Chart Update, page-338

Pb

Your NPAT margin of 5%+ is probably what will transpire to be the case. My 4.5% was rather crudely guesstimated with a bias towards the low side.

I started off with an intuitive range of 4% to 5%, knowing that it was higher in the halcyon days years ago. Looking at the historical statistics I decided that if I include the period of good years with the bad years, it would avoid my natural optimism disinclining to consider the bad years. Now the worst year was exaggerated, which is what managers are wont to do (impair, amortise and depreciate to the maximum). Consequently, the worst year was not as bad as the metrics suggest, and the underlying performance of subsequent years were not as good as the metrics suggest, because fully impaired equipment attracts no depreciation expense. Also, there is some fiddling with tax losses by not fully recognising tax assets early, and drip feeding them in later. I figured that a ten-year average would tend to smooth out these ups and downs. When I took a 10-year average, the NPAT margin was 4.6%, so I thought I would run with 4.5%, the mid-point between my initial 4%-5% range.

The following rows of statistics are: the FYs; revenue per share $; EPS cents; and NPAT %. If the table wraps around to two lines per row in HC, I am not going to attempt to fix that.

.. 08 .. .. 09 .. .. 10 .. .. 11 ...... 12 .. .. 13 ...... 14 .. .. 15 .. .. 16 .. .. 17 .. 10 yrs
1.93 .. 2.05 .. 2.43 ... 2.91 ... 4.85 .. 4.91 ... 4.05 .. 2.78 .. 1.03 .. 1.17 .. 28.11
16.9 .. 14.9 .. 15.1 ... 16.1 ... 34.7 .. 26.5 ... 15.8 .... -26 ... 5.7 .... 9.8 .. 129.5
8.76% 7.27% 6.21% 5.53% 7.15% 5.40% 3.90% -9.35% 5.53% 8.38% 4.61%

I would not be surprised if in the next two years the NPAT % is 5% or better, and that would tend to set my target SP to be (1100*0.05/321.8)*12 =$2.05. This is such a blunt valuation instrument that that I dislike pretending it has veracity by giving the answer other than “circa $2). If one always buys with a margin of safety (MOS), then a buyer has to select a MOS of 10%, 20%, or whatever, and so if 20% is selected, one can justify a buy price of $2.00 x .8 = $1.60.

I was not too fussed about pretending that my blue-sky-in-the-future calculation of 2000*0.046/321.8*14 =$4 had any merit. The revenue may be too bullish, and the NPAT margin too conservative. By the time a target SP of $4 become realistic, we would have a better idea of revenue, margin, share tally and PER, and these may well suggest a valuation of $4 in spite of applying lower revenue in the mathematics.

For traders, much of this post is just waffle. For long-term investors, belief in NWH's future may incline them to apply a low MOS, and buy at current prices. For those who need dividends in the future, I think by the time NWH has an EPS of 30c, maybe 20c, it is likely to feel comfortable paying about 40% of that as a fully-franked DPS, but you can make predictions on that yourself, or ask Jules if you ever get the opportunity.