Ann: Trading Halt, page-21

Thanks for your post Pb. I look forward to your FA-type take on NWH's future share valuation.

On ducks lined up to be shot, we augurs don't kill ducks, we leave that to those who indulge in haruspicy (examining entrails for omens). For Sabine's benefit, a haruspex is the guy who devines using that method, and the plural is haruspices, where the c is pronounced as a k.

On sentiment, I should consider changing how I express sentiment – that is, consider thinking of it as broker-type view, rather than a reflection of what I am personally doing, which is distorted by being over invested in some stocks, or being forced to get some cash at times, or not having funds to buy what I would be inclined to buy if I had the funds, and were not over invested in a stock. My decision to reflect sentiment the way I now do was driven initially by a desire to back my opinions with real money to avoid ramping when I wanted to sell, or down-ramping when I wanted to buy.

On the matter of guesstimating an EPS and a rule-of-thumb share valuation that I have posted recently, like all human beings living in a complex world, I take shortcuts, and in a fuzzy way I adjust a few basic factors to represent a complex web of factors that I cannot easily evaluate. Consequently, when I have ventured a share valuation for NWH, I have in recent times taken the expected FY19 Revenue, and converted it to a NPAT via a NPAT/Revenue percentage that is on the high side. This is because the EPS used relates to the near future, whereas I expect NWH to lift its Revenue in future years, and so I use a generous NPAT factor rather than getting cute and using a multi-year NPV approach based on increasing Revenue expectations and a guesstimated NPAT margin in those years. Also, there is the matter of the current advantage of NWH using tax-loss assets to offset tax payments, and to use a fleet that had its book value impaired in the dark days of recent years. Both these advantages will come to an end. In a nutshell, NWH may well be able to report a NPAT that is 7.5% of revenue for FY19, but if it drops back later as the two above-mentioned advantages are eroded, there are other things offsetting that – increased revenue, lower debt servicing, increased competence, improved track record leading to being able to compete on non-price factors, and hence hold firm on margins, et cetera.

Also, not all NPATs are worth the same to the health of a company. For example, an NPAT that carries a tax expense debit that has its contra entry reducing a tax-loss asset, rather being a credit to the ATO, is worth more than one where the ATO requires to be paid. The resultant improved health of the business flowing from improved cash flow should be reflected in a slightly higher PER. As my real interest is a share valuation, then it does not matter if the reported FY19 EPS transpires to be lower than my guesstimate, if the PER rises above 10. I value NWH at $2.30, but that could transpire to be 23c x 10 = $2.30, or 20c x 11.5 = $2.30, or something else.

The above may not be a smart way to derive an intrinsic value of a NWH share – it's just how I chose to do it in the absence of being more confident of being able to reasonably guesstimate many things in more detail over more years. If your spreadsheet gives you a better picture of future years, then a more sophisticated valuation procedure would be apt.