"What do you think is an appropriate PE ratio for DTL? Also, would you strip out the contribution from interest received from the NPAT when calculating an appropriate market cap using this PE multiple?"Two questions there, and the answer to the second one informs the first one, so let's start with how to treat the interest income.
Ordinarily, if we assume the best forecast of future cash rates is the current one, then a stream of interest earned on a lump sum of cash would be considered a fixed income annuity and its value would be capitalised at a relatively muted multiple to reflect the declining cash flows in real terms.
So let's say a multiple of 7x or 8x (recognising that this is pre-tax income, so
after-tax the multiple works out to be 10.0x to 11.5x)
But this is where a fundamental error risks being made when considering DTL's interest income stream. (Respectfully, judging by the tone and content of your posts about this, I suggest you are viewing DTL's interest income stream erroneously)
Because interest income for DTL is not fixed; i.e., it is not declining in real terms. Heck, it is not even merely maintaining its real value.
Instead,it is rising over time. Remember that, to avoid getting immersed in a debate about long-term interest rates, I am assuming constant interest rates, so the organic rate at which DTL's interest income is changing is a direct function of what its average net cash holding is doing.
And it is not constant.
Far from it; DTL's average cash balance has been rising at a rate that I daresay will surprise many - by a compound average annual rate of around 12%pa, reflected by the grey bars in the graph (the blue ones represent the projected cash balance at the historical rate of growth):
View attachment 5967010(Some qualifying comments are required: The past 3 years - following the supply chain issue after Covid - have seen the cash balance all over the place, surging in 2020 with the onset of Covid when government payments were accelerated for economic reasons and then the cash balance fell in 2022, only for the payment cycle pendulum to swing wildly in 2023 (they finished 30 June 2023 with over $400m in Net Cash), so I don't for a minute believe that that massive $250m column is sustainable and I think we will revert to a 2024 starting point closer to a touch above $150m, as shown in the graph.)
The point being that the net cash pile is growing at double-digits (~12%pa).
Ergo, other things held constant, the interest income is growing in double-digits (~12%pa).
So not a fixed income asset at all.
Quite different, in fact: an income stream increasing at a rate several multiples higher than the rate of inflation.
What multiple to put on that? A darn sight more than just 10x or 11.5x, I'd suggest.
One can choose one's own adventure, but I'd happily pay a high teen multiple for a stable income stream growing at 12%pa, especially given the business model and the management team backing it.
So I value DTL's interest income at, say 17x to 18x (after-tax, recall, so ~12x on a pre-tax basis).
Nothing too testosterone-laden about that approach, I don't think.
Now, back to the first question, viz., What current multiple to apply to the operating earnings of the business (i.e., the non-interest income part)?
I've long ago learnt that we mere mortals always underestimate the power of rapidly compounding growth, so when it comes to fast-growing companies, such as DTL, current point-in-time multiples are seldom very helpful (in fact, they are decidedly unhelpful, in my experience!)
So the way I approach valuing company like DTL is to skate to where the puck is going to be at the end of my investment time horizon (typically 3 to 5 years), and to paint a picture in my mind of what the prevailing multiples will be at that future point in time.
In DTL's case, the maths is simply as follows:
Current-year EPS is ~30 cps and the average annual growth rate that I expect over the next 5 years will be around 16%pa to 18%pa (some years they will come in at 15%, others they will shoot the lights out, ~25%). [For comparative context, EPS CAGR over the past 10 years averaged 20%pa]
So the 5-year prospective
EPS will be around 66cps, implying a P/E at that point of around 13x.
Clearly, there is no way that DTL will trade at that sort of multiple (and if it does, there are likely to be far bigger things happening in the world about which to worry)
So what multiple should it trade at?
Well, there are two parts to its earnings base that need to be valued separately:
1.) the operating earnings (i.e., excluding the interest income), which will represent at least 90% of the EPS (the derivation of that 90% figure being a discussion for another time), so around
59cps.
To capitalise that let's use a figure you quoted, namely 25x , so
$14.80/share in value.2.) the non-operating earnings, i.e. interest income, which represents 10% of EPS, so
7 cps.
which from the discussion above, I'm capitalising at 17x , so
$1.10/share in value.=> A 5-year prospective valuation of ~$16.00/shareWhich, if you reverse engineer the numbers results in a
compound annual capital appreciation of around 13%pa.Add 3% DY, for a Total Annual Investment Return of circa 16%pa.Which, for me, is an attractive enough risk-adjusted return offering.
Of course, that return won't get delivered in a neat straight line each year; some years the stock will do little, other years it will go up by 30%.
But I'm unconcerned by the precise timing of the delivery of the investment returns (because that I can't predict); all I can do is focus on the underlying performance of the business and take the appropriate action if my investment thesis is breached.
Which explains why, while a great many people get highly animated by financial results such as today's, for me they are merely milestones on the longer journey of increasing intrinsic value of a business over time.
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(20min delay)
