VTG: Ballpark valuation: $1.9-$2.2/share. For discussion, not a forecast. Gives some ideas on what valuation factors might be being built into the recent VTG share price weakness.
Methodology I use is documented in the Buffettology Workbook whereby a year 10 forecast of price is undertaken: based on present equity/share ($0.45 currently), Return on Equity (ROE) decay guess, retained earnings% (assume a steady 38%), and assumed future PE ratio of 12 (my guess based on past years). That year10 share price forecast and the year1-year10 stream of dividends are discounted back at my chosen Internal Rate of Return (IRR). I’ve assumed a desired IRR of 10% (an assumed risk free rate of 4% plus 6% equity premium). This is an IRR target that I use frequently for comparative stock valuation purposes.
The VTG ROE assumed is 36% for year 1 (a drop from 50% ROE last year), with further exponential decay down to ROE of 20% at year10. Combined with assumed retained earnings rate of 38% this results in year2-year10 earnings growth rate declining from 14%/year to 8.5%/year (reflecting lower profit margins and lower return on equity).
I’ve assumed earnings/share at $0.18 for year1 (down from $0.23 currently) as the ROE drops from 50% to 36% at year 2. For year2 to year10 the earnings have a steady climb back to $0.27/ year as per the derived growth rates that are described in the paragraph above. The dividend stream is discounted back to present value at above IRR after assuming a low marginal tax (15%) to reflect my average of private and SMSF pension stage tax rates.
VTG Price at posting:
$1.55 Sentiment: Buy Disclosure: Held
