Activity Test, page-35

@Islay,

Nothing personal against the MF (I too was once a subscriber to their newsletter, admittedly), but I find their analysis as often lacking in substance and sometimes just missing the point.

In this specific instance:

1) The author wants to measure “business performance” by looking at occupancy rates, rather than EBITDA, EBIT, NPAT and FCF.

2) In his self-admittedly overly simplistic illustration, the “break-even occupancy rate” (if there is such a thing) is completely thrown out of nowhere. GEM has reported EBITDA margins of 19% with 77% occupancy (2011) and of 14% with 75% occupancy (2010).

3) He generically claims that the current price is 30% above a level providing “some margin of safety”, but gives zero detail as to what that is supposed to mean. A couple more throwaway comments with regard to risks of expanding into China (they haven’t even started?) and buyers being too optimistic (why?)

4) He claims that the Company does require low-cost debt to remain available. Couple of points to make here: a) The acquisition pipeline for the next two years is already fully funded, and b) For a Company whose revenues and earnings grow at an above-inflation rate, the only concern is a rise in real (inflation-adjusted) interest rates, and those are very unlikely to increase to a level that could pose problems to GEM’s debt sustainability. The level of nominal interest rates is not really relevant.

5) He claims that this is a company that grows by acquisition. True, but incomplete; this is a company that grows organically as well, and this is a point that I do not see emphasised enough.

6) He claims that the availability of government subsidies remains a concern; well, a reform is being passed as we speak, therefore there is a fair degree of certainty in this regard for the short-medium term.

7) He concludes by saying that “at today’s prices, the future is not certain enough to make G8 a buy”. I guess one could say the same thing about pretty much anything, without providing a single line of valuation effort (not even a simple PE ratio, here).

Again, nothing personal, but I find it puzzling how a paid investor newsletter service can get away with this level of analysis. I guess this article was part of their subscription-free section, but still.

Anyway, thanks for sharing, it still provides some food for thought and gives an idea of what other participants in the market are saying about the Company.

Cheers