I thought it would be an interesting exercise to calculate the progression of the forward PE over the last 2 months, to determine what is the maximum price the market has been willing to pay for A2M shares over this recent period.
Bear with me if you are interested......
On 17 Nov we were advised that FY16 forecast EBITDA had increased from NZ$12m to NZ$22m. The weeks prior to this announcement the shares were trading at an average 72c. The shares climbed from 70c to 89.5c in the days before the announcement was released, suggesting some lucky people got wind of it before the market. So if we use 72c as the price before the wind, 723m shares, ebitda of AUD$11.28m, 35% for itda, that equates to a npat of AUD$7.33m and a forward PE of 71.
Following the announcement on 17 Nov, shares reached a max of 1.16. So if we use $1.16, 723m shares, ebitda of AUD$20.68m, 35% for itda, that equates to a npat of AUD$13.44m and a forward PE of 62.
Then on 18 Nov we were advised that FY16 forecast EBITDA had increased from NZ$22m to max NZ$37m. So far the shares have reached $1.95, 723m shares, ebitda of AUD$34.78m, 35% for itda, that equates to a npat of AUD$22.607m and a forward PE of 62.3.
So we have hit the forward PE of 62 that we hit earlier at $1.16. I find that fascinating and maybe not so much of a coincidence. In hindsight I should of set my sell at that level. I sold at $1.51 and doubled my money from 71c, so I can't complain. I am still a keen apprentice at this capper. Learning all the time.
Anyway, I guess the question now is how much higher will the market be willing to push the current forward PE. If they push it to 70, that will give a share price of $2.19. If they push it to 75, that gives $2.34.
Looking back at the history of other growth stocks, the market becomes increasingly more comfortable with the elevated PE the closer we get to the end of the financial year.
Prior to the latest upgrade, the share price settled around $1, which equated to a forward PE of 53 at the time.
With multiple earnings upgrades in quick succession, I doubt that the market will let the share price retrace back to a forward PE of 53 again. That would equate to a share price of $1.65.
Conclusions:
- Given its history, I guess it will be reasonable for the market to trade this in a range between a forward PE of 70 to 60. Equating to a trading range of $2.34 - $1.87.
- Synlait will likely squeeze more capacity out of their plant for their highest margin customer A2M, so my concerns over production constraints may be knee jerk and overly conservative in hindsight.
- As the end of FY16 draws closer the market will start to ask the question of what is a reasonable forward PE for FY17. I have learnt that lesson recently from BAL and CZZ. I see no reason why at this stage the market would not continue to value A2M's growth in the 50-70 forward PE range.
- Therefore if we get a further earnings upgrade to ebitda NZD$40m, AUD$37.6, that will equate to npat circa AUD$25m, at a forward PE of 70 gives a share price of $2.42.
Final conclusion:
- I am comfortable now with a npat range of AUD$20m-30m. At a proven forward PE of 62 reached by the market on 2 occasions now, I must accept (imho) that the trading range could now easily range for the remainder of FY16 from $1.71 - $2.57
Note: I am just a student, so these are just my rough guesses and are in no way advice. It will be fascinating to watch and study the progression of A2M and others in 2016 (eg. BAL, BKL, BGA, MGC, CZZ, ELD, etc).
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