MDRT check: FY2017 Perspective
The question I wish to pose is this. If SKE wanted to direct all of their underlying earnings into paying off debt, how long would that take?
Bank Debt |
$28m {A} |
Underlying Net Profit After Tax |
$45.799m / year {B} |
Minimum Debt Repayment Time |
0.61 years {A}/{B} |
Being able to pay off all your company debt within 8 months is an enviable position to be in. So we can now proceed to the 'Buffett Growth Model' and see what kind of numbers pop out. Don't take this post as an endorsement to buy SKE yet though. All I have looked at so far is what you get, and what you get looks very good. From an investment perspective though, the most critical thing is what you pay. And I haven't made any assessment at all about market value yet. Paying too much for something good is not good investment practice. So how much would be too much to pay for SKE? Let's see.
SNOOPY
Buffett Growth Model FY2017 perspective: the data....
Time to apply the Buffett growth model. The key pieces of data are:
1/ The business cycle return on shareholder equity,
|
FY2013 |
FY2014 |
FY2015 |
FY2016 |
FY2017 |
Average |
ROE |
14.5% |
9.3% |
12.3% |
13.0% |
12.4% |
12.3% |
We use this figure to work out the projected earnings from the start of the financial year shareholder equity.
2/ The proportion of equity retained each year to grow the business.
|
FY2013 |
FY2014 |
FY2015 |
FY2016 |
FY2017 |
Average |
dps/eps |
35% |
56% |
36% |
34% |
41% |
40.4% |
We use this figure to derive: (a) the proportion of earnings retained for future growth and (b) paid out as dividends.
3/ The multiple the market has applied to future earnings.
|
FY2013 |
FY2014 |
FY2015 |
FY2016 |
FY2017 |
Average |
Share Price @ 31st March {A} |
$8.45 |
$10.80 |
$12.75 |
$17.10 |
$20.55 |
NM |
eps {B} |
$0.92 |
$0.66 |
$1.02 |
$1.22 |
$1.34 |
NM |
PE Multiple @ 31st March {A}/{B} |
9.2 |
16.4 |
12.5 |
14.0 |
15.3 |
13.4 |
We use this figure to determine the value of the company in ten years time, based on teh expected earnings in ten years time.
Now we have the key pieces of data, we can proceed to create the earnings projection spreadsheet
SNOOPY
Buffett Growth Model FY2017 perspective: the calculation
Now we have the key pieces of data, we can proceed to create the earninhgs projection spreadsheet
Year |
Equity SOFY |
Earnings |
Dividend Paid |
Retained for Reinvestment |
2018 |
$10.86 |
$1.34 |
$0.54 |
$0.80 |
2019 |
$11.66 |
$1.43 |
$0.58 |
$0.85 |
2020 |
$12.51 |
$1.54 |
$0.62 |
$0.92 |
2021 |
$13.43 |
$1.65 |
$0.67 |
$0.98 |
2022 |
$14.41 |
$1.77 |
$0.72 |
$1.06 |
2023 |
$15.47 |
$1.90 |
$0.77 |
$1.13 |
2024 |
$16.60 |
$2.04 |
$0.83 |
$1.22 |
2025 |
$17.82 |
$2.19 |
$0.89 |
$1.31 |
2026 |
$19.13 |
$2.35 |
$0.95 |
$1.40 |
2027 |
$20.53 |
$2.52 |
$1.02 |
$1.50 |
2028 |
$22.03 |
$2.71 |
Ten Year Dividend Total |
|
|
$7.57 |
We now answer the question: What return can we expect, compounding annually for ten years, if we buy shares in Skyline at $24.60 today?
p(1+i)^10=(13.4*2.71 + 7.57), p= $24.60 (today's share price)
<=> (1+i)=[(13.4*2.71 + 7.57)/24.60]^0.1
=> i = 5.96%
So the net average compounding return we can expect by investing in Skyline today at $24.60 over ten years is 6% per year. With tax at 30% this is equivalent to a gross return average of 8.5%. Not bad, but given the development risk ahead, not a good enough return for me. Warren Buffett looks for a 15% compounding return. What share price would he have to buy at to get this?
Buffett Price
p(1.15)^10=(13.4*2.71 + 7.57) => p= $10.85
If the share price ever got down to $10.85, I would be backing up the truck myself. But such a low share price in the future seems very unlikely. Considering the quality of the underlying assets I would consider a 12% compounding return over 10 years acceptable. What purchase share price does that imply?
Snoopy Growth Price
p(1.12)^10=(13.4*2.71 + 7.57) => p=$14.13
What we have here are some price points at which the purchase of Skyline Enterprises shares looks good depending on what return you the investor sees as acceptable. For me a 6% net return is not high enough. SKE is a fantastic company. But it is very fully priced by Mr Market when stacked up against historical metrics. I would not recommend buying any at $24.60. But I do recommend watching and waiting for a better entry price!
SNOOPY