Forum Archive Index - November 2003

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

Hi Macdunk,

>
>Another misunderstanding applies to the high PE of AIA.      
>Some people think that a high PE means that the share Is fully priced
>with not much upside left.   
>If a company share price Increases by 20pc pa, and the PE remains
>static all It means Is the company Is earning 20pc more.  
>

Yes

>
> The PE means nothing, all that counts Is earnings and future >earnings.     
>

The PE represents the market's perception of current earnings and 
future earnings.    You cannot assume any PE will remain constant over 
time.   The PE will go up and down taking the share price with it.  Or the 
share price will go up and down moving the PE with it (which amounts to 
saying the same thing).

>
>Lets say macdunk bought AIA last year and lets suppose the share 
>price
>Increased by 20pc and the PE remained the same all It means Is they
>earn 20pc more than they did last year.       My advice Is
>buy what you really want, even although It Is slightly overpriced
>because next year the price will be right, and the year after you have
>a bargain.     
>

In essence I agree,  except that the way Macdunk puts it, it sounds like 
the price you pay for AIA doesn't matter.    In fact the price you pay will 
determine whether you get an excellent return or a merely average one.   
I would argue that given an investment is fundamentally good (and why 
would you want to invest in anything that wasn't), then the price you pay 
for it is *the* most important factor in any investment decision.

>
>The greater the Increase In aia earnings the lower my
>PE for the company becomes from my Initial Investment so the Pe for 
my
>holdings decreases as the earnings rise.   Auckland airport expect a
>rise in custom of thirty pc my conservative estimate Is a share price
>rise of 20pc plus dividends PE who cares It means less than nothing.
>   

No, they predict an increase in international capacity of 30%  which is 
not the same thing at all.   Whether there are 30% more *passengers*  
is quite another thing, and AIA acknowledge that even if these extra 
passengers come to pass, that a lot of expenditure will be necessary to 
cope with the extra throughput.   Sure the airport gets the landing fees 
even if the extra aeroplanes land empty.   But AIA does rely on the 'on 
site' spend by real people to keep growing like they have.   In fact, 
people spending more at the complex is what AIA primarily rely on for 
growth now.  If extra planes do land empty, then you can rest assured 
that in the medium term those services will be cancelled, and the AIA 
profit will plunge in proportion.

However, let's assume for a moment that Macdunks increase in earnings 
comes to pass.  27c x1.2 = 32.4c for FY2004.  Based on the current 
share price of $6.60 that gives a P/E of 20 or an earnings yield of 4.9%.   
A P/E of around 20 is not out of line with the long term average for AIA.  
By the "regression to the mean'' argument,  you could say that we  
expect a flat share price performance from AIA over the next twelve 
months.

Given there is a lot of work to do to achieve earnings of 32.4cps, and 
that current earnings yield is a mere 4%, that tells me the share is close 
to being fully priced.  If the share price were to rise from here by 20% to 
$8 in the next twelve months you would need a further increase in 
earnings of 20% to be on the horizon to justify such  a rise.  A further 
20% increase in share price for FY2004 probably represents another 
30% increase in passengers through the airport forecast for FY2005.

The increase in passengers we are looking for in two years to justify an 
$8 share price is 1.3x1.3= 70%.     I know tourism is growing Macdunk, 
but get real.  Not at 30% compounded per year, every year!

I find it hard to forsee the day that AIA will *not* be regarded as anything 
but an excellent company.     But being an excellent investment is 
another thing entirely.  IMO, AIA is priced at a premium that reflects its 
excellence.   If I held the shares I don't think I'd sell.  But as a value 
investor, I would have to ask 'where's the value' and look elsewhere.

SNOOPY

discl: no shares held






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