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Very good report on WAM Peter.
I think you maybe
underestimating WAMS ability to resume growth
once the new aquisitions are bedded in. Reportedly
they are performing
to company expectations so far.
I saw a
report out today that was fairly bullish about
the stock. Apparantly over the next couple of
years a significant lift
in landfill prices is expected. Combined with
this envirowaste have to close
their rosedale landfill site in auckland, and in
2003 another of their
sites lapses. This is expected to result in
an increase in WAMs
waste disposal at a time when prices are
high..
Nick
Up until
1998 WAM was one of the star performers on the NZSE. It's 1998 performance was
typical of how it had performed over many years - EPS growth of 18% and ROE
and ROIC of about 14%. WAM deserved the P/E in the high 20's the market gave
it.
However
this organic growth was not enough - the market demanded more. Another comapny
in the same boat was Nuplex.
Growth was
needed by acquisition. This started in 1999 with the acquisition of Wastecare.
In addition WAM bought out the interests of it's US shareholder Waste
Management International.
The result
- a bigger comapny, $80M more share capital and new debt of $46M (as at Dec
2000).
In the
period between 1998 and 2000 sales increased from $78M to $137M. Operating
margins have inproved slightly but the $59M increase in sales has only
resulted in profit going from $10.8M to $13.9M - the reason being that
depreciation/amortisation / interest costs were $14M more in 2000 than they
were in 1998.
WAM's ROE
has fallen to 9.0% and because of the higher level of debt ROIC has fallen to
below 8%. WAM is no longer earing more than it's cost of
capital.
In addition earnings growth has
stopped and the market has re-rated WAM accordingly. At the current price of
250 still a P/E of about 18. At this price the market is also valuing the NPV
of future cash flows (based on earnings growth) at about a positive $40M. This
means that the market is expecting WAM to earn more than it's cost of capital
in the future - something that it has not managed over the last 2 yaers and
won't do this year.
On current performance this
suggests that WAM is still overvalued and the share price could drift down to
somewhere closer 200 (it's level of capital) - which would also better reflect
its current earnings performance.
Phaedrus says wait until a new
up trend has been confirmed. Paul says there are indicators that the trend is
about to change.
As others have said WAM
fundamentals are strong - it consistently makes good profits etc. However the
acquisition path that WAM has gone down means that it's financial performance
is now only solid - not of stellar proportions. To achieve that staus it needs
to get NOPAT up to over $20M.
At the
current time I feel that even though the WAM price has dropped a lot over
recent times it is still slightly overvalued. I would follow Phaedrus's advice
and wait for a confirmed uptrend to form before buying for a short to medium
term hold.
Cheers
Peter
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