Hi Sauce
Been liking your posts in this thread. Thought I might contribute.
Basic finance calc which Sauce eluded to in his previous post is the calculation of growth... I.e. g = ROE * Retention Ratio.
Now care needs to be taken with this formula. The return on equity needs to be what the new funds (those which have been retained) can be invested at. This does not necessarily equal what the companies current investments are at. That said it's a good start if you believe the company will be able to use future funds to the same extent as past funds (which may be reasonable in a growing industry in the short to medium term).
Now to Ryman, from their latest report ROE = 72 / 511 = 14% (using average equity over year). Now firstly, let me say 14% growth is never available into perpetuity, however it is impressive and as long as there are opportunities there will be strong earnings growth.
Now for the growth the market seems to be factoring in... this is easy if you assume a WACC, I'm going to assume 9.6% but use whatever you feel the MARKET is using at the moment (i.e. this may NOT be what you personally feel it should be). Note the 9.6% is from the
PWC document gregrday was kind enough to link me to in another thread, I don't agree with all the WACC in this document, and the truth is I don't think the market does either... however it's a good place to start for an example.
Now a formula (there are a number which can be applied, but I like this one partly because we are using WACC):
Equity = Free Cash Flow to Firm / (WACC - growth rate) - Debt + Cash
Note that
FCFF = Operating CF + Interest * (1-tax rate) - Capital Investment.
What we already know:
Equity = $2.68 per share * 500m shares = $1,340m
FCFF = $133m + c.$8.5 * (1 - 0.30) - c.$120m = $20m
WACC = 9.6% (assumed)
Net Debt = c.$152m
Therefore:
1340 = 20 / (9.6% - growth rate) - 152
growth rate = 9.6% - 20 / (1340 + 152)
growth rate = 8.26%
Now this represents the rate of growth in FCFF after being weighted for time-value-of-money (i.e. growth this year is more valuable than growth in 5 years). Also note that RYM could have growth in FCFF tomorrow by cutting capital expenditure down to just that associated with replacement, this will reduce to roughly depreciation by the time they finish growing.
Now assuming RYM has growth of c.14% and then this drops all at once to a long term growth rate of 2% (i.e. inflation) at some point in the future then we can also calculate the number of years the market expects FCFF will grow for. In reality the shift will be progressive, which I can calculate but is more complex without a spreadsheet. This also assumes growth in FCFF = growth calculated earlier for earnings... this will not exactly hold but lets keep it for the example.
enterprise value = annuity at high rate + perpetuity at low rate discounted back to present
enterprise value = FCFF*(1+g)/(WACC-g)*[1-{(1+g)/(1+WACC)}^n] + FCFF*(1+inflation)*(1+g)^n / (WACC - inflation) / (1+WACC)^n
1492 = 20*(1+15%)/(9.6%-15%)*[1-{(1+15%)/(1+9.6%)}^n] + 20*(1+2%)*(1+15%)^n / (9.6% - 2%) / (1+9.6%)^n
now i can't be bothered doing the algebra, so I'm going to use excel to solve for "n"
n = 21.1 years
i.e. FCFF would need to grow by an average of 15% p.a. for more than 20 years to justify the current price... now is this reasonable? Maybe, the truth is FCFF should grow quicker than the return on equity due to leverage... so lets re-run with 20% growth, it's 13.7 years. This means it's highly sensitive to the growth rate, but that's no surprise.
Now I'm going to get REALLY rough and see what will happen with the following two assumptions: 1) 20% growth in FCFF over "n" years, and then 2) FCFF ads another 30% in the first year of the perpetuity (to account for reduced capital expenditure from this point forward). With these assumptions it takes 12 years of supernormal growth to justify the price.
This is largely why I'm personally not buying RYM... It's not that it's a bad company (it's seems fantastic). Also it's not that it won't grow (it should grow fast). It's not that it may not be worth it's price, or even more (it very well may be)... The reason I don't buy RYM is that I can't easily forecast what growth it will have and for how long into the future. Now with a full model taking population demographics into account etc I could have a very good stab, but I'll generally not build a full model for a business unless I can already tell there is a good chance a business is undervalued, and here I can honestly say, I have no idea what RYM is worth without a full model.
NOTE: A full model would be useful as it would take into account when the reduction in capital expenditure which would occur near the end of the growth period.
The reason for this post: Since this particular thread seems to be mostly fundamentalists, and many seem to be holding shares... a quick question, does everyone who has shares also have an idea of what they think the value is? I don't mind if you share the value or not, just curious if anyone has forecast what they expect growth to be before purchasing. (Not relevant question for any TA in here)
Note: I won't be buying either way, stick to stuff you can understand... well I struggle to forecast retirement villages. I know the industry will grow, but know little more than that. However I do worry that others are buying knowing less than me, some will certainly know more... but I doubt all will.
Also I agree wholeheartedly with previous posters re PE multiple based valuation. Just don't do it. Having ranges of PE as one of your selection criteria for what stocks to invest in is ok... but using it to value a firm is fundamentally flawed.
*Analysis done late at night, if there are mistakes then please be polite in correcting them.
EDIT: Oh and one sense check. 12 years of 20% growth is a total growth factor of almost eight times. Is eight times the number of villages, revenue etc. reasonable? Not sure if it is but could look to how many people are forecast to be over the age of 80 at any one point in time into the future (vs. currently). For this comparison it would be better to have growth changing over time as opposed to just stopping (easy enough in excel).
Cheers
Te Whetu