MFS - McLaughlins Financial Services

[KD]

This looks interesting ... low PE, high growth, high dividend, moderate/high risk minicap - stumbled across it last night but have seen plenty of adds in AFR - mini City Pacific??? Perhaps someone who holds City Pacific (Dimebag) might like to comment.

http://www.egoli.com.au/egoli/egoliStockIdeasPage.asp?PageID={B110DE21-C083-4AED-83A6-0AB6E3BF4CEB}

[davidrob]

Yeah, sorry that this response does not have the AAA quality of dimebag KD;)--and no I do NOT own MFS, but have been keeping eye on this and other potential City POacific's--isn't that just a par excellence share heh!! Now that one I do own.
To me quite simply there are 3 factors that say not quite up to scratch: (1) Track record not quite solid enough yet for last rapid recovery and increase in pre-tax profit and significant items profit of 125 or so % to be seen in THE CONTEXT of other solid years..I mean the base from which that was derived makes the number seem very good.
(2) Hence from Point (1) the Return on the assett is still only 7 %. I am definitely an 11% Return on Asset and 21% plus Return On Equit; kindaguy, (I derived this benchmark incidentally from where SDI dental(ASX code SDI), were on a fundamental analysis basis three(3) Years Ago. By the way look at the ASX price Gain on co's like SDI and ATR and FWD,...or evey City Pacific say 2 years ago, and do the numbers and you get a pretty consisten benchmark on what numberts might be for Earnings, return on equity, assets and profits---and their respective price/earnings ratio.This is, anyway the discipline I try to apply when I'm being a good boy in situations, like this. Also if history is some guide to the future...it's still the best I know....then I like to see the last 12 months being north of 85%-90 as an overall Share-Price Gain, and even better to this averaged over 2 or even better 3 Years...so respectively 180 % for 2 years and 270% for 3 years. This certainly narrows down the field..but I like that.
By the way,KD Have you had a little at the numbers and peek at overall outlook of Euroz:[EZL]--for shares in the City Pacific industry classification.[^]. Especially so in the Industry Classification. cheers now. davidrob
(3) Also the share has Negative Earnings for this last Reported period of minus 30% or even more if my numbers add up.

[davidrob]

Yeah, sorry that this response does not have the AAA quality of dimebag KD;)--and no I do NOT own MFS, but have been keeping eye on this and other potential City POacific's--isn't that just a par excellence share heh!! Now that one I do own.
To me quite simply there are 3 factors that say not quite up to scratch: (1) Track record not quite solid enough yet for last rapid recovery and increase in pre-tax profit and significant items profit of 125 or so % to be seen in THE CONTEXT of other solid years..I mean the base from which that was derived makes the number seem very good.
(2) Hence from Point (1) the Return on the assett is still only an ordinary 7 per cent. I am definitely, an 11 per cent Return on Asset and 21% plus Return On Equity; kindaguy,... (I derived this benchmark, incidentally, from where SDI dental(ASX code SDI), were on a fundamental analysis basis three(3) Years Ago. By the way look at the ASX price Gain on co's like SDI and ATR and FWD,...or even City Pacific...say 2 years ago, and do the numbers. You get a pretty consistent benchmark on what numbers for future quality performing Shares might be:.... for Earnings, return on equity, assets and profits---and their respective price/earnings ratio.This is, anyway the discipline I try to apply when I'm being a good boy in situations, like this.
Also if history is some guide to the future...it's still the best and Only real guide I know....then I like to see the last 12 months being north of 85%-90 per cent as an overall Share-Price Gain, and even better to this averaged over 2 or even better 3 Years...so respectively 180% for 2 years and 270% for 3 years.
This certainly narrows down the field..but I like that.
By the way,KD.... Have you had a little look at the numbers and a quick peek at the overall outlook of Euroz:[EZL]--for shares in the City Pacific industry classification.[^]. Especially interesting for shares that "stack-up", in the Industry Classification of City Pacific. cheers for now. davidrob
(3) Also the share has Negative Earnings for this last Reported period of minus 30% or even more if my numbers add up.

[KD]

davidrob - good rundown on your approach - I think SDI financial history is an excellent example and I have pointed this out to others myself. I (will) hold two portfolios - the present portfolio fits above criteria, the second one I'm about to start will be yield focused in wife's name for tax purposes. Dividends from this help pay interest bill to fund further aquisitions on growth portfolio. For yield portfolio I like stocks such as BWI (which I hold in my name at present to help pay bills). MFS caught my eye as a 10% plus yield stock as with ION. Different set of criteria to those above for growth. I will check out EZL for sure - you just keep your eye on those table-top dancers ;)

[davidrob]

KD...since its in between dance routines, thought I should mention also to have a look at Mariner Financial Limited--MFI, to look at alongside EZL..Hard to split these two. Also if you can avoid the falling knife with Jubilee Mines--JBM at present, it is still an extremely strong Mining Stock with excellent financials--spooked over demand out of China which is largely unfounded--market a bit schizzo. Jubilee-JBM pays 2 fully franked dividends totalling more than 12-14 per cent per year. Gor to go now, show about to start.:)
davidrob
quote:Originally posted by KD

davidrob - good rundown on your approach - I think SDI financial history is an excellent example and I have pointed this out to others myself. I (will) hold two portfolios - the present portfolio fits above criteria, the second one I'm about to start will be yield focused in wife's name for tax purposes. Dividends from this help pay interest bill to fund further aquisitions on growth portfolio. For yield portfolio I like stocks such as BWI (which I hold in my name at present to help pay bills). MFS caught my eye as a 10% plus yield stock as with ION. Different set of criteria to those above for growth. I will check out EZL for sure - you just keep your eye on those table-top dancers ;)

[Dimebag]

Hi Team

Thanks for bringing these stocks up for discussion.

I've checked out both MFS and EZL briefly. Here are some preliminary comments:

MFS is a unit trust and thus is obligated to pay out all earnings to avoid incuring taxation incidence. Because of this, MFS cannot grow internally - it needs to source external financing in order to expand.

It can do this without difficultly when its stock price exceeds its NTA backing by a decent margin. That is the case currently, with the price being $1.50 vs NTA of some $1.10. However, if the two come closer into line, MFS will be unable to grow.

The most recent half-year report showed no growth in assets from June-2003. Assets remained stable at $55m. Earnings were up versus the previous corresponding period, but compared with the first half of calender 2003, earnings were only up marginally from $1.9m to $2.0m.

With that said, MFS are likely to distribute about 20cpu this financial year. Thats a return of about 13% gross from current prices.

'Growth' in eps and asset backing may well continue to be achieved whilst the disparity between book value and market price remains, and new shares continue to be placed, and with such a robust yield the margin is unlikely to shrink much IMO. So growth plus income is potentially on the cards. Current PE about 7.5x

Verdict: Quite probably worth further investigation. The quality of their investments, and sustainability of their currently high ROE would need to be investigated.

EZL

EZL are into investment banking and securities services. In the half year to Dec-2003 they made about 10-11cps, which compares favourably to the current market price of 94c.

However, investment banking is notoriously cylical, volitile and unpredictable. Stockmarkets had a very strong 6 months during this period, and EZL benefited emmencely. EZL themselves have stated that market activity was unsustainably high during this period, as 'pent up' activity was released. Earnings are sure to fall in the near term.

Investment banking itself is not the best business to invest in. "Steven" in the OCL thread made a few comments about consultancy businesses, with the value often being tied up in a few key employees, and that is clearly the case with investment banks also.

EZL have limited history, and their future is difficult to predict. THere earnings are dependent on the health of equity markets, and the deal flow they can generate. The deal flow is crucially dependent on relationships that key employees have established with corporates, and these employees could depart at any time.

There is thus a significant degree of risk and uncertainty in investing in a stock like EZL.

With that said, at some price clearly they would be worth a punt.

At current prices, price-to-book-value is some 2x, and forward PE around about 7x. With other great stocks around at present with similar earnings multiples, growth rates, but considerably more earnings visibilty and predictability (OTI and AFC to name a few), I can't at this stage find a compelling reason to favour EZL above these.

Nevertheless, many thanks for bringing these stocks onto the radar. I will always track such stocks' subsequent progress both out of interest, and because someday they may well become a compelling buy.

Cheers
Dimebag

[Alban]

quote:Originally posted by Dimebag


There is thus a significant degree of risk and uncertainty in investing in a stock like EZL.



Agreed Dimebag, I looked at EZL a few weeks back and was also concerned about the cyclical nature of the business. Current earnings look great though. If only we could predict with a reasonably high probability that they will be this good (or even almost as good as this) over the next two or three years.

[KD]

Just a brief reply - thanks for your thoughts on this Dimebag - Just because Robbo said you provide AAA advise, you didn't have to live up to it!! Quality stuff - could you give more of an explanation as to the relationship between price to NTA and growth for trusts? I would be interested.

I had a brief look at the historical financials of EZL. I was scratching my head a bit as to what Robbo was getting excited about until I noticed the large increase in EPS last half. I recall some broking firms were almost at the brink 12 months ago and wondered whether the eps rise was mainly due to improvements in markets. However have not looked beyond that and was left with impression of cyclical/volatile earnings which has been confirmed by Alban.

Robbo - I checked out Mariner a couple of months ago - Ireland from Challenger seems to be setting up a great business leveraged to the baby boomers reaching retirement. Wilsons had provided some wraps on Mariner and I was impressed (but not with the way the share price took off on me). (I thought their annual reports were clever too - with titles spelt out using signalling flags)

- must go unfortunately - will catch up with this later

cheers

[davidrob]

Well before I respond to your excellent missives Team...I do all hope you took me up on my Suggestion--(see New Topic--BQT-28/4/04) on this excellent site; re BQT, two days ago: Turnover today:30/4/04 over $400, 000; and for those who were watching my posting there has been a very nice Solid 22 % Gain(with very solid volume and continued strong support. By the way the Ozzie Fin Review; has been also up-beat in these last two days. Not bad given the Beating the Chinese Premier's comments gave the Ozzie ASX these last two days...did I see right ---a 50 point drop; on one day on Thursday!!! ASX Sell off did have the upside of bringing one of my faves(at the right price) being JBM--Jubilee; into excellent Buying territory---so snapped some up today at $3.19 and $3.22 respectively-- in two parcels...
In my mind, this was a bargain:for a Solid mid Cap such as JBM;... with such consistently Superior Earnings over past 3 years and lowish Price Earnings and with such excellent liquidity and top of the range franked dividends of very nearly 11% per annum; this was; in my opinion, a bit of a STEAL.-
By the way;getting back to BQT; my next Target for BQT... within the next 2-4 weeks(if not sooner)is 59 Cents conservatively. How's that for going out on a bit of a limb!!
Got any more inside info Rene!!;)[:I]wink wink... nudge nudge!!
So where are you Guys on the Original Proposition;..(hope your not getting intellectually a tad lazy over there in l.of long white cloud Dimebag!! If you Recall; this Thread on McLaughlin Financial Services was conceived with the AIM of ascertaining whether there exists another CIY--City Pacific; in the making in the same classification. So I've already put up a couple of ideas in Mariner and Euroz--possibly Credit Corp(CCP)is also worthy of being in this discussion--but their really Debt Collection Commercial Serices and don't strictly qualify for purposes of this discussion.
So then: "To be Or Not To Be. That Is The Question."- said the Bard. Who is game to Stick their Neck Out; and Propose the NEXT CIY--or failing that--their No 1 and No 2 candidates for the next Fantastic, Fleetwood, GUD, SDI Astron et al???
One more thought to leave for discussion: I think EMITCH--(EMI)is NOW a terrric Buy for a very decent Investment.Look at pedigree of this business' management--Howard Mitchell Advertising and Media Buying; and the leverage and market advantage that gives EMITCH.
And yes Dimey;... it's a Buffett type of Business:)--lots of repeat, clickety click,set and forget revenue to get aus away from lumpy revenue down the track --Very Loyal Client Base-- AND... unlike naughty ION...no Debt to speak of and it is FOCUSSED and will stick to its knitting AND.... low, if any capitalization requirements--me don't like that ION beasty--exposure to too Few Large gorilla Clients, too many external factors out of their control and DEBT(I hate special DEBT vehicles/financial instruments and debt like they've got in general--reminds me of another of my Pet Hates--Burns Philp !!))and EMITCH--EMI--they have come back into Superb Buying Price...I have been lapping up as many as available at 12. and 12.5 cents. Even 13 cents says me; is still excellent buying. My Target for EMI for 12-15 months is 35--45 cents at a conservative guess. cheers everyone, davidrob--(Robbo)

[KD]

Dimebag - just to elaborate on my previous question -

you wrote

MFS is a unit trust and thus is obligated to pay out all earnings to avoid incuring taxation incidence. Because of this, MFS cannot grow internally - it needs to source external financing in order to expand.

Yes...not only trusts but also other companies with 100% payout ratios e.g. WES, PPT, RCD - the latter two of which, at least, have high growth by sourcing external financing.

It can do this without difficultly when its stock price exceeds its NTA backing by a decent margin. That is the case currently, with the price being $1.50 vs NTA of some $1.10. However, if the two come closer into line, MFS will be unable to grow.....'Growth' in eps and asset backing may well continue to be achieved whilst the disparity between book value and market price remains, and new shares continue to be placed,


I understand when price to NTA is > 1 there is an implied premium for growth (profits are the at heart of valuation not assets) but I don't understand how a price to NTA > 1 allows growth or a price to NTA equalling one prevents growth (as you say - MFS will not be able to grow). I'm assuming these statements refer to EPS growth - price growth would be favoured by a NTA < 1 (implying stock is undervalued according to assets alone).


and with such a robust yield the margin is unlikely to shrink much IMO. So growth plus income is potentially on the cards. Current PE about 7.5x

Yes, that's a good cushion on the price.

Verdict: Quite probably worth further investigation. The quality of their investments, and sustainability of their currently high ROE would need to be investigated.

Dimebag - MFI only have about 35 loans on issue and most of these for only a short term (around 12 months). However what is interesting is that their risk management procedures are such that they only accept around 5% of applicants. So there would seem to be room for growth in 'external finance' here.

I make reference to City Pacific not so much with respect to the stellar performance of this company but rather because their businesses look so much like MFI. MFI are only tiny in comparison and new (company has taken a new direction over last year or so). My thinking is that if they are in essentially the same business as City, operating under the same parameters, yet relatively unknown, there could be an opportunity here. Because I do not hold City - I really haven't looked into the nature of the business in great detail and therefore this makes it doubly hard for me to make a rapid appraisal of the similarities/differences between City and MFI. But they look very similar at first glance... City holders might have a head start. I believe the link provided above is a reasonable starting point to look at MFI.

Onto your post Robbo - I've been thinking that I've compiled a reasonable list of stocks with great credentials but where value might not be there (or not obvious anyway) at the moment. As Dimebag notes earlier words to the effect - thanks for bringing these to my attention - I will watch and wait for them to be compelling buys. It wouldn't hurt for us to compile a list of these well credentialled companies without any reference to value but rather to fundamental criteria. We could then keep an eye on price and debate value as a separate issue. I have access to AspectHuntleys database as well which allows searches on fundamentals which could help bring up a few more stocks provided the right searches can be compiled. I used this to find ATR and OTI for instance.

[OldRider]

My understanding is that growth can be produced when the share price is rather higher than NTA, from the issue of new units. This increases the NTA per existing unit, and hopefully gives growth when invested.A dollar from a new issue = a dollar of assets so according to the price premium over NTA might produce enhanced earnings.

Reminds me of the childcare business in Australia.
I understand that childcare centres there can be sold for only 3 or 4 times earnings as a going concern. However, shareholders in corporates in this area will pay perhaps 15 times earnings for the shares. So you buy your childcare centre revalue it upwards by three times, your shareholders are happy at this reduced PE,lots of profit, borrow some more & repeat and voila a rapid growth business.

[KD]

thanks very much OldRider - I'm learning... and this makes sense with respect to both MFI and ABS.

Of course, it all depends on the differential being maintained between what childcare centres can be purchased for and the share/unit price per NTA shareholders are willing to pay. Eventually, the price of child-care centres may be re-rated upward and, with that, the capacity to issue new units at reduced price to NTA to existing units diminishes. In the meantime, as long as childcare centres can be bought at 3-4 times earnings and shareholders are willing to pay 15 times earnings - everyone's laughing....and the growth will be sustained and thus the willingness for shareholders to pay 15 times earnings sustained and so on - until, for whatever reason, this differential is reduced and, with that, the price drifts back to NTA and opportunity for growth diminishes.

cheers