Capitalised Earnings Valuation (attempt 2) FY2018
Quote:
Originally Posted by
Snoopy
My 'Capitalised Dividend' valuation for this share was a failure. But after some soul searching, I believe that 'capitalising earnings' is a more realistic way to go.
Turners Automotive Group Limited (TNR/TRA) |
|
FY2015 |
FY2016 |
FY2017 |
FY2018 |
Snoopy Normalised Earnings Per Share {A} |
|
19.4c |
24.2c |
22.5c |
25.6c |
Dividend Paid (per share) {B} |
|
9c |
12c |
13c |
14.5c |
Underlying Retained Earnings (per share) {A}-{B} |
|
10.4c |
12.2c |
9.5c |
11.1c |
I favour using at least five years of data when doing an exercise like this. However, when considering a company as fast evolving as Turners Automotive Group there comes a point when historical data used as a proxy for what might happen going forwards becomes positively antiquated. So I have reverted to using just four years of data which covers the period from when TRA was conceived in its current form.
The valuation is in two parts. Once again I am using an acceptable gross return of 7.5% for the dividend part of it.
Average dividend received over the last four years
(9c+12+13c+14.5c) / 4 = 48.5c, divide by four = 12.1c
Gross Capitalised Dividend Component = 12.1c / (0.075 x 0.72) = $2.24 (1)
Average Retained Earnings Valuation reinvested over the last four years
All things going to best plan, retained earnings should be worth more than cash paid as a dividend. But this assumes a largely monotonic increasing profit year in year out, with very few exceptions. I don't believe that the historical underlying profitability data indicates that Turners can achieve this. So I think it wise to assume that a 'dividend in the bank account' is worth more than a 'potential dividend in the bush'. To reflect 'business execution' and 'car market volatility' risks, I am going to increase my required return for 'retained earnings' by two percentage points, out to 9.5%
(10.4 + 12.2 + 9.5 + 11.1)/4 = 10.8c (average)
Gross Capitalised Retained Earnings Component = 10.8c / (0.095 x 0.72) = $1.58 (2)
So my total 'fair valuation' for TRA becomes (1) + (2):
$2.24 + $1.58 = $3.82
Thus at a market price of just over $3, it looks like TRA might be worth accumulating!
I have finally nailed this 'valuation' thing:
1/ Make up some numbers for a 'fair valuation'.
2/ Observe share price going down.
3/ Revise my valuation downwards after shareholders lose money, showing how foolish you all were to hold shares at that higher price in the first place - after the event.
My adjustment is not radical. I have just observed how good ideas do take time to implement. Examples include the delayed set up of the new Turners Sales yard at the Basin Reserve in Wellington and the time it will take to bring 'Autosure' to exploit cross market synergies. This means I think it is wise to use an additional 'time value of money' discount to take into account the execution time inherent in all new investments.
Turners Automotive Group Limited (TNR/TRA) |
|
FY2015 |
FY2016 |
FY2017 |
FY2018 |
Snoopy Normalised Earnings Per Share {A} |
|
19.4c |
24.2c |
22.5c |
25.6c |
Dividend Paid (per share) {B} |
|
9c |
12c |
13c |
14.5c |
Underlying Retained Earnings (per share) {A}-{B} |
|
10.4c |
12.2c |
9.5c |
11.1c |
I favour using at least five years of data when doing an exercise like this. However, when considering a company as fast evolving as Turners Automotive Group there comes a point when historical data used as a proxy for what might happen going forwards becomes positively antiquated. So I have reverted to using just four years of data which covers the period from when TRA was conceived in its current form.
The valuation is in two parts. Once again I am using an acceptable gross return of 7.5% for the dividend part of it.
Average dividend received over the last four years
(9c+12+13c+14.5c) / 4 = 48.5c, divide by four = 12.1c
Gross Capitalised Dividend Component = 12.1c / (0.075 x 0.72) = $2.24 (1)
Average Retained Earnings Valuation reinvested over the last four years
All things going to best plan, retained earnings should be worth more than cash paid as a dividend. But this assumes a largely monotonic increasing profit year in year out, with very few exceptions. I don't believe that the historical underlying profitability data indicates that Turners can achieve this. So I think it wise to assume that a 'dividend in the bank account' is worth more than a 'potential dividend in the bush'. To reflect 'business execution' and 'car market volatility' risks, I am going to increase my required return for 'retained earnings' by two percentage points, out to 9.5%. On top of this I am attaching an additional 1% as a time value of money execution discount.
(10.4 + 12.2 + 9.5 + 11.1)/4 = 10.8c (average)
Gross Capitalised Retained Earnings Component = 10.8c / (0.105 x 0.72) = $1.43 (2)
So my total 'fair valuation' for TRA becomes (1) + (2):
$2.24 + $1.43 = $3.67
Thus at a market price of over a dollar less than this, it looks like TRA might (still) be worth accumulating!
SNOOPY
discl: did some accumulating myself last week at $2.77