Ann: Market Update Presentation-CCP.AX, page-31

I thought I would comment on dividend-based share valuation for a change.

A dividend-based share valuation is a very personal calculation, because it factors in knowledge, risk, cost of money, opportunity cost, marginal taxation rate, et cetera. Such a valuation is not a short- to medium-term SP predictions, so it is of little value to traders.

Because these calculations are highly subjective and personal to the evaluator, I dislike the term “intrinsic value”, because the adjective “intrinsic” conveys a misleading sense of concreteness to the resultant extremely subjective valuation. Creating a misleading sense of concreteness is also the reason why I dislike valuations put forward as a precise value to two or three decimal points. If one used a rock at end 'A' of a plank to counterbalance a pig at end 'B' on a see-saw device, with the fulcrum set at 3.13 metres from end 'A', and 1.87 metres from end 'B', it would be dishonest to aver that the pig weighed 25kg x 3.13/1.87 = 41.845kg on the basis of guestimating that the rock weighed 25kg. A more honest answer would be “roughly 40kg”, or “between 35kg and 45kg.

On the basis of rough numbers, CPP in my SMSF portfolio is worth to me about ($0.70)/(10%-5%) ≈ $14.00. That is: a) the dividend plus franking credits are nearly 70c; b) my IRR is about 10%; and c) I have assumed CCP will, on average, grow by 5% per annum. If I held CCP in my personal portfolio, I would reckon that personal tax would wipe out the franking credits, and the valuation would be roughly $10.00. I have in recent months been prepared to buy CCP for my SMSF portfolio at up to $10.00, if I had the funds. Sadly, I did not have the funds when the SP was depressed some months ago.

I arrive at the 10% IRR by the fact that I have a small debt that costs me something like 4.75% a year, so I doubled that to get 9.5%, and hence I used 10% as a round number. Research abroad has suggested that on average the premium to derive an IRR is 80% above the risk-free interest rate, but there is a high level of variation around that number, so one could easily decide to increase it by 90%, or as I have done, by 100%. One could use a higher premium if one considered CCP to be a risky investment, which I do not think is the case. My risk-free interest rate is the interest rate that I pay for the loan that I have.

On the question of opportunity cost, the problem that I have is that I am not omniscient, so I do not know all the options out there, and I am not prepared to spend effort looking either – good enough is good enough, and for now I would be happy to buy CCP at $10 or less when I have the funds to do so. If funds become available, which should happen soon, I'll reconsider that $10 hurdle price that I have held for a long time. I may well not buy more CCP at current prices.