smaller syndicates which it estimates to be $US125 million. That is just over 20 per cent of the $US560 million that the company has set aside for payouts related to one major catastrophic event per calendar year.
It will also be comfortably contained within QBE’s total budget of $US1.65 billion for which it has allowed a series of natural disasters around the world this year.
Unlike last year where QBE’s profit downgrade was caused by falling investment income on its ‘float’, with over 87% of QBE’s investment portfolio is held cash and other highly liquid investments failing to capitalise on an ever strengthening Aussie dollar, reduced foreign currency gains and historically depressed low interest rates globally. This is now more than ever before being offset as QBE moves from $AUD to $US reporting.
The remaining 13% of the insurer’s investment portfolio is in equity markets, its holdings could contribute a small profit in line with the rest of the ASX.
Looking through the headlines, QBE’s core insurance business model has held up well. With industry-leading insurance margins, and a successful record expansion in the USA with the Bank of America Corporation having sold all of the lender-placed and voluntary property and casualty insurance assets and liabilities of Balboa Insurance Company and affiliated entities to QBE Insurance Group, along with the acquisition of Ren Re’s US insurance operations. QBE has to date cemented a sizable competitive advantage over its Australian competitors. This I feel is what Value investors should be focusing on, whether or not QBE’s moat is widening or retracting.
Roger Montgomery
:
Brilliant stuff Simon. Thank you on behalf of everyone at the blog for taking the time to share. Most analysts suggest stocks based on an outlook of 12 months at most. If you are looking out beyond a few years then the short term relative softness in the pricing cycle should be forgotten and the strength and prospects of the business (over say five years) remains intact. Near term reserve drawdowns in the industry will be more than made up by higher multi year pricing thanks to the withdrawal of cheap capital, economic recovery.
Phil Crossan
:
Using shares on issue of 1.1B, equity of $10.4B, forecast profit of $1.32B, required return of 10% and payout ratio of near 100%, I get an intrinsic value of $12.20, a significant discount to the current share price. As I don’t think the intrinsic value will catch up for a fair while, I have sold the shares. There are too many good opportunities elsewhere, and it’s important for me to accept that my previous analysis was wrong or that the outlook has changed.
Allan
:
Long term payout ratio is around 55-60%% for QBE. I have always marvelled at this company’s ability to grow by acquisition and it is once again being questioned from their two recent (albeit more riskier than historically) acquisitions in the US. A greater than expected US hurricane season will hurt them (if it occurs) and the full year results were severely impeded by poor investment return and they report in $US. Albeit income from premiums grew and we know this will ocntinue to grow (ever made a claim and the premium doesn’t increase the next year).
Based on a slightly improved forward ROE I have the company trading at a slight discount in 2012 and will be watching the half year results with great interest.
Regards
Al
Roger Montgomery
:
Agree with all your points Allan.
Harley
:
what has SGH done to off all current lists
Harley G
:
Another Harley! I will have to use Harley G from now on then..
Looking forward to what you unveil Roger. Also, keen for the next few blog posts you previewed.
Dan S
:
KAM, SWL, TGA, TRG and TSM.
NFK anyone?
Roger Montgomery
:
Thanks for sharing your list Dan. Good stuff.
Peter
:
Hi Roger,
Cash Converters (CCV) is a company that seems to be getting airplay on Your Money Your Call, seems pretty solid.
All the best,
Peter.
Roger Montgomery
:
Not unlike the time MMS found itself possibly at the short end of the government’s legislative stick. An A1.