share price, page-14

Hi Mike,

What I was referring to is what number to use when performing valuations. The number most often quoted is net profit after tax- but you have to remember that this is an accounting measure and often does not truly reflect the state of a company's finances. Growing companies often have no free cashflow.

Going back to Decmil.
NPAT for the half was 14m- if you annualise this it comes to 28m.
Using a 10% required return gives 280m and then add 60m net cash comes to EV of 340m, which is not far off its current market cap.

The free cashflow is operating cashflow (23m) take capex (12m) or ~ 11m. Owner earnings is similar but tries to work out sustaining capex, which depends on industry, capital requirements of business etc etc. (which will probably be somewhere between the 2.5 and 12m respectively from 2009 to 2010). I imagine (but I haven't done an in-depth analysis of DCG because I don't have time), that the 12m capex is relatively high for a half, and that it will be non-recurrent. This would potentially give a higher number to use in the above valuation.

There are a whole lot of valuation methods you can apply, but I find that if you try to identify good companies (with high returns on invested capital and low debt), almost none fall below the 10% RR, no growth calculation above (its equivalent to using a PE ratio of 10). If you can buy a good company below a very conservative price, you are doing well. Conversely, you can calculate upside using more outrageous assumptions. Eg.

Using a key value driver formula/ perpetuity growth formula

Intrinsic value = (NPAT * (1-g/ROIC))/(WACC-g)
Where g= growth and GDP real growth of 3%
Gives numbers upwards of 3.80. This is my perceived upside.

In the longer term, the question is whether competitive tendering and staff retention (with higher wages) will start to erode margins. Decmil's has been consistently 6% so its pretty easy to calculate NPAT when you know the revenue (read contracts or work-in-hand) stream.

Obviously the inputs change as more information becomes available. I don't follow TA, and if they think it will drop to 1.50 good on them I will be buying their shares. For what it's worth- on the conservative valuation method above, Decmil would have to have lost 2 million in the last half to get a value of 1.50!