In recent posts I did not explain how I valued NWH, so I'll do so below.
First, I looked at big-picture stuff relevant to NWH, which was the tonnage of iron ore to be mined in WA, bearing in mind how this translates to royalties, and considering how the WA Government's Royalties-for-Regions programme translates into civil works. Then I looked at NWH's debt (minus cash), and I took a few other metrics into consideration. I Googled to learn what folk are saying about NWH's management. I then looked at the Thomson Consensus Estimates, and decide if they seemed realistic, which they did, and pleasingly, EPS for 2014 and 2015 had been uplifted slightly, which reflected a view I had written in a paper on 11/4/2014 (I gave myself a pat on the back for that – a harmless pleasure that costs nothing, and hence appeals to my frugal nature). The Thomson Consensus Estimates are now:
Historically the Thomson Consensus Estimates (TCEs) have proven to be realistic, and when I have disagreed with them, they have been more correct than I have been. Consequently, I feel comfortable if my guesstimates are similar to the TCEs.
On future profitability, mining services contracts run for years, so healthy work-in-hand metrics can be published, as one can see for MLD in its 1H213 presentation, but margins tend to be low, about 6%. In contrast, civic works contracts are often less than a year, so future earnings visibility is poorer, but margins tend to be higher, about 10%, and contract extensions are the order of the day. As NWH shifts emphasis to civil works, work-in-hand metrics will tend to decline, but one should not extrapolate that to imply results manifestly inferior to the TCEs.
I then simplified the TCEs to a flat-for-three years EPS of 28¢ and a DPS of 14¢ (16¢ including the franking credit), and I asked myself if reality is likely to be better or worse, and I concluded that it is likely to be better, so I accepted the 28¢ and the 16¢, and figured out that the fair-value SP should be about $2.80, and not less than $2.00 (7 x 28¢ - $1.96). Consequently, $2.00 a share, or less is a good buy. Lastly, I asked myself if there is a stock, or an alternative investment, of which I am aware that is a better place to put the money, and I could not think of a candidate.
For stocks in a flat earnings setting, with reasonable net debt levels, and which pay about half the EPS as a fully franked dividend, my starting PER is 10 – hence the $2.80. A 30% margin of safety (MOS) yields $1.96. The 50% dividend payout rule of thumb that I often like, means this is a 5% yield, but with franking credits it is about 7% - the sort of return that I look for in my SMSF portfolio. The 50% retained earnings gives the investor some assurance that the dividend is sustainable.
At prices below $2.00, the dividend-cum-franking-credit yield is good enough for me to sit on NWH shares forever. Obviously, if an individual does not think NWH can generate an EPS of 28¢ and a 16¢ dividend-cum-franking yield over the long haul, then the dynamics of his or her valuation would give a lower fair-value SP, and after applying the required MOS, the person could end up with a sub-$1 buying price. There is no such thing as an intrinsic value – the results of all share valuations are so fraught with subjectivity as to mock the use of the word “intrinsic”.
At yesterday's closing SP of $1.155, the 16¢ delivers a return of 13.85% - very nice.
As always, things can go wrong, so being in this sector, I would not put more than 5% of my portfolio into it. This is why I used the word “punt” when I opened this thread over a month ago. It's like betting on Black Caviar at 10 to 1 – good odds if you can get it, but you could lose.
Timing the bottom of the market is another matter, and it is not my strong point. I bought at $2.00 circa 11 March 2013, which was too early, and I bought again at $1.155 yesterday, 18 March 2013, and that may prove to be too early too, if the balance of buyers and sellers is anything to go by.
As for the crudeness of my approach - there is no purpose advancing sophisticated share valuation methodologies when the basic metrics are conjectural – good enough is good enough.
NWH Price at posting:
$1.16 Sentiment: ST Buy Disclosure: Held
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