Ann: Market Update Presentation-CCP.AX, page-46

CP

I did not write about forecasts of growth, I wrote about the use of PEG set to equal 1 to derive a share valuation - a very different beast.

I have no idea how Morningstar forecasts growth. The reason why I suggested 10% for the relatively near future is that is what CCP has achieved in recent years, and it fits in with the idea that if a company can hold its ROE, and substantially keep other factors the same, then growth should equate to ROE x Retained Earnings Ratio. CCP's ROE has been about 20% for a few years, and its Retained Earnings Ratio is about 50%, so 20% x 50% = 10%.

CCP need not always grow by 10%. If PDLs become expensive, management would tend to buy less of them, and in the absence of an attractive alternative, increase the dividend payout ratio, and hence reduce the Retained Earnings Ratio. Investing more in its Loan Book is one possible alternative, and buying PDLs in the USA, rather than in Australia and NZ, is another.

By the way, when you mentioned PEG a few days ago, I wondered why using PEG had always filled me with cognitive dissonance. That is, the idea left me cold, but I did not know why. On looking into PEG, I realised that it ignored dividends, and other factors. If one used a PEG of 1 to value CCP, one would then need another calculation to value the dividend stream, and add the two values together. The PEGY formula does this in one fell swoop, but it does not factor in things like risk.