"I guess what I am asking is when you say that you may accumulate in the coming days, would you see this window as an ideal time. At least the theory states that unnatural holders will be selling on mass."
You mentioned Coles and S32, constituting de-merger mispricings at the time but I think that the biggest opportunity came with Dulux when it was de-merged from Orica.
That happened at the time when the 2010 commodity boom was in full swing and investors - in their infinite wisdom - all wanted a part of the explosives business, so they were offloading the "boring" paints business to buy more of the "sexy" explosives business.
Classic herd mentality!
[Clydesdale Bank being spun out from NAB was a similar situation (although extraneous factors such as Brexit and then Covid rendered that particular opportunity a bit short-lived).]
Getting back to EDV, yes, my intention was to "wait and see", on the expectation that the typical "de-merger discount"would materialise.
However, I have to say that it hasn't to the same extent as some previous situations.
I suspect that might be because the businesses that make up Endeavour, and their inherent defensive qualities, are already quite well known to the investing public.
Just one important accounting footnote that I think is worth considering: it relates to the structure of the P&L which, in turn, could have bearing on the way the company is valued.
This accounting issue is brought about by the adoption, from 2020, of AASB16, a change in the accounting standard which sought to better account for lease liabilities (which, previously, where held off-balance sheet).
And - importantly - in the P&L, pre-AASB16, the lease-related expenses were recorded in the P&L as operating expenses, so above the EBITDA line.
But with the advent of AASB16, these lease expenses are recorded partly in the Depreciation line and partly as an Interest element.
So what this means is that, the effect of implementing AASB16 is Pre-Tax Profit for the averaged company to remain largely unchanged, but for EBITDA to experience an increase; along with EBIT (but to not quite the same extent because not all of the lease expense booked below the EBIT line).
Obviously, the greater the lease liabilities a company has, the greater these pre- and post AASB16 changes are.
And in EDV's case, the lease liabilities are large - almost $4bn, out of total liabilities of $8bn and in the context of total assets of $11bn. So, objectively, quite material.
In terms of the P&L, lease depreciation charge is around $270m and lease interest charge is a further $180m, so $450m in total. Again, highly material in the context of pro forma EBIT of some $700m.
What this means is that, under AASB16, EBITDA is $450m higher than it would otherwise be, and EBIT is about $180m higher than it would have been, pre-AASB16.
What this means in valuation terms, is that the stock will appear meaningfully cheaper on EV/EBIT, and even more so on EV/EBITDA, and relatively more expensive when valued using P/E.
The distortions are so pronounced that when I value the company on EV/EBITDA or EV/EBIT, it looks quite attractive, but when I value it on P/E, it is less so.
So this is another reason that I am adopting a "Do-nothing" approach - because I really don't have any conviction in the way the market will actually value the business.
As you know, its one thing wanting to buy a good business; but it only becomes a good investment if you buy it cheaply enough.
As I said in my inaugural post on EDV, at the current price, I think it is modestly undervalued, being some 13%below the mid-point of my $6.90 to $7.60 valuation range.
But, unfortunately, what is not presenting itself this time around is the unambiguous steep de-merger discount which has happened on other occasions, which warrants me adding to my position.
Finally, a long-winded answer to your original question of, "when you say that you may accumulate in the coming days, would you see this window as an ideal time. At least the theory states that unnatural holders will be selling on mass." is:
No, I don't think this is the ideal window for a number of reasons:
1. Institutions take time - up to 30 days - to execute mandated exits.
2. Many retail investors intending to sell will wait until well into July (to defer CGT liabilities)
3. Existing shareholders will think about deferred settlement constraints until 1 July.
4. Valuation-grounds (as discussed above)
I think the buying window, if it does open, would only happen over the course of July.
But for now, I suspect the market has got it approximately right, valuation-wise. undervaluing it by 10% to 15%, maybe.
.
EDV Price at posting:
$6.33 Sentiment: None Disclosure: Held
(20min delay)