Forum Archive Index - April 2000

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

The recent weakness in the ITC has prompted be to actually read the 
Merrill Lynch report drawn up on February 4th from a value investor 
perspective.   I wanted to answer the question, when the mist and 
smoke of hype clears, what is ITC worth?   Is there some sort of 
floor through which the share price is unlikely to drop when the 
fundamentals catch up with it?

The main value of ITC seems to be in the ability to exploit the gap 
between the actual cost of setting up an  running an infotech venture 
verses the public perception of its worth (or share price).   ITC has 
net assets of 17c per share of which 9c per share are actually 
invested in IT.  So at a share price of 45c the market is telling us 
that this 9c on the books would actually be worth 36c if those same 
investments were publicly floated.

We are told that existing investments (basically that means 
Terabyte)  have been purchased at up to 2 times revenues.   We are 
also told that such companies might expect to list at 10 times 
revenues which implies a floated worth of 5 times the book value.   
This gives an expected value of ITC shares of (5x9)+9 =54c based on 
their current investment portfolio.    Some of the businesses that 
ITC invests in may be stars, while others may be clangers.   If they 
are properly diversified they will be in both.   Just as the market 
has rewarded them for their perceived star investments (virtual 
spectator) I expect the market to punish them for their clangers, 
perhaps even marking them to around 70% of 'fair value' (after all it 
happened to BIL while they still had good stuff left).  That would 
give an entry price to ITC of around 39c if you were a bargain 
hunter.

Furthermore to achieve the ITC  business plan the NASDAQ must 
remain buoyant and ITC must retain their key staff.  Given that 
the NASDAQ is volatile and it is public knowledge that ITC 
staff are on below average retainers,  both these are key risks which 
cannot be discounted.   Or more correctly may have to be discounted 
into the ITC share price.

The rest of the numerical information in that Merrill Lynch report 
seems to me a waste of time.  ML draw up a growth curve for the 
overall tech business market but you can't really say whether ITC 
businesses will follow that curve.    Unless they are lucky enough to 
be managing a future market leader I would suggest the actual growth 
path for ITC won't be anything like that.   ML go on about the B2B 
Australasian market.   I would suggest to them there is no such 
thing, as such businesses are becoming global.   Then they suggest 
that ITC will somehow get 4% of this 'market'?   I would ignore that 
figure (even 1% will be hard work)-  I think they just made it up. 
Furthermore the ML  projected cash flows assume no new investments by 
ITC, which as ML themselves say,  isn't going to happen.

Disclosure: Do not hold ITC.  May get some when they get below 40c- 
barring any new deals I see that as the fundamental floor.   If I did 
own some ITC I would be a seller at around 70c.  SNOOPY



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