dividends paid from borrowings, page-2

Valinvestor

In my view PE is a completely meaningless valuation metric for WHK in its current form (ex growth).

When the market is being efficient it values stocks based on changing growth assumptions - this then gives PE some value as a crude first glance metric to give a rough approximation of value. As an example if a stock has a 6% growth expectation a PE of 13-14 may be a reasonable valuation point etc.

Currently WHG is ex growth and being valued on dividend yield alone IMO. Its essentially trading as a bond proxy. Its trading a range between 81-89cents, a trading range that keeps it close to an 8% dividend yield. 8% is what the market says it is worth based on the current risk free rate of return plus 200bp equity risk premium.

It will continue to do this as long as the dividend is sustainable and it remains ex growth.

I also think you need to take a longer view than merely looking at the most recent Cash Flow statement to decide whether the dividend is sustainable out of cashflow. The December half cash flow is always lower due to the build in WIP around year end accounts.

I believe the dividend can be sustained out of cashflow without any difficulty. WHK is an excellent producer of fcf, I am yet to see a stock that producers more fcf for the market cap. Primarily this is due to the maintenance capex being so low. An example is from JH09-JH10 when OCF was over 27 times Capex - quite extraodinary.

Regarding the debt again you need to look over a longer period than the current HY.

NIBD over the last four half years has been as follows;

June 10 39.2m
Dec 10 39.7m
June 11 31.2m
Dec 11 43.4m

As you can see the net debt level has been realitively flat over the last four reporting periods.

I expect that the June half will show significantly stronger cashflow - I expect OCF to be above 27m for the half.

Medium term I am hopefully Lombard can install some organic growth into the business which should see the stock rated away from purely dividend yield type valuation.