Forum Archive Index - January 2001

["Peter Maiden" <pmaiden@xtra.co.nz>]

 

Ben - a good article - a pretty simple explanation of how companies are very often valued (not just for stockmarket purposes either). This way of looking at PE ratios and the use of the market to book values ratios do tell a lot about the real 'value' of a comapny - which then gets reflected in it's share price.

 

We often don't give 'the market', per se, credit for realistic valuations. More often than not 'the market' values a stock 'fairly' even though it appears to be 'undervalued' by many analysts.

 

One such stock is THL which shows a current PE of about 8 based on forecast earnings of $20M in 2001.

 

This is what I posted a few weeks ago on THL  - 

 

In the last two years the THL price has gone from about 152 in Dec 1998 to 350 and back to the current 190. In that rollercoaster ride there has not been any real price levels of sustained support for the share. On the way up there were signs of sustained support at 175 and 260 while on the way down at 260 again. However these price  levels were not sustained for long. The current price level has now been sustained for nearly 9 weeks.

 

Maybe the market has finally settled on the current price as to what the real valuation of THL should be. The company still expects to make $21M this year - if achieved then THL has a PE of about 9x future earnings.

 

The ups and downs in the THL price leads to a high calculated WACC (weighted average cost of capital) of 15.5% used in DCF valuations. THL is a 'risky' stock (compared to the overall market) and this no doubt is built into any serious valuation of the business.

 

The enterprise value, as mentioned in that article, of THL is $3.09 per share  - this is 15 times the 2001 forecasted earnings.

 

A more realistic ratio than the PE of 8?

 

I often look at market to book ratios. In THL's case this is about 1. This fundamentally means that the NPV of THL's future cashflows is NIL. This is driven from their high WACC of 15.5% noted above. THL returns on funds used is insufficient to generate a positive cash flow.

 

The THL high WACC is a result of a high equity beta - they are one of the most volatile (risky) shares on the NZSE. This risk factor is built into the discounted cash flows.

 

From these numbers one must conclude that 'the market' has fairly valued THL and as such it is not undervalued.

 

Given the amount of publicity ( part of Peoples Pick, some brokers tips, story on Sharechat etc) lately there must be some disappointment around that the THL price has not moved with the market over the past week.

 

This explanation is probably is the reason.

 

Peter.