Forum Archive Index - January 2001

["Douglas Stewart" <dougstew@ihug.co.nz>]

An interesting post Peter.

 

In valuing the shares, I would take a different approach from yours:

 

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.

 

I would say that any serious valuation of the business would completely ignore the ups and downs of the share price.  It is much more reasonable to assess the earnings the business will provide its owners with rather than bothering with the vagaries of what the market says its shares are worth on any particular day/week/month. 

 

So, taking a Buffett style approach, let's assume we could buy all of THL's shares tomorrow at the current market price of $1.86.  So we buy 92 million shares at a cost of $171 million.

 

With regard to profits over the next two years we will assume the market analysts' consensus of $20.5 million and $27.5 million are correct.  (I posted a few days ago that, on the whole, these forecasts have been fairly reliable for the NZSE and this holds for THL.)

 

Compared with the current year we are hence going to get 38% earnings growth in year 1 followed by 34% growth in year two.  Then assume 1% earnings growth thereafter.  Let us now set Buffetts (very high) hurdle rate of a 15% annual return.  If we do this we value the THL business at $188 million.  It is hence a very good buy at its present $171 million.

 

If we were to employ a more customary "risk free" hurdle rate of say 6.5% the value of the THL business shoots up to $488 million.  $171 million looks a bargain price indeed. 

 

Now, you may argue that it is unreasonable to say that THL will grow consistently at 1% per annum.  It'll inevitably have some down years.  That is true, but given the long term tourist number growth for NZ and Australia, I believe it is reasonable to expect that THL will benefit from this and that overall growth in THL earnings from year 3 onwards will exceed 1% per annum.

 

I would conclude that THL shares, based on best assesment of future earnings and conservative projections of the future are in fact trading at a substantial discount to fair value.

 

(I bought a few the other day.)