Yeah ... it does feel like that at times ... but I do remind...

Yeah ... it does feel like that at times ... but I do remind myself as to why I invested in COE in the first place .... East Coat Australia Gas!

I've often posted on COE's "Intrinsic Valuation (IV)" on a Residual Earnings based model. I still stick with that and I would make the observation that one needs to separate Market Price from IV and the "Value" investors to figure out what the "Margin of Safety (MoS)" needs to be.




That said my IV is still ~$0.415 ... and given where the MP currently is that is akin to ~25% MoS ... and keep in mind that Warren Buffet insists(?) on a 50% MoS for equity investments. Of course this highly dependent on what your view of the company's assets and earnings power is. The LHS side numbers are the average and the RHS is the standard deviation. So using 2 Standard deviations the IV is between 31.5 cps and 51.5cps with a midpoint of 41.5cps

Benjamin Graham is probably the "father" of value investing. Applying his formula (and we could make all kinds of corrections wrt to corporate bond yields and PE ... reduce it to say 7 to be even more conservative)



The TTM earnings is a bit of an anomaly for COE, given its at the tail of a lengthy Capex program to bring the jewel in the crown online.

A "traditional" Graham IV using the current MP (31.5cps) and REVISED TTM earnings of say 0.2 cps (allowing for what might have been had Sole been more or less on schedule and GSAs begun) and company growth rate in earnings of 15% puts an estimated IV at 70cps with an "overvaluation" of -55% .... i.e. under valued by 55% (so Buffett would like it).

Fully realize that making those adjustments is "confirmation bias" in action ... just means that using Graham IV will have to wait until next FY when we have at least 6 months of Sole GSAs and an Capex light year. Also why I am more confident in my own IV based on Residual Earnings in the shorter term (using more conservative assumptions).

I've used this diagram or a variant of it few times.




The MP does not go up in a straight line (neither does IV) but what the real message is, pay attention to the MoS, which is the buffer you need BELOW the IV you think the stock has to decide what price to buy at.

So right now, if I believe outright that the IV is say 40cps and I want a MoS of 25% then I would be a buyer BELOW 30cps and I would be a seller at ABOVE 40cps.

That disregards what I think is occurring at the moment where the Market is discounting all "fossil fuel" stocks and then company specific risk factor in that the Sole gas plant has had more than its fair share of issues reaching nameplate.

For my investing I would consider adding to an already overweighted position at below 30cps purely for short term trade as in the end, residual earnings growth is rewarded by the market (money talks ... even though tobacco stocks were hated they offered above average investment returns).

Sole at nameplate is the answer and for me current SP is due to "risk off".