The Best of the Best
My kids love the Men in Black movies. One of their favourite scenes is when Will Smith attends the initial interview for Men in Black. With that in mind here are some of the best of the best of Australian equities. Now it’s time to interview each one and see if any jump out of the box.
I used AspectHuntely Search with the following search criteria.
- Interim Ratios ROE > .2
- Interim Ratios PER > 5
- Interim Ratios PER < 10
- Interim Ratios Gross Gearing (D/E) < .25
| ASX Code | Company Name | ROE | P/E | Debt/Equity |
|---|---|---|---|---|
| REF | Reverse Corp Limited | 68.10% | 5.39 | 0.00% |
| BTA | Biota Holdings Limited | 27.53% | 6.34 | 0.00% |
| FGE | Forge Group Limited | 24.29% | 6.48 | 0.00% |
| NCK | Nick Scali Limited | 31.24% | 8.7 | 0.00% |
| JBM | Jubilee Mines NL | 35.22% | 9.63 | 0.00% |
| MML | Medusa Mining Ltd | 20.31% | 9.99 | 0.00% |
| FLX | Felix Resources Limited | 27.47% | 5.21 | 5.69% |
| ORL | OrotonGroup Limited | 50.33% | 7.77 | 9.26% |
| AIR | Astivita Renewables Limited | 21.70% | 6.26 | 16.05% |
| GRB | Gage Roads Brewing Co Limited | 31.43% | 7 | 18.95% |
| TRS | The Reject Shop Limited | 33.61% | 9.75 | 19.62% |
Why those ratios? The following snip from an old post should fill in the blanks. Though in summary, I’m looking for companies with good returns on equity, low debt and that are undervalued.
There are three general investment approaches; secular growth, individual growth and margin-of-safety. There are two techniques to achieve margin-of-safety, buy at times when the general market is low ordiscover undervalued individual common stocks.
Due to an obsession with growth the market discounts ” enterprises that are long established, well financed, important in their industries and presumably destined to stay in business and make profits indefinitely in the future, but have no speculative or growth appeal.”
Is it any wonder that low P/E stocks outperform? TMFRich at TMF has been doing some back testing and found a P/E range of 5-10 provides the best returns. Dreman and others have highlighted that point over the years.
Disclosure: Long Biota
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Hi Dean, TRS is on PE of 14 not 9. Most of the others haven’t been around for more than 5 years. REF has a seriously bad chart. Reverse charge phone calls sound like something from the past.
Good idea though. I trawled up FSA this week as it has a PE of 3. Interesting business but ethically, I can’t bring myself to invest in it and I have my suspicions about their business model.
Hi Sean
All the ratios are based on interim reports. not on trailing twelve months.
REF is a seriously bad and a great example of why it is very difficult to mechanically apply these strategies which have consistently outperformed the market. People trying to follow these strategies all to often put their own filters on and then miss the very companies which provide the out performance. Take REF, while recent fundamentals have deteriorated it could turn around and be a multi-bagger which by itself may account for the out performance of this strategy. REF’s strategy is provide reverse call from mobiles which are out of credit, e.g. kids calling their parents. The danger to any business model like that is the carriers could simply provide teh functionality themselves.
Gage Roads Brewing Co Limited looks interesting, I wonder if I can write off a slab of their beer on investment research
Hi Dean, I had a look at the stocks a bit more:
BTA: you know probably more about it than I do. I don’t know what the shelf live for Relenza is, but I would have thought significant viral resistance would or has occured. The patent expires in ?2013 in any case. The future shareprice depends on what happens with swine flu concerns and the drugs in their pipeline. I wouldn’t bet on it at this price.
REV: Interesting when I looked at it further. It may have potential. Looks cheap. I like it. Will look at it more.
FGE: can’t find much on this one
GRB: Nice website. I like it as a business, it’s on the right side of beer trends. Issued 25% of shares to WOW for 2.5c each for distribution deal.
http://www.microbrewing.com.au/news/articles/137.html. Still they haven’t made an actual profit yet, with the recent profit being a tax loss brought forward or some accounting trickery. Their operational profit is still negative and their margins will get squeezed. Say they overacheieve target and produce 1.2M cases p.a in 2 years (current expanded capacity 700k yet to be completed), margin on each case $3, Profit 3M. Current price 10c, shareholders equity 30M (300M outstanding shares). PE would be 8-10 in 2 years if they produce 1.2M cases per annum, whcih is optomistic at this point. Looks to be fully priced to me at current levels.
Hi Sean
Why did you pick $3 profit per case? My research suggests that’s a pretty good guess, so I’m wondering where you got it from. In 2008 1H Foster’s did $3.87 EBITA per case, so $3 is aggressive, but maybe in the ball park. Cage are expanding to 1.2M cases by end of 2H 2010. With that kind of growth P/E could go way higher, but I have to use aggressive profit margins and P/Es to make Cage look like a great buy at current prices. Though a double in 18 months seems possible.
My adjusted earnings for 1H 2010 is loss of $1.2M, but with the explosion in volume and ensuing fall in variable costs they may even eek out a profit in 2H and if not they should next year.
It appears roughly half the employee costs goes to senior execs and board so that cost per case should fall dramatically. All other variable costs should also fall.
Woolies have guaranteed the loan from ANZ for expansion, so the 1.2M cases is probably not too optimistic.
I think it is a good one to keep an eye on. Big risk having Woolies as such a key partner. I’d like to know how similar deals have worked out for other companies.
Hi Dean,
Rev: I had another think about it. What was I thinking? Their business model stinks! It might be a good punt at 1c or something. Still they are actually making a profit which made me like it just on the numbers.
GRB: it’s had a run. Hasselhurst recommended it on Eureka report at 5c last year. $3 per case I guestimated on what I found on the internet. I think it’s optimistic. From what I can gather WOW own(ed) White and Anchor but they couldn’t ramp up production. WOW then bought GRB stake as it had better prospects for expansion of capacity and closed White and Anchor. It will be interesting to see whether GRB will be able to expand capacity without major glitches. If they can’t they’ll probably be dumped. It’s part of WOW’s strategy for vertical integration and to squeeze margins on the brewers. I think they have thought it through, so I would be surprised if they didn’t have some strategy to either buy the rest of the company if it is sucessful at a reasonable price or squeeze the margins to the point where they would have no interest in acquiring the rest.
I looked at HLD today. It’s had some recent press, as mini ramp up and I think Roger Montgomery was or still is a director although he’s never mentioned it. That could be a potential turnaround at an earlier stage of rampup than GRB.
FGE: interesting but they just issued 20%-50% of their company to clough for 1.9-2.1 which if it proceeds would be earnings dilutive. Don’t know why the shareprice surged on that but it’s actually worth a lot less now.
ORL, TRS look to be fully valued or not in excellent value territory.
One interesting thing I’ve been looking at lately is discount to NTA for LIC’s. http://www.asx.com.au/products/pdf/lmi/lic_premiums_discounts_to_nta_201002.pdf
I wonder if a lot of their demand has been sucked up by ETF’s. Maybe they’re going the way of dinosaurs. Some are badly managed, will always trade at discount to NTA and should be wound up. On the face of it they seem an obvious arbitrage play if someone could take over, but maybe it depends on the management agreements or other barriers. Interesting Clime Capital (CAM) has NTA at 1.3 and trades at 1ish. Roger of course was the founding director of this.
Nice LIC list Sean. One of the reasons I didn’t sell me remaining MMA shares to GPG was due to the large discount to NTA. I just couldn’t bring myself to give up that much value, despite not liking or trusting management and not seeing any clear chance of realising the value. I might end up lucky with that poorly based decision.
I had a look at ORION EQUITIES LIMITED (OEQ) from the list. What a tangled web that is!
SOULS PRIVATE EQUITY LIMITED (SOE) have been on my watch list for a year or so. While the discount is large I don’t know LICs well enough yet to know what could crystallise the closing of the gap.
LIC’s: it’s nice to think about buying $1 for 70c but it’s too hard to crystalise. There’s nothing that can crystalise that discount to NTA that is within my control so I’ll avoid. Interesting to look at the shareprice for CAM. You would have been better off in an index fund. Despite a very persuasive way of putting across his view, Roger stuffed up with CPP with a very large holding in CAM’s portfolio. It’s hard to consistently outperform year after year as a stockpicker.
FLX: has been taken over
JBM: has also been taken over and delisted
Dean you mentioned PSH before, I had a look at it. The main problem seems to be no one believes the maintenance capex requirements for a 70 year old plant (built by ICI in the 1930′s) are what they have been recently and like a run down house there could be a few big one off costs in the future on the turbines or any major component. The replacement value of the plant is 300m. The company is valued currently at 50M with 60M debt. If they had a large EPS dilutive capital raising in the second half of last year, I suspect a return to dividends may not be for a while. I’ll look at it further in the 70-75c range. I think the capital raising occurred at 70c and it could retest that. Having said that, it could go as expected and book a healthy profit.
I’d be interested in what your thoughts are about HLD. I bought a small (3k) bit of this last week. It’s very speculative.
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