TGA - Thorn Group

[Pioupiou]

Aaaah, the price, that's my point though Klogg.

I think the words below address both what Klogg wrote (great value today . . . blah, blah) , and it accommodates Boggo's comment (had I skipped in and out of TGA more nimbly, I would have done better. . . yahdi yahdi).

Since 2007 I have been buying TGA, and in that time invested $536,302, which even at Friday's SP of $1.435 is worth $645,750 – a paper capital gain of 20%. If the dividend is accepted to be 10 cents a year now (we do not know exactly what will be announced on 22/05/2012), I get a return of 8.4% fully franked, and being retired, I get the franking back from the ATO, so that is worth 12% to me – very nice. I can sit out the current share price decline in the belief that the dividends will grow, and in time the SP will rise to increase my on-paper capital gain. A black-swan event could upset this fond notion, but such is life.

Had I been smarter and skipped out a year ago at $2.20, and got back in about now, I would have done much better, but that is spilled milk. Also, the Great Dispenser of IQ, was not that generous with me when I was created, so I only know what I should have done with the benefit of hindsight. I hung on for a few more cents a year ago - big mistake.

On another matter, could some FA guru explain how Macquarie arrived at a target SP of $1.78 via the EP/EBIT methodology? See http://www.macquarie.com.au/dafiles...retail-newsletter/docs/2012-03/TGA150312e.pdf It looks like Macquarie multiplied the expected EBIT by 6 or a fraction more, then tweaked it to accommodate the debt and cash situation. I would like to review the Macquarie analysis with the benefit of the YE 30/03/2012 annual report, but I am unfamiliar with the EV/EBIT methodology.

 

[Nutmeg]

And to be honest, the case is a lot stronger for TGA in this case than it was for ORL back then.

Agree.

 

[craft]

On another matter, could some FA guru explain how Macquarie arrived at a target SP of $1.78 via the EP/EBIT methodology? See http://www.macquarie.com.au/dafiles...retail-newsletter/docs/2012-03/TGA150312e.pdf It looks like Macquarie multiplied the expected EBIT by 6 or a fraction more, then tweaked it to accommodate the debt and cash situation. I would like to review the Macquarie analysis with the benefit of the YE 30/03/2012 annual report, but I am unfamiliar with the EV/EBIT methodology.

I'm no Guru, but maybe below will help.

EV/EBIT is best thought about as backing the financial structure out of the business results.

EV is Market Cap + Debt - Cash(excess)

EBIT is earnings before interest and tax (interest creates a tax shield, that’s why tax is included)

If you were going to buy a business ‘outright’ and pay ‘all cash’ for it, this is how you would think about the company. How much would the business return on your capital?

I haven’t read the Macquarie report yet, but I suspect they have just assigned a multiple to the EBIT. No different than applying a multiple to earnings to come up with what P/E something should be trading at.

Real question is how good they are at gauging an appropriate multiple.

 

[craft]

It looks like Macquarie multiplied the expected EBIT by 6 or a fraction more,

I ran a quick scan for stocks on an EV/EBIT between 5 and 6 (Based on current price and last reported numbers.{TGA currently 7.14}) – which might help you judge the reasonableness (or otherwise) of a multiple of 6.

KMD Kathmandu Holdings Limited 5.97
HHL Hunter Hall International Limited 5.93
VLW Villa World Limited 5.92
JBH JB Hi-Fi Limited 5.87
GNG GR Engineering Services Limited 5.83
HFA HFA Holdings Limited 5.82
OYM Olympus Pacific Minerals Inc 5.82
DJS David Jones Limited 5.81
SNR Synergy Plus Limited 5.8
SGN STW Communications Group Limited 5.78
VII Vietnam Industrial Investments Limited 5.74
IRC Intermin Resources Limited 5.7
RFV Rift Valley Resources Limited 5.65
DTL Data3 Limited 5.63
TTA TTA Holdings Limited 5.61
COM Comops Limited 5.61
IDL Industrea Limited 5.59
HST Hastie Group Limited 5.55
NFK Norfolk Group Limited 5.54
NPX Nuplex Industries Limited 5.53
SCC Scott Corporation Limited 5.52
PMP PMP Limited 5.51
RCG RCG Corporation Limited 5.48
NTC NetComm Wireless Limited 5.39
KNH Koon Holdings Limited 5.36
CUE Cue Energy Resources Limited 5.36
MBD Marbletrend Group Limited 5.34
PFG Prime Financial Group Limited 5.33
SSM Service Stream Limited 5.31
CGR Careers Multilist Limited 5.29
MOC Mortgage Choice Limited 5.26
LMR Lemur Resources Limited 5.26
FLT Flight Centre Limited 5.22
GLG Gerard Lighting Group Limited 5.17
AGG AngloGold Ashanti Limited 5.12
TYO Treyo Leisure And Entertainment Limited 5.09
IXR IMX Resources Limited 5.07
WIC Westoz Investment Company Limited 5.04

ps

I'm not vouching for the accuracy of the scan results.

 

[Pioupiou]

typo

. . . I haven’t read the Macquarie report yet, but I suspect they have just assigned a multiple to the EBIT. No different than applying a multiple to earnings to come up with what P/E something should be trading at. . .

You may well be right – Macquarie could simply pick a multiple of about 6, and multiply the EBIT by it. They could even indulge in apparent sophistication by deriving that multiple by dividing a before-tax-apt required rate of return into 1, which in the 100%-franked setting is the required rate of return that one would use to invent a baseline PER, adjusted by dividing it by 70%, because company tax is 30%.

I want to know how Macquarie adjusts that baseline multiple (or to put it another way, the baseline required rate of return) to accommodate debt (in particular), growth, cash and potentially other considerations. A mooted target SP of $1,78 is of little value if one cannot see the arithmetic.

Referring to the methodology of deriving the target SP as an EV/EBIT methodology is misleading, because it is unlikely that EV comes into the calculation if Market Capitalisation is a component of EV. A target SP is simply a target Market Capitalisation divided by the number of shares.

And yes, the same is true of PER multiples, the PERs are simply 1 divided by baseline required rates of return that are adjusted to accommodate franking, debt, growth, cash and other considerations. I have never seen a stock valuation where these considerations are patent.

 

[Pioupiou]

I ran a quick scan for stocks on an EV/EBIT between 5 and 6 (Based on current price and last reported numbers.{TGA currently 7.14}) – which might help you judge the reasonableness (or otherwise) of a multiple of 6. . ..

If you used the Morning Star metrics now available, TGA's EBIT is given as $32.7m for YE 30/03/2011. Macquarie guesstimated the EBIT for YE 30/03/2012 to be about $40m. If you prorate the 7.14 back by 32.7/40, you will get 5.84, which is typical for the range that you put forward. Obviously, that 5.84 multiple gives you the current SP (unchecked), so if Macquarie mooted a target SP of $1.78, then you would expect the multiplier to be higher than 5.84. On the basis of an EBIT of $40m, I have no problem with Macquarie's target SP of $1.78 - I simply wanted to know how the multiplier was derived, rather than retrofitting the calculations to a sample in an attempt to guess what was done.

Anyhow thanks for the response - it was interesting to see how closely clustered those multiples were over an eclectic gaggle of stocks - something over which I'll ponder tomorrow.

 

[Klogg]

Aaaah, the price, that's my point though Klogg.

Yeah, but my point is he did his homework using fundamental analysis, then bought in. Your first post stated "It would have to start breaking back up through around 1.90 before it would make a shortlist imo". Had he waited for a 20% increase in the price before buying (as TGA was about $1.55ish when you said this), he'd have a smaller profit margin.

Anyway, I'm happy to agree to disagree on this point. I'm sure everyone has their own style of investment. Appreciate the points you raised though Boggo.

 

[Boggo]

Weekly charts are more useful on slow moving/low volume stocks such as TGA.
(Trade the smaller time frame but don't fight the bigger picture)

Any worthwhile upside seems to have ended about a year ago Klogg.
It would have to start breaking back up through around 1.90 before it would make a shortlist imo.

Quite correct at the time, it never got to 1.90 so I wouldn't have tried to enter at 1.55, just saved going around 8% in the red based on todays price.
Today, just by looking quickly at the chart I would be reluctant to get too carried away with it until it got through around $1.60.

Yeah, but my point is he did his homework using fundamental analysis, then bought in. Your first post stated "It would have to start breaking back up through around 1.90 before it would make a shortlist imo". Had he waited for a 20% increase in the price before buying (as TGA was about $1.55ish when you said this), he'd have a smaller profit margin.

Doing homework on fundamental analysis is of no value if the market is telling you that the stock is decreasing in value as it has in this case.
When your potential fundamental value and the market value (ie PRICE) are going towards the same target then the price will take over and all that is where the rubber hits the road.

Had he bought at 1.55 he would now be 8% in the red based on todays market value ( ie PRICE) because he tried to pre-empt what might have but didn't happen.

Buying on the way down because you believe that it is worth more and that the price will turn up doesn't make sense to me, how do you know how far down it is going to go. Why not let the price behaviour tell you when it has bottomed.
Don't fight the market (the trend) as you will come off second best.

What you fundamentally "value" a stock at is irrelevant really, it is only a potential value, the market price is the actual value at any point in time.

 

[Klogg]

Had he bought at 1.55 he would now be 8% in the red based on todays market value ( ie PRICE) because he tried to pre-empt what might have but didn't happen.

My average buy-in price is at approx. $1.55 - so this applies directly to me. However, I'm happy to sit on the unrealized loss until sentiment changes and the company continues to perform well. This may take a year, but I'm not day-trading, so that's fine with me.

Had he bought at 1.55 he would now be 8% in the red based on todays market value ( ie PRICE) because he tried to pre-empt what might have but didn't happen.

Value != Price.
Value is what something is worth, price is what you pay... and they're different.

Doing homework on fundamental analysis is of no value

Let's use Facebook as an example here... You mean to say that if FB is floated for 99*P/E and the price is trending upward, I should buy? Even though fundamentally speaking, it would take 99years for the company to earn back what I paid for it...


On the topic of 12mth SP targets, may I ask what the most bearish is that you've heard, Pioupiou?

 

[Nutmeg]

What you fundamentally "value" a stock at is irrelevant really, it is only a potential value, the market price is the actual value at any point in time.

Boggo, I think you and we will just have to accept that for daytraders or anyone else with an investment horizon of a few weeks at most value and price must be considered synonymous because daytrading's only goal is to profit from relatively miniscule fluctuations in price. Multibaggers, except where total capital loss is a real risk, is simply not within the ken of daytraders.

However, I'd be curious to know your response to the following: Back in the depths of the GFC, Kerry Stokes' Seven Media (before it became Seven West Media) was trading in April 2009 on a per share basis for less than the cash of its net working capital, i.e. not only were the shares trading well below net asset value but also below the value of the cash on its books. In effect, you could buy $1 of Seven's cash for 0.85c (or thereabouts, I can't remember the exact figure) and receive the business for free.

Seven's share price continued to travel downwards throughout May 2009. So if you are right that "the market price is the actual value at any point in time", you would have accepted that in April/May 2009 the market's share price for Seven was the "actual" value of Seven, notwithstanding that you could have bought $1 of Seven's cash for 0.85c and had the business thrown in for nothing.

Ultimately, your belief that value is price and price is value is wrong. However, because of the timeline on which you hold stocks, I can also see why you consider value irrelevant. Philosophically, your position is equivalent to saying: "Only the present is real".

 

[kermit345]

Boggo while I agree that entering when a stock is in a downtrend is not the way to go, I don't think you can discount fundamental analysis saying it has no value if the market movements are telling you otherwise.

I find it hard to believe that the political situation in Europe causing our market to go down today (including TGA) has eroded any of TGA's value. I'm also talking long-term value, not the way in which you have used the word value describing the day to day movements as increasing/decreasing companies value.

What we fundamentally 'value' a company at is a potential price, your correct there, but in my experience companies will meet their fundamental value at some point in time. Now this may mean earnings decrease and so to does the fundamental value so market price meets fundamental value, OR market price increases to meet fundamental value. In my experience over time one of the two occurs.

It's time like these with TGA that provide opportunity for a fundamental investor and in my view I don't think you can discount the fundamental value so easily. I wholeheartedly agree that at least some TA should be used for making an entry as nobody wants to buy a falling stone.

I think it was motorway posted elsewhere an article where some fundamental investors found a happy-medium between FA and TA - Entering a stock with 80% FA and 20% TA analysis, and exiting with 80% TA and 20% FA, seems like a fair enough rationality to me. In the case of TGA it seems the 80% of FA analysis speaks for itself and signals an entry, but were waiting for the 20% of TA to come to fruition which I believe boggo is trying to get across.

Best of luck to all, either way i think theres money to be made with this company particularly if you can get your timing right.

 

[Boggo]

Value != Price.
Value is what something is worth, price is what you pay... and they're different.

I have a car that I reckon is valued at around 30k, the market value of the same is around 25k and that is what they are selling for.
If I can get someone stupid enough to believe my valuation then its theirs, the actual value is what the market dictates.

Let's use Facebook as an example here... You mean to say that if FB is floated for 99*P/E and the price is trending upward, I should buy? Even though fundamentally speaking, it would take 99years for the company to earn back what I paid for it...

I have no idea about the 99*P/E etc, if the price has sufficient data and there is an upward trend then yes, it may be a candidate. If someone believes that it is worth $100 and it is at $50 and trending up then bonus, there will be a likelyhood of more momentum in the beneficial direction.

I am not going to be around for 99 years so I am not interested in any formula that may relate to that time period, price goes up - I go with it, price turns down I get out and move on to the next candidate.

When KZL went bust last week there were three brokers with buy recommendations based on formulae that indicated that it was undervalued.
The reality (price) was indicating that it was in more trouble than the first settlers.

Which one have I learned to trust for value - have a guess

 

[Nutmeg]

... If someone believes that it is worth $100 and it is at $50 and trending up then bonus, there will be a likelyhood of more momentum in the beneficial direction.

Boggo, isn't momentum here synonymous with a line of fools, each more foolish than the next, bidding up a stock in the hope that they can sell it to the next fool for more than they bought it for? But to whom do you pass the steaming baggy when you turn to find no one in front of you? Don't you just dump it and run? After all, it has no more value than the price that someone would buy it from you for, right?

 

[Boggo]

Boggo, I think you and we will just have to accept that for daytraders or anyone else with an investment horizon of a few weeks at most value and price must be considered synonymous because daytrading's only goal is to profit from relatively miniscule fluctuations in price. Multibaggers, except where total capital loss is a real risk, is simply not within the ken of daytraders.

I am assuming that you are confusing me with a daytrader because I don't have a 99 year plan.
I have held stocks for a few hours and for a few years (currently holding RRL since Aug 2010 - does that meet your multibagger criteria), the time period is determined by the stock, when it stops making money then I no longer have a use for it whether that is one day or 10 years.

However, I'd be curious to know your response to the following: Back in the depths of the GFC, Kerry Stokes' Seven Media (before it became Seven West Media) was trading in April 2009 on a per share basis for less than the cash of its net working capital, i.e. not only were the shares trading well below net asset value but also below the value of the cash on its books. In effect, you could buy $1 of Seven's cash for 0.85c (or thereabouts, I can't remember the exact figure) and receive the business for free.

Seven's share price continued to travel downwards throughout May 2009. So if you are right that "the market price is the actual value at any point in time", you would have accepted that in April/May 2009 the market's share price for Seven was the "actual" value of Seven, notwithstanding that you could have bought $1 of Seven's cash for 0.85c and had the business thrown in for nothing.

My response - no idea, totally unfamiliar with anyting to do with it and I can't recall having ever held it. As with most of these "bargain at this price" stocks, why aren't the insto's etc all over it if it is such a good deal, they are obviously daytraders too !

Ultimately, your belief that value is price and price is value is wrong. However, because of the timeline on which you hold stocks, I can also see why you consider value irrelevant. Philosophically, your position is equivalent to saying: "Only the present is real".

You misunderstand the hold in only one direction only concept, time is irrelevant.

 

[Klogg]

@Nutmeg, Boggo - I'm enjoying this discussion a fair bit, but before I reply to what's been said, we might want to consider moving this to another thread.

 

[Boggo]

Boggo, isn't momentum here synonymous with a line of fools, each more foolish than the next....

Isn't that a line of fundies who have just googled the last annual report issued six months ago based on the the six months prior to that who have just worked out that it is VALUED at $100 but it has to be a bargain because the market (which really doesn't understand) is pricing it at $50.

I would be a mug not to capitalise on that mob mentality

 

[Boggo]

@Nutmeg, Boggo - I'm enjoying this discussion a fair bit, but before I reply to what's been said, we might want to consider moving this to another thread.

Good point.

 

[Nutmeg]

@Nutmeg, Boggo - I'm enjoying this discussion a fair bit, but before I reply to what's been said, we might want to consider moving this to another thread.

Agree.

 

[Nutmeg]

My response - no idea, totally unfamiliar with anyting to do with it and I can't recall having ever held it. As with most of these "bargain at this price" stocks, why aren't the insto's etc all over it if it is such a good deal, they are obviously daytraders too !

The issue is not whether you know or knew anything about Seven Media in May 2009. The issue is whether your claim that the "the market price is the actual value at any point in time" is a sensible definition of value in the context of the example that I gave you. Whether you know and knew anything about the particular price/value anomaly that occurred to Seven Media at that time is irrelvant.

 

[Julia]

The issue is not whether you know or knew anything about Seven Media in May 2009. The issue is whether your claim that the "the market price is the actual value at any point in time" is a sensible definition of value in the context of the example that I gave you. Whether you know and knew anything about the particular price/value anomaly that occurred to Seven Media at that time is irrelvant.

Nutmeg, you've made some good points in this discussion but perhaps consider just getting rid of the necessity for "value" when considering the position of the investor/trader who is simply a price action/trend follower.

"Value" imo is a term which is peculiar to so called 'value investors'
As a group they have little in common with those of us who have no interest in other than the price.

It doesn't make one group superior or inferior to the other. Simply a different approach, perhaps determined by one's personality.