Forum Archive Index - October 2002

["Lyall W Taylor" <lyall.taylor@lycos.com>]

I have a few other interesting observations to make.

I commented earlier that investors were havign difficultly pricing CLI 
rationally due to their lack of understanding of CLI's business and accounting 
methodology, largely due to lack of benchmanks and precedent in Australia.

Following on from this comment, its useful to note that in the UK, there are 
several listed annuity providers who use the same methodology as CLI, and they 
have not aroused any controversy.

Whats more, these providers back their annuities with fixed interest 
instruments and EQUITIES.  They anticipate the likely growth in equities over 
time, and discount the residual value back to present value and book it as 
profit just as my example and CLI does.

Arguably this is much more controversial.  Equities are much more volitile 
than, and do not generate enough cash to satisfy annuity claims.  ie they rely 
on asset sales and CLI DO NOT.

Yet these companies are valued at embedded asset backing PLUS a multiple of new 
business.

In the past this multiple has been as high as 18, but has now fallen to around 
10, largely due to the huge equity exposure to the free-falling FTSE.  CLI is 
not exposed to this.

CLI's current embedded asset backing is $2.63 per share.  Last year they 
generated $650m in new business, worth a PV of (estimating conservatively) 
around $200m, or 70cps.

So if we give CLI a multiple of 10x (which is wholy under-rated due to their 
non-exposure to equity markets, superior business model, and growth prospects), 
we should get a market value of.

$2.63 + 10 x $0.70  = $9.63.

When you realise CLI is trading at a discount to asset backing of 20%, implying 
a NEGATIVE multiple of new business, you begin to realise just how absurd CLI's 
current valuation is.

CLI plan to list in the UK at some stage, when their presence in this market 
has expanded, so this should provide the impetus for a re-rating.

How will CLI do in the UK?

CLI are at, in the UK, where they were in Australia 4-5 years ago.  Their novel 
approach to backing annuities with high cash-flow property allowed them to 
offer the highest and safest rate in Australia and rapidly gain market share.  
They bring this same competitive edge into the UK which should allow them to 
make rapid inroads.

The UK annuity market is many times the size of the Australian market.  
Capturing just 2% will double the size of CLI's business.  I am optimistic that 
this will be achieved.


Lastly, with regard to their non-life business, SNOOPY, they made around $20m 
last year (not a loss).  However, unallocated group overhead also totalled 
around $20m so the net result was around break even.

Negative cashflow of $7m (an improvement from negative $20m the year before) 
was registered for these businesses.

The MD states these divisions have now reached critical mass and should result 
in substantially increased profitability in future periods.  This in turn will 
mean increased dividends.  The MD also states that this YTD (2002/3) is trading 
above budget and non-life business is on track to record strong positive 
cashflow for the year.

Pull CLI top bits, and its clear it is a winner

Think for yourself and prosper
Dimebag 


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