Suggestions Please

[Buzz_Lightyear]

Hello

I have been reading many of these posts for sometime now and am looking to invest in another stock with good potential.

I remember reading a previous post saying that 5-6 shares at the most is about the right size for a portfolio. I am currently a shareholder in MCR (enjoying a nice gain atm) and am looking to invest in another company and would like suggestions to which company the readers would recommend as a second investment.

I would appreciate any suggestions.

Also I apologise now if this has been posted in the wrong section.

Cheers

Steve

[Halebop]

Welcome to the forum Buzz. I'm a proponant of concentrated protfolios but keep in mind it must suit the goal of the investor and as such 5 or 6 shares might only be "optimal" if that is aligned with your goals.

Diversification does not create wealth. It helps protect wealth. Fund managers and the sales people that sell these products are keen on the concept because it protects their profits and commissions. This isn't necessarily in the interests of investors even if it does provide a small advantage in terms of capital stability (The statistical advantage can be quite minor, a detail glossed over by proponants of diversification).

To me the irony is that diversification is most compelling for the rich rather than the poor. Rich people often have a defensive bias (they don't want to become poor, rich is a far more attractive status and takes a bit of work getting there). Rich can also afford to simultaneously make concentrated bets while remaining diversified because their volume of capital allows for it. A win / win scenario. A person with $20,000 or $300,000 or even $3,000,000 is much more limited in how their money can be optimally invested than the truly rich.

There are a number of threads dedicated to different investments on the Australian Stock Excahnge (I presume by posting in the ASX forum that is you areas of interest?). Reading some of those is a good place to start.

In any case here's one of your mooted six...
For a patient, moderate risk / high profit trade off my pick of the moment would be Retail Food Group (RFG). I'd value it at A$1.60 to $2.00 and am happy to buy below $1.00 (But would prefer it's near lows when it was recently trading around 80 cents).

[thereslifeafter87]

Halebop,

You had me interested in RFG until I saw the balance sheet.

$38mill of intangibles and debt almost equal to their revenue!

In other words, negative NTA.

Their interest cover for the full year must only be 3-4x.

Massive leverage so heaps of upside, but if their manufacturing facilities run into trouble on start up then they could go bust.

[thereslifeafter87]

Plus it looks like the IPO was designed to let the prior shareholders take amssive amounts of equity out of the business, funding it with debt.

[mark100]

Hi TLA87,

Yes you're right RFG has been loaded up with debt although based on their forecast earnings for the year the interest cover is still a healthy 9x.

I think they're undervalued at present however it may take a full year of earnings before the market re-rates them.

cheers

[JoeKing]

Steve
Looks like you are into metals....
My recommendation..do some research
AGS, AGM, PNA. IMHO all 6+ baggers by mid 2008
Cheers
JK
discl. I hold all

[OneUp]

RFG's revenue's are mainly a 7% cut of franchisee revenue from selling donuts. That's pretty reliable (and growing). RFG is a cash cow and IMO is quite able to service a large amount of debt.

Capital costs of the manufacturing plant are being paid for by a joint venture partner.

[thereslifeafter87]

quote:Originally posted by mark100

Hi TLA87,

Yes you're right RFG has been loaded up with debt although based on their forecast earnings for the year the interest cover is still a healthy 9x.

I think they're undervalued at present however it may take a full year of earnings before the market re-rates them.

cheers


Not if you use a full year normalisation of interest expense, including the new debt they will be taking on board to finance their new facilities.

[thereslifeafter87]

quote:Originally posted by OneUp

RFG's revenue's are mainly a 7% cut of franchisee revenue from selling donuts. That's pretty reliable (and growing). RFG is a cash cow and IMO is quite able to service a large amount of debt.

Capital costs of the manufacturing plant are being paid for by a joint venture partner.




Read more closely.

The purchase of the land + the building fit outs are being funded by RFG debt. I think around $4million from memory.

[JoeKing]

Steve.
I hope you are taking notes...

[mark100]

quote:Originally posted by TLA87

Not if you use a full year normalisation of interest expense, including the new debt they will be taking on board to finance their new facilities.


They are forecasting EBITDA of $11.9m. They currently have Net Debt of $16m. I don't have my notes in front of me but from memory they are paying around 7.5% on the debt which gives an interest expense of around $1.2m and an interest cover of 9.9x

Assuming they borrow another $4m for the manufacturing facility I would expect the interest cover to fall to 8x.

I still think that is quite healthy.

cheers
Mark

[thereslifeafter87]

quote:Originally posted by mark100


quote:Originally posted by TLA87

Not if you use a full year normalisation of interest expense, including the new debt they will be taking on board to finance their new facilities.


They are forecasting EBITDA of $11.9m. They currently have Net Debt of $16m. I don't have my notes in front of me but from memory they are paying around 7.5% on the debt which gives an interest expense of around $1.2m and an interest cover of 9.9x

Assuming they borrow another $4m for the manufacturing facility I would expect the interest cover to fall to 8x.

I still think that is quite healthy.

cheers
Mark


I was using NPAT for my interest cover figures. We had our wires crossed. 8x cover based on EBITDA provides a level of comfort, but their balance sheet provides no comfort at all to me. Negative NTA is never good.

I understand that the intangibles are valued based on the cashflows they produce - the royalties from franchisees, so perhaps we can make an exception in this case.

However, I generally avoid companies with high debt levels. Especially when the debt came about from the founders bailing out with their equity.

That's not to say that RFG won't prove to be a great investment.

[absolut-advance]

AAR at or below $0.0670

EPG at or below $0.7000

FLT at or below $13.55

KAR at or below $1.850

NPH at or below $5.100

PBT at or below $0.4200

PDL at or below $2.800

investment time-frame 2-7 weeks


companies were picked up by my personally customized ASX scanner on the 20th and the 23rd of october.

Back-tested... and back-tested...and back-tested..... until my eyes were blurry for days on end...

Still Running under test set F/A and T/A parameters

Testing.... Testing....

proof in the pudding

regards


AA

[Buzz_Lightyear]

Hi Guys

Just want to say thanks for all the replies and I will have a good read of all the companies mentioned.

I am very much a novice investor and I love reading all the posts on sharetrader.

Thanks again for the suggestions

Steve

[Halebop]

quote:Originally posted by thereslifeafter87

Halebop,

You had me interested in RFG until I saw the balance sheet.

$38mill of intangibles and debt almost equal to their revenue!

In other words, negative NTA.

Their interest cover for the full year must only be 3-4x.

Massive leverage so heaps of upside, but if their manufacturing facilities run into trouble on start up then they could go bust.

Where you see negative NTA I see high return on assets with low capital expenditure requirements. Debt could be paid down in less than 3 years on a zero dividend assumption. Factoring (my) expected growth rates and rising dividends debt could still be paid down to nil in 5 or 6 years (interest cover is many times higher than 3 or 4). NTA is an illusion in any case and if the business has prospects of perpetuating as a going concern it should be valued as a going concern. The value here is brand and the likelihood of associated royalties continuing or repeating. High assets / NTA in an IP company like this would be a turnoff rather than a desireable feature. Let the operators of retail stores have high asset investments. The owners of royalty income streams have little need for plant, equipment, fixtures, fittings and high street key money investments.

Debt also appear high versus revenue because most of the revenue is profits - RFG enjoy very high operating leverage. They don't need to sell a real donut to make money. They earn a passive annuity income from the efforts of others selling real donuts. Consequently small increments in revenue growth flow more directly to the bottom line. Conversely the vendor of that $1 donut has to wear the food and transaction cost before translating any extra profits, RFG enjoy 7 cents straight to their bottom line.

I certainly don't think they are the greatest franchise model in the world (nor the fastest growing). But they have a long operating history, a profitable business model capable of delivering incremental growth on the back of improving economies of scale, high return on assets, moderate debt to enterprise value and their shares sell at a substantial discount to intrinsic. It's hard work finding that many stars in alignment.