I was wrong when I implied that TAMIM and RM used Price EBITDA...

I was wrong when I implied that TAMIM and RM used Price EBITDA Ratios. TAMIM and RM probably use EBITDA growth to project a fast-growing EPS trajectory, so let's get on with guesstimating forward-looking NPAT numbers, and convert them to an EPS trajectory. Deriving a valuation via NPV-style logic should give us a feel for the value of an EML share. A PER-based proxy for NPV-style logic is inappropriate, because it only works reasonably well in a steady-state NPAT trajectory.

In the TAMIM report, the paragraph ending with “just under $9.00 per share” refers to “multiples”. Because only an estimated EBITDA was provided, I wrongly understood that TAMIM multiplied EBITDA by some multiple. The range of multiples mentioned in that paragraph tell us that the writer intended “multiple” to mean the hoary Price Earnings Ratio (PER). As suggest earlier in this post, TAMIM would not use a PER to derive its $9.00 valuation, and references to it may simply be to say that the resultant PER should be very high.

There is no reason why a PER of 50 should be regarded as high for a stock in a sector that enjoys a PER in the high 30s. If EML's PER relates to FY19 or FY20 estimates, it could be higher than that. The PERs published in the sector reflect an average of FY19 and FY20 PER estimates, because that is what I understand Morningstar does, and it is the Morningstar PER one sees in online broking sites like COMSEC and other Australian banks. I Googled the matter a few minutes ago, and read in https://www.morningstar.com.au/learn/article/looking-back-looking-ahead/5620, “Morningstar provides both a current P/E ratio, based on trailing 12-month earnings, and a forward-looking P/E calculation, based on analyst consensus forecasts of a company's average earnings per share during the coming 12 months.”

Once we have a projection of EPS metrics, we should ask ourselves what a reasonable SP should be. If we end up with a range of values of say $4.00 on the pessimistic side, and $9 on the optimistic side, this could elicit a “buy” sentiment. One does not have to have a precise reason to buy, sell or hold, a sufficient reason will do. A simple upside-versus-downside decision may be all one needs.

PS for TasTroy – We could see $10 in calendar year 2020, because a believable EPS trajectory for the next few years could emerge to support a valuation of $10, but maybe not. That is why I am so keen to build a credible trajectory for at least FY20, FY21 and FY22, but preferably further out than that. Also we should add to my FA-style valuation another layer of consideration, Mr Market's mood swings.