Invest4Profit.com recommends Magna Pacific to Members as a speculative investment.
In addition to the Portfolio recommendations, speculative opportunities like MPH are identified for those Members who also seek the greater profit potential of such investments.
DVD sales are booming due to S-curve growth in the household penetration of DVD players.
In 2001, just 14% of households owned a DVD player. In 2004, that had risen to 64%.
As Australia 's largest independent distributor of DVDs, MPH has been a beneficiary of the DVD boom.
Magna has rights over more than 2,500 DVDs and accounts for 5.7% of the Australian market.
In 2005 MPH posted a NPAT of $7.25 million, more than double the previous year.
Profit margins expanded from 8.7% to more than 12% in 2005 - a strong indication that the company does benefit from economies of scale.
Having said all that, MPH has tempered expectations for 2006, forecasting a net profit of just $6 million.
Slowing consumer spending and increased competition for shelf space were cited as the reasons.
Based on 0.435, the market cap is $48 million. That makes the 06 P/E 8.
Having said that, MPH have over $10 million in cash. In that light, it's appropriate to use enterprise value to assess the company.
On an EV basis MPH is on a multiple of just 7. That's cheap for a growth stock with emerging economies of scale.
DVD sales are still booming, and total industry sales are expected to reach $2 billion within 3 years.
If MPH maintains its market share and margins, the company could post a profit of $13.5 million by 2008. In that light, the 2008 P/E could be as low as 2.
Macquarie Bank have also done the numbers on Magna Pacific. As a result, since March, Macquarie have built an 11.1% stake in the company - with most of the purchases made at higher prices than this.
Have a look at the market depth - there's lots of volume on the bids in the low 0.40's, so in all likelihood, this is about as low as MPH is likely to be seen going forward - assuming the overall market stays firm.
Looking forward, Magna can easily double in price in the next 18 months to 2 years.
Given only about 10% of downside risk, Magna is an attractive investment - i.e. in the low to mid 0.40s.
By the way, 0.46 is a minor Key Level, so once that mark is surpassed, the price can probably advance in a meaningful sense in percentage terms - and in a short term time frame.
MPH is a small company however, so liquidity and volatility are risks. In that light, Magna is a speculative investment, but even so, the risk reward ratio is very favourable for investors with a two year outlook.
In fact, if 0.46 is surpassed, 0.73 will become a reasonable short term target.
MPH Price at posting:
0.0¢ Sentiment: Buy Disclosure: Not Held
