MHJ - Michael Hill International.

[Halebop]

Belg I'm not certain that the impact of a rising gold price is bad for Jewellers but I'd be pretty confident it isn't good.

In any case MHI are a quality company that you must pay a quality price for in order to participate. I'm still not in because the value doesn't quite hit my benchmark hurldes, although I've had a spare cash lying around of late and have been tempted to dribble little buy orders in (the only way to buy a company this thinly traded). Apologies to holders but I'm still waiting out for the day they get hammered by a bad trading quarter...

[Phaedrus]

MHI has moved more or less sideways for a year or more. Over this time there have been a few minor trends and multiple support/resistance levels. MHI would need to breakout above $8.35 to re-establish its old long-term uptrend.
While this is a stock that I would not want to be holding, I do not see it as a good "shorting" prospect either. Look how the OBV continues to rise - this stock is being accumulated, not distributed.

[Halebop]

6 months to December 2005: Australian sales down 2.3% (same store -5.3% in A$). NZ up 1.6% and Canada up 9.9%. Profit forecast to be down $0.7m or so for the half year versus last year.

MHI down almost 8% at time of posting. This could be the bad quarterly news paitent accumulators have been waiting for.

DCF Estimate for MHI: $14'ish
Wait for price below $7 and accumulate on the next uptrend.

[Lizard]

Halebop, I'm sure your DCF is far more accurate, but mine only comes in at $6.89....

A good share though, and I agree that it is an accumulate below $7.

[Halebop]

Hi Liz,

I guess it all comes down to what parameters you plug in. DCF is always wrong in any case. I always use a 10% cost of capital because my metrics only get me this far into analysis with quality companies but will not go so far as Buffett and use a risk free rate of return - might be something like a $20+ MHI valuation if this was the case...

Depending on the direction of the wind I'll use a termination growth rate of either NIL, the most conservative, or 3%, my long term guesstimate of inflation.

For a quality company with a clear and defined growth path and a history of delivery I'll use something aproximating their growth rate over the last 7 to 10 years. Because MHI fits this bill I'm happy to assume a 14% to 15% growth rate for 10 years with a 3% termination rate. Plug in 10% cost of capital and this derives a $13 to $14 valuation.

While this might be demanding they have a history of delivering these kind of returns while maintaining high dividends to boot. To get a valuation of $6.89 on 10% discount/3% termination rates, growth would be just 5.5% per annum. Using a more conservative 0% termination rate requires 8.2% growth rate to reach the same number. I think both of these are too low but you may be looking ahead less than 10 years as well.

Any number could be correct but I prefer to stick with the known quantities (historical growth rates) than really attempt to auger the future. Quality management tends to continue to be quality management. MHI's goal of opening lots of stores (I think 2,000?) is easy to understand, duplicatable and given time, achievable. Using the 50% margin of error rule means I can only buy if the price is below 50% of valuation anyway. This goes some way towards insulating me from optimistic assumptions of continued outperformance.

Edit: Fixed various illiteracies.

[Lizard]

Hi Halebop, Funnily enough (since I developed this spreadsheet back in 1998 I think), I also have 10% rate on everything and mostly use 3% for terminal growth - often, but not always, for everything beyond 5 years. However, my choice of "cashflow" is probably a little different and I also have a funny "fudge factor" which modifies all my DCF's. This is just a historic quirk which seemed to work and bring them all in line with analyst figures - after all, what the analysts tell the institutions its worth is probably going to have more impact in the shorter term than my own calculation!

I guess I find that using 15% growth may turn out to be correct for a company like MHI, but institutional analysts are unlikely to be that courageous, and anything beyond 5 years will more than likely be "normalised" down to less than 5%. Using 15% therefore carries a risk that I might have to wait 5 years for anyone else to notice the company!

Historically, I go for 33% below valuation. I also do a DCF for 1 year out and see how much it changes by - add the % change to the dividend yield and look for total 15% - which, now that I've heard of it, probably gives a similar indicator to using the dividend growth model...

But, as you say, while these things suggest value (and usually work out over timeframes of 3 years or more) the correlation can be less than reliable - particularly at peaks and troughs in the cycle - so now make more allowance for management quality and market sentiment and more willing to buy closer to full value for a company with solid management history.

[Lizard]

Hi Belg,

My cashflow estimates sometimes encompass detailed analysis - and often include an exchange rate influence of some kind. But in this case, they are mostly based on a fairly consistent rate of expansion and some limited cyclical behaviour. In this case, I have not attempted to take into account exchange rates to any great extent, given that I would also need to factor in gold (and other commodity) prices and elasticity of demand...... surprisingly, detailed analysis of short-term cashflows is not often worth the effort (there are some exceptions where future profits are a direct result of activity in preceding years).

I know you like opportunistic buying on downward spikes, but re-read Halebops advice...."Wait for price below $7 and accumulate on the next uptrend"

[Halebop]

Hi Belg (nice to see you at the "business end" of the forum!),

Pretty much what Liz said. I make no attempt to factor exchange rates with a company like this. There would not be a reliable probability model for it anyway. Intuitively it seems likely the A$ will rise versus the NZ$ but I haven't attempted to model it. Over time exchange rate conversions will become both more complex and less useful in MHIs case as they open in new markets. For now it's "good enough" for me to think the soft Australian results may receive a boost from an improved NZ$ exchange rate conversion but within the context of looking back 10 years and looking forward 10 years they aren't relevent unless you believe some major structural or catastrophic change is due.

[rmbbrave]

quote:Originally posted by rmbbrave

In the last 6 months MHI has been trading between 7.4 and 7.6.

But the SP has gone on a steep dive below this twice and then shot back up into it's usual range again just as quick.

I have bought on both of these dips and sold soon after, for a small profit.

The SP looks like it might be at the start of another dip.

Is this a recognised TA pattern? If so does it indicate anything?

Time for Rmb"lucky" to ride again my intrepid traders.

Unfortunately tomorrow is not a good day for me to be trading shares as my winter holidays are now at an end and it is back to 3 hours days for yours truly.

After 3 hours of hard slog I then have a dentists appointment at 1:30 Japan time so I will miss most of tomorrow's trading on MHI.

If I am really lucky MHI may wait for me until Thursday - I have the morning off.

[Sky Tower]

Michael Hill sales lose lustre

11.01.06
By Michelle Dacruz
From NZ Herald

Jeweller Michael Hill International issued a profit warning yesterday after a fall in sales in its biggest market, Australia.

The retailer said sales in Australia were down 2.3 per cent in the six months to December. Australian same-store sales - excluding stores opened in the past year - were down 4.3 per cent.

It said net profit in the six months to December was now forecast to be between $10.5 million and $11.5 million.

It had not previously set a forecast for the period, but analysts had expected a first-half net profit of $13 million or more.

Chief executive Mike P****ll said that even though Australian sales had been flat leading up to Christmas, the extent of the slowdown had been a surprise.

"We sensed a tightening of the market in October and November when sales were relatively flat, but the Christmas period was definitely harder than we anticipated," he said.

"Demand was not to the level that we anticipated and there was a lot of competitive activity which put a bit of pressure on margins as well."

With 158 stores catering to mid-range jewellery consumers, Michael Hill generates nearly two-thirds of its revenue from Australia.

While there is anecdotal evidence that holiday retail trading in Australia was softer than expected, Forsyth Barr analyst Guy Hallwright said Michael Hill's warning represented a more significant decline than was probably being seen across the broader retail sector.

Hallwright said Michael Hill's Australian sales were a "a substantial slowdown" compared with early evidence of holiday trading in Australia. "The result is obviously going to be well below what the market expected."

New Zealand sales were up 1.6 per cent and Canadian sales up 9.9 per cent on the earlier period.

The company made a net profit of $12.2 million in the six months to December 2004 but will restate that result based on new international accounting standards.