Forum Archive Index - January 2001

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

Douglas - good to get a response to my post about THL and how to view the current THL share price after reading that article that Ben posted about 'enterprise' values.

No argument with your sums.  It is interesting that you got a value pretty similar to the current THL price when you applied a 15% hurdle rate.  This still has THL trading at 7X next years earnings.

Where we differ in our views is how to treat the level of debt that THL has.

The article about using 'enterprise values' (which does bring in factors to allow for the added risk associated with debt) was really about falling into the trap of thinking that a share, like THL, with a perceived low PE of 7 is undervalued when it may not be   That article used Caterpillar as an example and THL is in much the same mould.

You used the example of buying all of THL at it's current market value of $171M.  What would you be buying?  Shareholder equity of $171M plus $113M of debt, ie the enterprise value of $284M.

Last year THL returned 7% on this $284M of invested capital.  This was well short of their cost of capital which has been calculated as 15.5%. (as per my previous post this rather high WACC is mainly driven from a high equity beta).

At current market value the implied NPV of future cash flows is a negative $114M - because their returns are significanttly less than the cost of capital.  THL is currently not creating shareholder value.  THL needs to at least double current earnings to do so.

The topsy turvy ride of the THL share price over the last 2 years shows that the market, per se, has struggled to come to a consensus valuation of this stock.

The current price for THL is the first time that a solid support level (over a reasonably sustained length of time) has been maintained. The proponents of the efficient market theory would say that the current price is what the market has finally agreed as a 'fair' price, albeit it has taken some time to get to that consensus.

I too have some THL shares (obviously purchased in a moment of weakness) and it looks like I will need some 'irrational market exhuberence' to make a profit out of them.

In saying that if THL manage investor expectations over the next year or so the price does not appear to have much downside from it's current level. Over time the price should improve if earnings continue to grow more than forecasted. However bear in mind that the market has built in a bullish growth rate already into it's current valuation.

Douglas  - we sort of agree to differ but at least we are on the same wavelength. THL has a lot going for it ..........we'll wait and see what happens.

Good debate though

Peter