eps, taxes and valuation

I have been a long term holder of MML since around the $1 mark. I am pleased as punch as much as everyone else here it seems and reading through the Annual Report made me glow! But one thing did catch my keen eye and has not been commented on in all the back slapping and calculations of EPS, DPS and PE valuations.

Medusa pays no tax. This is due to the tax holiday which I believe lasts for 10 years but not sure what date it started? I am sure someone can enlighten me.....

Anyway. Dont get me wrong I love to pay no tax but my experience in the stockmarket suggests that the market will not give you full credit for a low or nil tax rate. Alternatively the market may just chose to value based on EV/EBITDA as is so common these days and the tax benefit will be assumed away in any valuation comparison.

If we are talking about valuing MML on PE basis, my general rule of thumb is that the market will give you somewhere between half the benefit and no benefit for the low tax rate. So the EPS of 45c can become somewhere between 31-38c and hence the stock is on an effective PE of closer to 10-12x..which is closer to the majors although at a discount. Arguably there is also a Philippines discount that should also apply but that is another issue altogether. We can then talk about the 2011 EPS rising further due to greater production offset by some rise in costs. Maybe 10% growth. It is still cheap on this basis but less optically appealing.

On the issue of a DPS, frankly it would be madness from an economic viewpoint for a company paying no tax to pay dividends to shareholders who would then pay 46% tax on the dividend. Sure it may have some benefit to sentiment but economically it would not be a good move and I would not want them to do it. Much rather keep capital to expand production and benefit from the low tax rate. I cant see anything other than a very small dividend if one is paid at all. If they do pay a large one then its madness or it means they have no growth options left. In that case takeover another company but dont give me the cash back with that tax rate.

I am a believer in MML but I suspect we should tone down any expectations of the company attracting a very high PE mutiple and or paying a large dividend.

Just some thoughts to keep things in perspective.

Lord