Forum Archive Index - October 2001

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

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