Forum Archive Index - May 2004

["Fiona Phibbs" <fibz@xtra.co.nz>]

----- Original Message -----
From: <tennyson@caverock.net.nz>
To: <sharechat@sharechat.co.nz>
Sent: Monday, 24 May 2004 20:19
Subject: Re: [sharechat] Sailing into the sunset with Norgate?


> Hi Dean,
>
> >
> >Still, in hindsight
> >any historical figure used for future prediction  - the past may be
> >nothing like the future.  Interestingly Snoopy when I looked further
> >there are a number of different figures for beta for WRI depending on
> >the source of the information, so perhaps to be on the safe side I
> >should have calculated my own as well.
> >
>
> I have appreciation of what 'beta' is trying to do.  That is adjust for
the
> return chacteristics of an individual share relative to the market.
> However, I have severe doubts as to whether 'beta' actually achieves
> this.
>
> The basic presumption is that 'the market' has a 'beta' of 1, and that
> any share with  a 'beta' of less than one is less 'risky' than the market,
> whereas any share with a 'beta' of more than one is more 'risky' than
> the market.  The more volatile a share is the higher 'beta' it has.
>
> The problem I see with this is that the 'risk' of  investing in a share as
> measured by beta is not affected by the prevailing share price, or
> business fundamentals.   Put in the context of WRI, what 'beta' is
> telling you is that the risk of investing in WRI at $1.40 is exactly the
> same as the risk of investing in WRI at $1.00.   Clearly those investors
> who buy into WRI today at $1.40 are taking a far greater risk than
> those that bought in at $1 in 2003.    So any 'risk measure' based on
> volatility I believe has next to no value to investors.
>
> Sure making an adjustment to the market premium required on
> individual share investments relative to the market is a good idea.
> But 'beta' doesn't do that as I see it.
>
> SNOOPY
>
> PS  For WRI I would argue that a suitable coefficient to replace 'beta' ,
> which I shall call 'better', should be based on
>
> 1/ normalised earnings yield
> 2/ the ability to pay back long term debt and
> 3/ consistancy of profitability
>
> Such a coefficient would be much more useful indicator of risk.
> Without going into a formal calculation I would rate WRI as being
> excellent on points 1 and 2 and fair on point 3 leading to an overall
> 'better' coefficient of 0.3
>
> Rerunning the share valuation DDM model using a 'better' of 0.3
> gives
>
> WRI Equity WAC = 5.87%+ (0.3)(8.35% - 5.87%)= 6.61%.
>
> If I take this years core dividend of 2.5c + 6c= 8.5c as my starting
> point, then using the DDM model I get one WRI share to be worth:
>
> = 8.5c/( 0.0661-0.0218 ) = $1.92
>
> Any comments on that?


Hi Snoopy

Rating a share on its ability 'to generate cash on a consistent basis' (if I
have interpreted it correctly?) does appear to have merit.  Can you direct
me to where I can get info on this 'co-efficient'?  The only comment I would
have and it would only be speculation as I have no info on your model, is
the rating you have given WRI for debt repayment.  Taking past performance
into account WRI debt increased steadily between 1994-97 to the point where
they basically had to sell off their finance assets to repay it.  Does the
input ignore this?

cheers Dean


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