pcg :valuation 101

hey guys

sentiment always drives our mkt short-term, but long term you cannot escape the fundamentals of a stock!

The managing director has said that theyll make 10 cps in the last announcement.

Since sentiment is bad at the moment with quite a bit of uncertainty out there as to the direction of mkts, the p/e has gone down from 10 to around 8.

fair enough, its a small cap after all. BUT the P/E should revert back to 10ish given that we are in the midst of a
period if strong elevated metals prices and extensive investment in the mining , oil and gas sectors.

China and India alone have a few BILLION people whom arent going to stay on the same income level or wealth level in the long-run - GDP rates are growing at very high levels and GDP per capita esp in china is growing by the yr.

China needs energy, metals etc to continue industrialising which means that oil and gas companies are going to continue to invest BIG-TIME heavily in expansion.

the BRIC countries GDPs are growing and demand is only going to go up, and due to years and years of underinvestment, it is touted that supplt simplt wont meet demand.

There is just not enough oil + gas (energy) to fuel the world, esp with china and india on the brink of heavily investing in industrialising.

Bog companies are going to continue investing billions in their projects as a result -it doesnt look like investment will stop too soon given years and years of underinvestment in these areas, and the demand-supply equation.

this means that there will be should be plenty of work for PCG in the future.

IF we are in the midst of a 'super-cycle' and china and india dont stop investing in their industrialisation, then the outlook for the mining oil and gas sector looks AWESOME - and this is AWESOME for the future of PCG.

If the outlook for PCG is awesome based on my above analogy then I can safely assign PCG a P/E of 10 despite it being a small cap.

If I give a P/E of 10 (given the strong outlook for the mining oil and gas sector due to the china /india/ BRIC factor of billions of people demanding more energy when energy is already scarce for the west i.e oil shortage for USn alone), then based on an EPS of 10cps, id say that the share price is easily worth $1.

Add to this growth in PCG of say 15% each yr, then I have EPS 10cps for '06, 11.5cps for '07 and 13.2cps for '08;

After july 1st people will already start looking at '07 and '08 and base their investment decisions heavily on these figures.

Taking '08 at say 13.2cps with continued heavy investment in the oil+gas sector to bring on much needed added supply to accomodate chinas industrialisation not to mention the rest of the world, I can still safely give a 'small cap' a P/E of 10 and not the traditional P/E of 5,6,7 or so for small caps historically.

Hence a valuation of $1.32 per share.

If PCG grows by 15%, and P/E 10, then over the next yr the price will grow from 78cents to $1.32 when people slowly start to factor '08 EPS

Those are the fundamentals. you cannot escape the fundamentals.Its that simple.

Hence BUY at 78c and youll realise a return of :

1.32-0.78 divided by 0.78 = .692 within a year or so or 69%!

More conservatively if its $1.20: $1.20-0.78/0.78= 0.53 or 53% return!!!

Huntleys STILL values the stock at $1.20:

have a look

Outlook
Conditions remain buoyant in the Caspian, Arabian Gulf and Asian regions where oil and gas construction activity is high and is expected to remain so for at least five years. PCG continues to focus on these regions. In September 2005, the first project in Kazakhstan was secured on the $30bn Kashagan project. Tendering has commenced in the Arabian Gulf and South East Asia. We expect offshore activities to continue to contribute 40-60% of PCG's earnings.

Work on hand in domestic resources and infrastructure grew during the half year, however there is an increasing trend of major projects moving construction offshore. Conditions in commercial and high-rise have been soft and are expected to remain so for 18 months. PCG is experiencing strong demand for scaffolding in the medium high rise residential segment in WA. This is expected to continue through FY07.

The roll-out of new products, namely formwork and temporary fencing has been successful, providing 10% of sales. Approximately half of $8.7m in capex during the period was spent on these products. Whilst utilisation rates are lower than scaffolding it allows PCG to capture a larger percentage of a project's revenues.

Forecasts and Valuation
We expect margins for the full year to be stronger than FY05 as labour supply makes up a lesser proportion of costs and formwork and fencing revenues grow. The tax rate should be around 15% as offshore earnings (not assessable for tax) will provide for approximately half of pre-tax profits.

Management indicated that the second half may not be as strong as the first. Our forecast sales revenue for FY06 of $115m assumes $55m for 2H which is conservative. Coupled with expected margin expansion, our adjusted FY06 and FY07 EPS forecasts are 12.0 and 13.2cps respectively, placing PCG on an FY07 PE ratio of about 7 times. Investors have to recognise the geographic risk and the low tax rate. Accumulate.