My criticism was not directed at that specific analysis put out by UBS, and for all I know that analysis may fall into the sometimes-they-get-it-right basket that I mentioned. I like to do my own stock picking, and often it's a mixture of FA and gut feel. Often I get it right, and often it turns out to be wrong.
On getting it right, I have in recent times mentioned CCP and MND in this subforum. I have done well out of these and NWH too, but not without being behind initially with all three of them. I have taken some profits from NWH when I needed money.
On getting it wrong, I got BYL spectacularly wrong. I thought that as BYL had been so poorly run since it floated, that the then new CEO would be able to turn it around, even if if he only had ordinary ability. I took large positions in BYL, and I did well initially, only to lose everything, bar some dividends paid earlier. With TGA, it was the same storey - I did well for years, and then its SP dropped from about $3.00 to 60c. I figured that as the business had operated for eighty years, management did not have to be too savvy if they stuck to what they knew. However, they decided to diversify, and of six initiatives they took, five failed, and collectively lost heaps of money. I have held TGA for about a decade, and sold some at $3.00, so considering dividends and capital gains realised, I may not have lost on it, but I probably did.
My investment failures in BYL and TGA should warn you to take my opinion with a grain of salt. Cum grano salis if you like Latinisms
NWH and BYL were a paired set of punts that I thought could go wrong, because of their common cyclical sector. NWH, is still a punt because it has not settled into a steady-state business, and it remains in a cyclical sector. NWH is morphing into a different business relative to where it was initially, so I hope it turns out to be a superb long-term investment. Being a business that is changing, makes it pretentious for me to value NWH using traditional FA technique like DCF. I decided to simply use Management's revenue estimate for F19, and assume a NPAT margin of 4.5% of revenue, and then assume a PER of 12. That gives me a valuation of (1100*0.045/321.8)*12 =$1.85.
I have in the past mooted that the NWH's SP should get to $2.00, but I have always said so with some future date in mind, like December 2018, or June 2019. That is because I think something positive and meaningful may be announced soon, and that will excite Mr Market. The $2.00 is a gut feel, not a valuation.
Why use 4.5% to derive NPAT from Revenue, or the same thing stated as EPS per per share? Well, the average since 2008 is 4.6%, so 4.5% is a round number that does not pretend to be the product of the mind of an omniscient being. Times are tougher now than they were in 2008, so I do not expect to see the margins that applied a decade ago, nor the recent thanks-to-Samsung loss. However, NWH is becoming more like a civil engineering company than an earthmover, so there is less danger of it being forced to take a sub-4% NPAT margin in a competitive market. As an aside, MND made a NPAT/Revenue margin of 6.06% for the ten years ending June 2017. MND has low debt, and a good historical ROE, so it often has had a high dividend payout ratio. Things have been tougher for MND recently.
Why use a PER of 12? A company like NWH of old would typically have a PER of about 10, but for the reasons mentioned in the previous chapter, I lifted the PER to 12. MND has a PER of 19, but that is too toppy for now. As NWH transforms itself into a higher-skill company, its PER should edge towards 15.
NWH Price at posting:
$1.61 Sentiment: Hold Disclosure: Held
(20min delay)
