One normalises to guesstimate the future performance, not to...

One normalises to guesstimate the future performance, not to compensate for past woes. I always like to use diluted normalised EPS to get a feel for the underlying performance per share of the business. That said, for a few years AMA will not pay tax because of past losses, which will help cash flow, which can be used to reduce debt and pay dividends. It will not help EPS, because there will be a tax expense debit, with the contra credit going to reduce the deferred tax asset. Add this cash-flow advantage to a now-wiser management, and things should improve in coming years.

As I wrote in my earlier post, I neither own nor plan to own AMA, so my analysis was not deep, and it was perhaps flawed. I merely wanted to point out that the metrics in Comsec and similar places are misleading, and one should normalise the metrics to get an idea of EPS in future. Also, I wrote before yesterday's announcement, which seems to have a diluted EPS for the half year ended 31/12/2011 that one can accept.

Yesterday's announcement has the words “It’s worthy to note that whilst the after tax numbers are down, we will not be paying tax until all of our trading losses are used which we estimate taking between 2 to 3 years at current run rates.” The accounts give a tax figure of $857K on a profit-before-tax $3,587K. The “Deferred tax assets” in the balance sheet declined by $948K. I could not reconcile these tax numbers, but on balance I think one can take the 0.92 cents diluted EPS as being reasonably normalised, and hence assume that it will be say 2 cents for the year if business is improving. Consequently the 14 cent SP is based on an implied PER of 7.

An implied PER of 7 is low – it translates to an RRR of 1/7, or 14.3%. If you hold AMA, this is good news, and the 1 cent dividend signals management confidence (boosted no doubt by that deferred tax asset).

The comparative figures for the H1 ended 31/12/2010 are misleading, mainly because the tax treatment was different. AMA is not going backwards as a comparison with the EPS metrics for H1 ended 31/12/2010 suggest. AMA is a good turn-around story.