What now for Myer shareholders?
From the beginning of September last year, I warned investors about the pricing of the Myer float. If you read The Australian newspaper, watched or listened to the ABC or read the Sydney Morning Herald or Alan Kohler’s Eureka Report you couldn’t have missed the warning. On the 28th of September, using the valuation formula I have been explaining for some time and which I detail in the forthcoming book, I wrote:
“The current owners, including TPG and the Myer family, plan on raising $1.9b to $2.8b to exit the business. (Yes, the Myer family indicate on Page 33 that they may sell 100% of their shares).
$315 million will be used to pay down debt and $100 million odd are frictional costs associated with the float. The rest will go to Private Equity and the Myer Family.
Upon listing, the business will trade with a market capitalisation of somewhere between $2,282m and $2,768m.
What, however, is the business worth?
With all the relevant data to value the business now available and using the pro-forma accounts supplied in the prospectus, I value the company at between $2.67 and $2.78, substantially below the $3.90 to $4.90 being requested. It appears to me that the float favours existing shareholders rather than new investors.
Investing safely in the share market requires a wonderful business and a rational price. Myer is arguably now a much better business than it was, but the price being requested is even hotter than the cover.
By Roger Montgomery, 28 September 2009”
Then James Dunn wrote an article for The Australian entitled Is the Myer Float a Dog? (you can read the article and many others at http://rogermontgomery.com/media-room/in-the-press/ or by clicking MEDIA ROOM at the top right of this page and then selecting “IN THE PRESS”) In James’ article I was feeling a bit more generous toward Myer and gave it a valuation of $2.90.
Both institutional and private investors however willingly paid $4.10 to the vendors of Myer for their stake in the business and while this was at the lower end of the price range, the reality is that it was way above any sensible valuation of the company. Indeed in one article I was quoted as saying that I thought the valuation would be $3.90 in five years time. At the current price today of $3.14, shareholders have lost a total of $1.8 billion. This was an easy loss to avoid but analysts who cover the stock don’t use a valuation model based on Equity, Return on Equity and the payout ratio. Instead they looked at the $41.0 float price and compared the resultant P/E to that of DJ’s and concluded the lower P/E of Myer meant it was cheap. But what if DJ’s higher P/E was too high to begin with? What if it was the result of short term fashion or enthusiasm for something that didn’t eventuate. What if the promoters of the Myer float were buying DJ’s shares (or borrowing stocks to take it away from short sellers) to make the P/E of DJ’s higher? Then the P/E of both would decline.
Professional analysts get paid more than us and yet, their expertise in the case of Myer has currently cost their clients $1.8 billion in aggregate. Now, they will point to the turn down of the broader market, a change in sentiment towards retailers – things they cannot control, but Myer’s 23% decline since it listed on November 2, exceeds the All Ordinaries Index decline of 1/3rd of 1% and the 20 cent decline (less than 1%) of other (preferred by me) retailers such as JB Hi-Fi.
Investors thinking about buying Myer now, because 1) the shares have fallen so far or 2) have underperformed by so much, need to keep in mind that such reasons are purely based on price and therefore will result in financial pain and suffering. You must think about value not price. My earlier posts and analysis reveals that Myer’s valuation should rise to $3.90 in 5 years time. This change is equivalent to a 4.4% compounded annual return which is not high enough – given the risk, compared to the 8% now on offer by some banks for 5 year term deposits. In other words, Myer is still not cheap enough.
Posted by Roger Montgomery, 6 February 2010
Ps. And don’t forget, if you have any questions or you have an experience at Myer you can share click the Leave a Comment button below.
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.
Liz
:
OK Roger, I hope this is helpful to others.
Basically I think the key aspects are this:
1) They invest in top companies, and, LIC’s like Argo and AFI, who consitently pay fully franked dividends, and, they take up DRP’s where the can. LIC’s give them exposure to mining but they don’t hold mining commodity stock directly.
2) They do not have too many stock in their portfolio – approx 20.
2) They rarely sell and ride the ups and downs of the market cycles
3) They accept advice from both their stock broker and accountant.
Above has given them both capital growth and an income and they are now at an age where if they want to spend some capital (usually on their children!) they do.
admin
:
Liz,
That is very generous of you. Thanks for sharing.
Liz
:
Hi Roger,
Not sure if my comment fits in this blog but this is it.
By and large I think I fit into the category of value investor, and, I also like to look at some of the emerging companies where there’s perhaps a leap of faith based on ones assessment of their technology/product offering. For example, UBI or CLV. I’ve bought a few of both to put away yet they may well be punts that fizz or caught by superceded technology.
It would seem that Microsoft -for example – was a standout last century. New technologies re energy/environmental solutions might be the big thing this century… Who knows!
How do you think about valuing stock offering new ideas/products or technologies?
admin
:
Hi Liz,
Thanks for contributing. I just don’t know how to value something that doesn’t yet make any money. You said yourself that “they may well be punts”. I agree. Speculation is different to investing. For me, all investing is value investing and what is value investing if it is not the idea of receiving more than you paid for? And of course, in order to do that you need to know what something is worth. If it doesn’t make any money today or you cannot be reasonably certain about how much it will earn in the future, it is not able to be valued. I don’t claim to be able to know everything but I do know what I can value and what I can’t and you will find that even with a relatively focused circle of competence, there are enough opportunities to do well, if you are not in too much of a hurry.
Liz
:
Thanks for your response Roger. I agree with your comments. (A widowed member of my family has lived off the gains/dividends of ‘value’ investing for 40 years so I’ve seen it work over a long period of time).
I do think there’s more complexity now re assessing intrinsic value in that ‘globalisation’ has led to many companies operating beyond AU boarders so the risk profile has broadened e.g. currency fluctuations (which have been wild in the last 2 years), sovereign risk, demographics and the impact on demand and productivity (a global issue).
In terms of the 2 stock I mentioned, we shall see. Whilst I’m still working I accept the risk – with a small proportion of my capital.
admin
:
Hi Liz,
I would like very much to hear more about the member of your family who has been value investing for 40 years. I think we could all benefit from you sharing what you would like about this person and their investing approach and experiences.
Manny
:
OK then a simple question. Someone holding MYER now having bought at $4.10 and with current price of $3.37, what should he do?
Can the money be used better elsewhere and hence losses should be realised on myer OR should we wait till we get a bit more. I dont expect it to go to $4.10 anytime this year.
admin
:
Hi Manny,
By answering that question, I would be giving advice with knowing all your financial circumstances and needs. You should speak with the person who recommended MYER to you.
Manny
:
The person who recommended MYER to me was “me” i.e. myself. So I have no one to go to ask and since I did not know the answer as I cant value companies like u do thought would ask you.
As far as my financial circumstances are I dont really need the money from the sale of my myer shares but want to know if I could use the proceeds in a better company for long term growth.
admin
:
Hi Manny,
I hear you! On Myer, I think I have articulated what I believe to be the issues facing the company and its intrinsic value. On the second part of your question, there doesn’t seem to be a huge number of bargains at the moment. But just because I can’t find bargains, doesn’t mean that stocks (including Myer) can’t go up and by a lot. Valuing companies is not the same as predicting their course. I have to admit to being average at best at predicting stock prices.
Manny, you are going to have to make your own mind up about what to do with your Myer shares. I cannot help any more than that as I do not own them.
John
:
Dear Roger,
Great call on MYR, so far! What would change your view here? A great interim result with margins through the roof as they focus on house product and get a promotional leg up from suppliers?
Is the propectus net debt to equity a real number?
Keep the blog going, good indepentent food for thought.
John
admin
:
Hi John,
Thanks mate. I trust now you appreciate why I didn’t take an allocation. And welcome by the way. I could make some joke about using pc’s for something useful but I won’t. It would take a bit to change my mind about Myer. I would want to see a few years results and for all of the so-called non-recurring and excluded items noted in the prospectus to wash through to find out what the repeatable numbers are. I would also like the tidal wave of investors that write to me telling me of the poor service they receive at Myer to cease and then I would want to see the valuation to rise at a clip better than a few per cent per annum. Of course none of that means the share price won’t go up, its just that I won’t be participating even if it does. Hope to catch up soon.
I should add for everyone else’s benefit ‘John’ (it is his real name) is one of my brokers and over the last few years has become a good friend. He offered me an allocation of Myer in the float and was not surprised when I declined.
Eamon
:
Hey Roger, was you decision to decline purchase of myers float based on valuation or because the propectus featured roughly 15 times Jennifer Hawken plus a glossy cover? Personally I took a copy as Jennifer was in it couldn’t help overlooking the accounting figures as Jen clearly was better looking then a bunch of numbers on a page! Until my sister slapped and told me to focus that I realized perhaps all this hype will drive up price, and that I should look else where! Eamon!
Roger Montgomery
:
Hi Eamon,
Rejected on valuation grounds.
Mark
:
It’s OK Roger, you have covered it in “What does JB Hi-Fi’s result and resignation mean?”
Mark
:
Hi Roger,
Is there a caveat on JBH?
What are your thoughts on their latest announcement and the subsequent price dive?
Regards,
Mark
Damian
:
Roger,
I’ll be looking forward to reading your book to get an idea on valuations. Do you see David Jones as overvalued? I like the fact that it has consistent ROE > 20% over the last 4 years, but it still looks expensive to me when I compare ROE with the price to book value (currently at 3.36).
http://money.ninemsn.com.au/shares-and-funds/research-a-company/results.aspx?inforeq=historical&code=DJS
A few thoughts from me on the market at the moment.
I also don’t see much value at the moment. I don’t know your exact method of valuation, I generally look at ROE divided by 10% and compare with price to book.
When I create my own search on ninemsn share screener using a criteria of debt to equity 20%, EPS growth > 0%, and display price to book value, I can’t find many cheap stocks.
http://money.ninemsn.com.au/shares-and-funds/share-screener.aspx
However, I have to admit, I do find the decision to sell very difficult. Let’s say you can get 5% in an online bank account, assume 3% inflation, you are getting a real return of 2%. Do I sell companies that have low debt and consistently ROE > 20%, even if they are overvalued? If analysts have underestimated the EPS growth, I could be selling too early. When I do hold a lot of stocks, I find myself checking the US futures every day to see what is going to happen in the US (http://finance.yahoo.com/indices?e=futures), whereas when I am in cash, I am less obsessed and actually hoping for the market to fall!
I do have my doubts at the moment that world growth has recovered. I think oil and mining service companies like Ausenco and Worley Parsons give a good indication of world growth, since they have staff in so many countries and good worldwide exposure. In recent announcements, both are saying that mining companies are not starting new projects, so I have my doubts on mining stocks, even though many brokers are bullish. I hear them say China is the main driver, yet the consistent comments from the head of BHP are that China is 30% of their business, so what about the other 70%? It depends on your view of the USA and Europe. Copper is also regarded as a good indicator, and it has fallen recently (http://finance.yahoo.com/futures?t=metals). I only own Monadelphous in this sector, since it has such a good record, but I will be interested to hear its results (according to Boardroom Radio, their results are on 16 Feb (http://www.brr.com.au/events/filter/results).
Enjoying your blog Roger, keep up the good work.
admin
:
Hi Damian,
You have an elegant way of screening for companies. You may discover in time however that your model for valuation underestimates the value of companies that retain large portions of their earnings and employ them at high rates of return on equity.
If as you say there are few new mining projects being commenced, wouldn’t that mean that the supply will eventually be outstripped by demand, leading to higher commodity prices?
Thanks for your encouraging words. I am pleased you are finding the blog useful.
Kero
:
Roger,
Your reference to the 8% offered by banks is interesting. That 8% apparently requires a commitment to leave the money there for 5 years and while 8% looks attractive now, one wonders what inflation might do in a couple of years time.
So my question is this. In your opinion, if you were investing today with a 5 year horizon, which companies would offer a more compelling investment case than the 8% fixed term?
I like your blog – keep it up.
Cheers
Kero
admin
:
Hi Kero,
Thanks for the comment and the encouraging words. There is a small list of companies at the moment that have the following three characteristics; 1) great quality, 2) trading at a discount to their current valuation and 3) have a rising valuation over the next few years. The only caveat of course is there are caveats. In the case of CSL, its the currency. In the case of MMS its the Henry Tax Review. You pay a high price for a cheery consensus so waiting for the ‘coast to be clear’ is not the key, but neither is the betting when you don’t know who the patsy in the room is. If you have a look at some of my posts for the blog around Christmas, you will find I also thought (and still do) that the market seems expensive. It has since fallen about 9%, but the great companies have still not fallen below intrinsic value and many are trading at my valuations for them in 18 months time.