Legendary Mr. Market has re-priced issues of Suncorp-Metway.
On 19 May when we looked at Suncorp-Metway's June 2008 convertible preference shares IPO and found the new issue, quoted as SUNPB, being offered with a very attractive yield compared to other issues of the bank. At that time, floating rate notes SUNHB and reset preference shares SUNPA were offering gross yields of 9.64% and 7.80% respectively. Based on latest two half year dividend payouts, fully paid ordinary shares quoted as SUN were offering a grossed up dividend yield of 9.91%. SUNPB was being issued with a gross dividend yield of 10.97%.
Ideally, SUNHB should have the lowest and SUN the highest yield. SUNPA and SUNPB should have the same yield but be between yields of SUNHB and SUN. However, that was not the case before the issue of SUNPB.
Since then a gradual re-pricing has occured. SUNHB, SUNPA, SUNPB and SUN closed the day at $84, $89, $101.24 and $12.15. Their yields respectively are 10.18%, 8.13%, 10.84% and 12.58%. Apart from SUNPA, whose yield still looks out of line, yields of SUNHB, SUNPB and SUN look more in line with their associated features and risks.
I suspect that the issue of SUNPB contributed to an increase in the yield of SUN and therefore a drop in its price.
At current yields, SUNHB with its cumulative interest payments is attractive compared to SUNPB. We cannot comment on SUN without conducting a detailed analysis of the bank's accounts and operations.
01 July 2008
19 June 2008
Quick comparison of Clarius and Peoplebank
Clarius Group Limited (formerly called Candle Australia Limited) was one of the many shares that I traded last year. I bought it a couple of times and sold it that many times to make a tiny profit.
Last year, Colin Nicholson's work drew me to the idea of picking out companies with price to earnings ratios of less than ten. Peoplebank Australia Limited caught my attention then as it was one of the few stocks trading at a price to earnings ratio of less than ten. However, while discussing Peoplebank with a friend of mine, I was informed that he stayed away from recruitment companies as they are not generally well managed and in a relatively flaky industry. I decided to stay away from them too.
It is a long time since these events occurred.
I quit trading after my brief flirt with the market. Now that I have been learning about value investing for some time and can make sense out of numbers in company reports, it may be time to look at these companies again.
Folks at The Intelligent Investor have written a brief note on Clarius for issue 251 of their newsletter. Whereas I do not have a membership to their newsletter, the bit of text visible without a membership tells me that they are on a positive note about the company.
In this post we will look at why that might be the case - as an exercise for me to learn more about value investing. We will also compare Clarius to Peoplebank with a limited amount of data.
Clarius
As of the end of FY2008H1 Clarius has $91.5m in net assets. Of this $1.6m is deferred tax assets; $3.0m is property, plant and equipment; and $71.7 is intangible assets. Cash and equivalents are therefore circa $15.2m. With 57.4m outstanding shares and 8.3m exercisable options the diluted cash available per share is $0.23. Diluted book value per share is $1.39.
Average NPAT per year from FY1998 through to FY2008H1 is $6.3m. Diluted average EPS is circa $0.09. The value of this earnings stream at the discount rate of 4.4% p.a. is circa $2.
Clarius shares opened the day at $1.31 viz. a 34% discount to our valuation based on average earnings over a period of 10.5 years.
Peoplebank
Peoplebank has $15.4m in net assets as of the end of FY2008H1. Cash and equivalents are $1m, which we obtain by removing $42k for other current assets; $902k for property, plant and equipment; $624k for deferred tax assets; $11.6m for intangible assets; and $1.2m for other non-current assets. With 97m shares outstanding and 0.75m exercisable options the diluted cash available per share is $0.01. Diluted book value per share is $0.16.
Average NPAT per year from FY2004 through to FY2008H1 is $2.8m. Diluted average EPS is circa $0.03. The value of this earnings stream at the discount rate of 4.4% p.a. is circa $0.68.
Peoplebank shares opened the day at $0.70 viz. about their fair value.
While Peoplebank may be a smaller recently listed company with high growth prospects, there is a higher risk attached to investing in it for lack of an audited track record. On the other hand, Clarius, which has an audited track record of at least 10.5 years is available for a discount to its valuation based on average earnings and for a discount to its book value. While both companies have no long term debt, Clarius has a higher proportion of cash per share (18%) compared to Peoplebank (2%).
Clarius may be a candidate for purchase. Although, we cannot decide on that without conducting a thorough company analysis.
Last year, Colin Nicholson's work drew me to the idea of picking out companies with price to earnings ratios of less than ten. Peoplebank Australia Limited caught my attention then as it was one of the few stocks trading at a price to earnings ratio of less than ten. However, while discussing Peoplebank with a friend of mine, I was informed that he stayed away from recruitment companies as they are not generally well managed and in a relatively flaky industry. I decided to stay away from them too.
It is a long time since these events occurred.
I quit trading after my brief flirt with the market. Now that I have been learning about value investing for some time and can make sense out of numbers in company reports, it may be time to look at these companies again.
Folks at The Intelligent Investor have written a brief note on Clarius for issue 251 of their newsletter. Whereas I do not have a membership to their newsletter, the bit of text visible without a membership tells me that they are on a positive note about the company.
In this post we will look at why that might be the case - as an exercise for me to learn more about value investing. We will also compare Clarius to Peoplebank with a limited amount of data.
Clarius
As of the end of FY2008H1 Clarius has $91.5m in net assets. Of this $1.6m is deferred tax assets; $3.0m is property, plant and equipment; and $71.7 is intangible assets. Cash and equivalents are therefore circa $15.2m. With 57.4m outstanding shares and 8.3m exercisable options the diluted cash available per share is $0.23. Diluted book value per share is $1.39.
Average NPAT per year from FY1998 through to FY2008H1 is $6.3m. Diluted average EPS is circa $0.09. The value of this earnings stream at the discount rate of 4.4% p.a. is circa $2.
Clarius shares opened the day at $1.31 viz. a 34% discount to our valuation based on average earnings over a period of 10.5 years.
Peoplebank
Peoplebank has $15.4m in net assets as of the end of FY2008H1. Cash and equivalents are $1m, which we obtain by removing $42k for other current assets; $902k for property, plant and equipment; $624k for deferred tax assets; $11.6m for intangible assets; and $1.2m for other non-current assets. With 97m shares outstanding and 0.75m exercisable options the diluted cash available per share is $0.01. Diluted book value per share is $0.16.
Average NPAT per year from FY2004 through to FY2008H1 is $2.8m. Diluted average EPS is circa $0.03. The value of this earnings stream at the discount rate of 4.4% p.a. is circa $0.68.
Peoplebank shares opened the day at $0.70 viz. about their fair value.
While Peoplebank may be a smaller recently listed company with high growth prospects, there is a higher risk attached to investing in it for lack of an audited track record. On the other hand, Clarius, which has an audited track record of at least 10.5 years is available for a discount to its valuation based on average earnings and for a discount to its book value. While both companies have no long term debt, Clarius has a higher proportion of cash per share (18%) compared to Peoplebank (2%).
Clarius may be a candidate for purchase. Although, we cannot decide on that without conducting a thorough company analysis.
14 June 2008
Brief valuation of Wide Bay Australia Limited's assets
This post is a follow on from a previous post in which we conducted a Brief valuation of Wide Bay Australia Limited's earnings.
In this post we will broadly separate Wide Bay Australia's banking and non-banking businesses and determine a value for them.
The banking business
Loan book, deposits, provisions and securitisations are main components of the banking business. To determine a value for the banking business we need to identify net profit margin to net interest income made from the loan book.
For a start we assume that all expenses incurred are related to maintaining the loan book. Thus, to obtain NPBT generated by the loan book, we subtract all non-interest revenue from the organisation's NPBT. Seventy percent of this amount is the loan book's NPAT, implying a tax rate of 30%. Using the loan book's NPAT figures thus derived and net interest income available from financial statements, we obtain the loan book's NPAT margin to net interest income for each financial year. The loan book's NPAT margin to net interest income for the period FY1999 through to FY2008H1 averages 13.37%.
For the purpose of this exercise, we will assume a net interest margin of 2%. With the current loan book standing at $1596m, 2% percent equals $31.92m, which is the net interest income. Based on the average loan book's NPAT margin to net interest income, net profit will be approximately $4.27m. Value of this income stream at a discount rate of 4.4% is $97.05m. With circa 30m shares outstanding this equates to a value of $3.24 per share.
The non-banking business
If the banking business were sold, deposits, provisions and securitised loans will be taken over by the buyers. Thus, we remove these items from the latest balance sheet to obtain a value for the non-banking business. The resulting net assets of $174m equates to $5.8 per share, which may be optimistic. Pessimistically, we can completely remove the value of investments, tangibles and other assets leaving us with $30m in net assets, resulting in $1 per share.
As a whole
Optimistic value for the whole business is around $9.04 per share. If we consider the lower value for non-banking parts and the banking business being sold for half price, we get a floor of $2.62 per share.
On the basis of NPAT averaged over 9.5 years of available history, the business is worth around $7.58 per share. Based on an average NPAT for the past 5.5 years, the business is worth $9.50 per share. Based on last year's NPAT, the business is worth around $12.12 per share. And based on forecast provided by management, the business is worth around $13 per share.
As the business has demonstrated growth with a prudent management, it is unlikely that the business will backtrack its steps forward. Therefore, it deserves a premium to valuation based on NPAT averaged over 9.5 years, while maintaining a reasonable margin of safety to valuation based on latest or forecast performance. As a reasonable price, full value of the business calculated by separating its banking and non-banking components may deserve merit.
In this post we will broadly separate Wide Bay Australia's banking and non-banking businesses and determine a value for them.
The banking business
Loan book, deposits, provisions and securitisations are main components of the banking business. To determine a value for the banking business we need to identify net profit margin to net interest income made from the loan book.
For a start we assume that all expenses incurred are related to maintaining the loan book. Thus, to obtain NPBT generated by the loan book, we subtract all non-interest revenue from the organisation's NPBT. Seventy percent of this amount is the loan book's NPAT, implying a tax rate of 30%. Using the loan book's NPAT figures thus derived and net interest income available from financial statements, we obtain the loan book's NPAT margin to net interest income for each financial year. The loan book's NPAT margin to net interest income for the period FY1999 through to FY2008H1 averages 13.37%.
For the purpose of this exercise, we will assume a net interest margin of 2%. With the current loan book standing at $1596m, 2% percent equals $31.92m, which is the net interest income. Based on the average loan book's NPAT margin to net interest income, net profit will be approximately $4.27m. Value of this income stream at a discount rate of 4.4% is $97.05m. With circa 30m shares outstanding this equates to a value of $3.24 per share.
The non-banking business
If the banking business were sold, deposits, provisions and securitised loans will be taken over by the buyers. Thus, we remove these items from the latest balance sheet to obtain a value for the non-banking business. The resulting net assets of $174m equates to $5.8 per share, which may be optimistic. Pessimistically, we can completely remove the value of investments, tangibles and other assets leaving us with $30m in net assets, resulting in $1 per share.
As a whole
Optimistic value for the whole business is around $9.04 per share. If we consider the lower value for non-banking parts and the banking business being sold for half price, we get a floor of $2.62 per share.
On the basis of NPAT averaged over 9.5 years of available history, the business is worth around $7.58 per share. Based on an average NPAT for the past 5.5 years, the business is worth $9.50 per share. Based on last year's NPAT, the business is worth around $12.12 per share. And based on forecast provided by management, the business is worth around $13 per share.
As the business has demonstrated growth with a prudent management, it is unlikely that the business will backtrack its steps forward. Therefore, it deserves a premium to valuation based on NPAT averaged over 9.5 years, while maintaining a reasonable margin of safety to valuation based on latest or forecast performance. As a reasonable price, full value of the business calculated by separating its banking and non-banking components may deserve merit.
13 June 2008
Investing in residential property
[Adapted from my statements in an email conversation.]
With levels of gearing and cheap credit that was made available, the property market in Australia has become excessively overvalued. This has been my view for the past year or so since I started looking at properties. I was delighted to know that the folks authoring The Intelligent Investor newsletter shared a similar view in a marketing email.
The future needs to have better savers
Properties are a better investment only when someone else is ready to buy your property at a price higher than what you paid for it. Not just that, but the price should be high enough for you to recoup monies and the time value of monies paid to hold the property. Thus, not only should the gross profit from sale cover the total interest and other expenses, but also the time value of such interest and expenses.
As properties have six digit price tags, while our deposits generally have five digits, the return on investment for a modest growth in property prices is pretty high. However, when property prices start growing too quickly by too much, the demand subsides. People collect their five digit deposits by saving hard and its rare for these savings to grow by 100% - 300% a year, even after saving religiously. The following should explain.
Lets assume that a house is priced today at $300,000 and that there is a requirement of 20% deposit. This implies a deposit of $60,000. Thats pretty much a house that a first home buyer, like us, would aim for.
Lets assume that our savings are $20,000. This may have been saved over a year. That is a big ask at current salaries and living expenses. Nevertheless lets assume it as possible.
With current growth rates in residential property prices of circa 20% p.a., the house price next year will be $360,000. Deposit required will be $72,000.
With 100% growth in savings from our end, they will have become $40,000. Let us add a generous 10% interest after tax (the highest savings return lately has been circa 8% before tax) resulting in $44,000. Our savings are still a fair way away from the deposit required.
The year after that the case is not much better. Price of the house will have become $432,000. Deposit required will be $86,400. Savings and more than generous interest will result in $70,400.
As time goes on, savings will take longer to catch up with required deposits. Therefore, for double digit growth in property prices to be sustainable in the economy, all future buyers have to be better savers than their previous generation.
The mortgage bubble
This was the scenario a while back. As this was not sustainable, institutions that lend reduced deposit requirements so that people could buy properties. As a result, we now have a scenario where lenders will lend a borrower more than 100% of the property value and will not require a deposit. Although, the requirement to be able to afford repayments is still valid, interest costs may form a major part for a long period of time, and repayment terms can be as long as 30 years.
If property prices keep growing at current rates, future buyers will barely be able to afford repayments of interest, rather than interest and principle.
While we may be able to afford purchasing a property today with snazzier arrangements that lending institutions have to offer, it is unlikely to be the case ad infinitum. At some point in time there will be an interest repayment crush i.e. interest repayments due to one of: high property prices and low interest rates, current property prices and high interest rates, or low property prices and very high interest rates will make buying a property not affordable.
At that time it may become difficult to find a buyer who might be ready to pay more than what we paid for our properties over time.
Against the argument of paying someone else's mortgage
Interest goes in pockets of lenders and rents go in pockets of landlords. As far as I am concerned, neither of them go in my pocket. If present value of rent paid over a lifetime is cheaper than interest repayments, renting is better. In my opinion, the risk assumed by being an owner of a property also implies that the present value of interest repayments should be cheaper by a margin of safety.
Therefore, I am prone to think that a property may not be a good investment in the current scenario. Like any good asset, be it property, shares, wine, plantation or a good art piece, its value will rise over long periods of time. Profit can only be made if we buy it at the right price.
With levels of gearing and cheap credit that was made available, the property market in Australia has become excessively overvalued. This has been my view for the past year or so since I started looking at properties. I was delighted to know that the folks authoring The Intelligent Investor newsletter shared a similar view in a marketing email.
The future needs to have better savers
Properties are a better investment only when someone else is ready to buy your property at a price higher than what you paid for it. Not just that, but the price should be high enough for you to recoup monies and the time value of monies paid to hold the property. Thus, not only should the gross profit from sale cover the total interest and other expenses, but also the time value of such interest and expenses.
As properties have six digit price tags, while our deposits generally have five digits, the return on investment for a modest growth in property prices is pretty high. However, when property prices start growing too quickly by too much, the demand subsides. People collect their five digit deposits by saving hard and its rare for these savings to grow by 100% - 300% a year, even after saving religiously. The following should explain.
Lets assume that a house is priced today at $300,000 and that there is a requirement of 20% deposit. This implies a deposit of $60,000. Thats pretty much a house that a first home buyer, like us, would aim for.
Lets assume that our savings are $20,000. This may have been saved over a year. That is a big ask at current salaries and living expenses. Nevertheless lets assume it as possible.
With current growth rates in residential property prices of circa 20% p.a., the house price next year will be $360,000. Deposit required will be $72,000.
With 100% growth in savings from our end, they will have become $40,000. Let us add a generous 10% interest after tax (the highest savings return lately has been circa 8% before tax) resulting in $44,000. Our savings are still a fair way away from the deposit required.
The year after that the case is not much better. Price of the house will have become $432,000. Deposit required will be $86,400. Savings and more than generous interest will result in $70,400.
As time goes on, savings will take longer to catch up with required deposits. Therefore, for double digit growth in property prices to be sustainable in the economy, all future buyers have to be better savers than their previous generation.
The mortgage bubble
This was the scenario a while back. As this was not sustainable, institutions that lend reduced deposit requirements so that people could buy properties. As a result, we now have a scenario where lenders will lend a borrower more than 100% of the property value and will not require a deposit. Although, the requirement to be able to afford repayments is still valid, interest costs may form a major part for a long period of time, and repayment terms can be as long as 30 years.
If property prices keep growing at current rates, future buyers will barely be able to afford repayments of interest, rather than interest and principle.
While we may be able to afford purchasing a property today with snazzier arrangements that lending institutions have to offer, it is unlikely to be the case ad infinitum. At some point in time there will be an interest repayment crush i.e. interest repayments due to one of: high property prices and low interest rates, current property prices and high interest rates, or low property prices and very high interest rates will make buying a property not affordable.
At that time it may become difficult to find a buyer who might be ready to pay more than what we paid for our properties over time.
Against the argument of paying someone else's mortgage
Interest goes in pockets of lenders and rents go in pockets of landlords. As far as I am concerned, neither of them go in my pocket. If present value of rent paid over a lifetime is cheaper than interest repayments, renting is better. In my opinion, the risk assumed by being an owner of a property also implies that the present value of interest repayments should be cheaper by a margin of safety.
Therefore, I am prone to think that a property may not be a good investment in the current scenario. Like any good asset, be it property, shares, wine, plantation or a good art piece, its value will rise over long periods of time. Profit can only be made if we buy it at the right price.
10 June 2008
Brief valuation of Wide Bay Australia Limited's earnings
It may be a while before I get time to write up on Wide Bay Australia Limited. However, as I have collected all the figures that I think I need and have an analysis draft on paper, I will put it up as a post.
Wide Bay Australia is a building society. As far as we are concerned it is a bank as its operations are regulated by the Australian Prudential Regulation Authority (APRA). Although, it may have a higher capital adequacy requirement than other larger banks.
Low risk
A small client base, focus on residential loans, no low-doc loans, and no reverse mortgages imply a low risk loan book. If we assume the average price of a house to be $300k, the $1.5b in loan assets would be covered by 5,000 loans. Even twice that, 10,000, is a very small number of customers to assess and manage. Very small bad debts (< $1m) for all of 9.5 years of data that I could collect, further assures that the management has been prudent in dishing out loans.
Valuation
We can value this institution in two ways: by using its NPAT as an earnings stream; and by breaking down its assets and valuing them separately. The former is not very complex and neither is the latter considering that a loan book is the only major asset listed on the bank's balance sheet. Other major assets that come to mind are brand equity and customer relationships, but we won't bother with them.
Average NPAT over 9.5 years is circa $10m. Using a discount rate of 4.4% and with circa 30m shares outstanding, the value of each share is approximately $7.50. Wide Bay Australia warrants a premium to this valuation as a large chunk of this average has been achieved in first half of the current financial year.
We can shorten the period over which we average NPAT as profits of the building society have grown over time. Over the past 4.5 years, NPAT has averaged circa $13m resulting in a value of approximately $10 per share.
Wide Bay Australia posted a NPAT of $16m in FY2007. Value of each share is circa $12 if we assume the society will be able to maintain this profit to perpetuity.
In a later post we will value this building society by breaking down its balance sheet.
Wide Bay Australia is a building society. As far as we are concerned it is a bank as its operations are regulated by the Australian Prudential Regulation Authority (APRA). Although, it may have a higher capital adequacy requirement than other larger banks.
Low risk
A small client base, focus on residential loans, no low-doc loans, and no reverse mortgages imply a low risk loan book. If we assume the average price of a house to be $300k, the $1.5b in loan assets would be covered by 5,000 loans. Even twice that, 10,000, is a very small number of customers to assess and manage. Very small bad debts (< $1m) for all of 9.5 years of data that I could collect, further assures that the management has been prudent in dishing out loans.
Valuation
We can value this institution in two ways: by using its NPAT as an earnings stream; and by breaking down its assets and valuing them separately. The former is not very complex and neither is the latter considering that a loan book is the only major asset listed on the bank's balance sheet. Other major assets that come to mind are brand equity and customer relationships, but we won't bother with them.
Average NPAT over 9.5 years is circa $10m. Using a discount rate of 4.4% and with circa 30m shares outstanding, the value of each share is approximately $7.50. Wide Bay Australia warrants a premium to this valuation as a large chunk of this average has been achieved in first half of the current financial year.
We can shorten the period over which we average NPAT as profits of the building society have grown over time. Over the past 4.5 years, NPAT has averaged circa $13m resulting in a value of approximately $10 per share.
Wide Bay Australia posted a NPAT of $16m in FY2007. Value of each share is circa $12 if we assume the society will be able to maintain this profit to perpetuity.
In a later post we will value this building society by breaking down its balance sheet.
19 May 2008
Suncorp-Metway Jun 2008 convertible preference shares IPO
[Adapted from my statements in an email conversation.]
I assume you know about Suncorp-Metway.
They are looking to raise money through the issue of Convertible Preference Shares (CPS). They have applied for the symbol SUNPB and we will use that to denote the new issue.
Suncorp-Metway has previously issued Reset Preference Shares (RPS) that trade with the symbol SUNPA and floating rate capital notes that trade with the symbol SUNHB.
Coupons
SUNPA is offering a pre-tax yield of 7.24% till Sep 2011 on the issue price of $100. SUNHB is offering a pre-tax yield of 0.75% above the 90 day bank bill rate at the beginning of each quarter, paid quarterly, and stands at 8.55% of the face value of $100 as determined in Feb 2008 to be paid at the end of May 2008. SUNPB is being issued to offer a yield of 3.2% above the bank bill rate as at the first business day of a quarter, paid quarterly. At present the pre-tax yield of SUNPB is expected to be 10.97% on the face value of $100.
Yields
As of now the asking price for SUNPA is $92.80, for SUNHB it is $88.70 and the issue price for SUNPB is $100. Corresponding pre-tax yields are 7.80% for SUNPA, 9.64% for SUNHB and 10.97% for SUNPB.
SUNHB is the closest comparison to SUNPB. Lately, SUNHB has traded as low as $85 and has reached a low of circa $79 last in 2002. At $85 the yield for SUNHB is 10.06%. We cannot compare this to the price and yield in 2002 as market circumstances were significantly different.
SUN shares closed the day at $15.43. Preceding two half yearly fully franked dividends amount to $1.07, giving the fully paid ordinary shares a gross dividend yield of 9.91%.
Ideally, SUNHB should have a yield lower than SUNPA and SUNPB, with the latter two having comparable yields. SUN should have the highest yield as it is riskiest of all issues. With dividends of SUNPB being non-cumulative and distributions of SUNHB being cumulative, the 1.33% difference in yield in favour of SUNPB is warranted.
SUNPB is being offered with a good yield according to latest market pricing of comparable securities in the same franchise.
Sufficient interest cover
Suncorp-Metway's profit for HY2008 before tax and capital funding costs associated with paying interest to bond, note and preference share holders is $553m. Payments as interest and dividends for non-ordinary capital is shown to be only $63m. The actual amount has been offset with interest earned though non-ordinary activities. Nevertheless, the pre-tax profit is a little greater than 8 times the interest commitments. Not only is this good for ordinary shareholders, but also for the bond, note and preference share holders.
In my opinion SUNPB is worth subscribing to.
I assume you know about Suncorp-Metway.
They are looking to raise money through the issue of Convertible Preference Shares (CPS). They have applied for the symbol SUNPB and we will use that to denote the new issue.
Suncorp-Metway has previously issued Reset Preference Shares (RPS) that trade with the symbol SUNPA and floating rate capital notes that trade with the symbol SUNHB.
Coupons
SUNPA is offering a pre-tax yield of 7.24% till Sep 2011 on the issue price of $100. SUNHB is offering a pre-tax yield of 0.75% above the 90 day bank bill rate at the beginning of each quarter, paid quarterly, and stands at 8.55% of the face value of $100 as determined in Feb 2008 to be paid at the end of May 2008. SUNPB is being issued to offer a yield of 3.2% above the bank bill rate as at the first business day of a quarter, paid quarterly. At present the pre-tax yield of SUNPB is expected to be 10.97% on the face value of $100.
Yields
As of now the asking price for SUNPA is $92.80, for SUNHB it is $88.70 and the issue price for SUNPB is $100. Corresponding pre-tax yields are 7.80% for SUNPA, 9.64% for SUNHB and 10.97% for SUNPB.
SUNHB is the closest comparison to SUNPB. Lately, SUNHB has traded as low as $85 and has reached a low of circa $79 last in 2002. At $85 the yield for SUNHB is 10.06%. We cannot compare this to the price and yield in 2002 as market circumstances were significantly different.
SUN shares closed the day at $15.43. Preceding two half yearly fully franked dividends amount to $1.07, giving the fully paid ordinary shares a gross dividend yield of 9.91%.
Ideally, SUNHB should have a yield lower than SUNPA and SUNPB, with the latter two having comparable yields. SUN should have the highest yield as it is riskiest of all issues. With dividends of SUNPB being non-cumulative and distributions of SUNHB being cumulative, the 1.33% difference in yield in favour of SUNPB is warranted.
SUNPB is being offered with a good yield according to latest market pricing of comparable securities in the same franchise.
Sufficient interest cover
Suncorp-Metway's profit for HY2008 before tax and capital funding costs associated with paying interest to bond, note and preference share holders is $553m. Payments as interest and dividends for non-ordinary capital is shown to be only $63m. The actual amount has been offset with interest earned though non-ordinary activities. Nevertheless, the pre-tax profit is a little greater than 8 times the interest commitments. Not only is this good for ordinary shareholders, but also for the bond, note and preference share holders.
In my opinion SUNPB is worth subscribing to.
07 May 2008
Mortgage Choice Limited - initial analysis
[Excerpt from company analysis of Mortgage Choice Limited dated 06 May 2008.]
Mortgage Choice Limited operates as a mortgage broker forming a nexus between mortgagees and mortgagors. The business helps prospective home buyers and residential property investors find suitable products out of those offered by a panel of 29 lenders.
Mortgage Choice approaches its customer base through a network of loan consultants and franchisees cumulatively called brokers. Brokers run their own operation affiliated to the Mortgage Choice brand. In return for customers, lenders offer Mortgage Choice upfront commissions and on-going trailing commissions. Brokers are remunerated with a part of these commissions.
Limited overhead costs, an emphasis on property ownership in Australia, high property prices relative to income necessitating a loan, and a large number of lenders without store fronts make this mortgage broker's business a candidate for investigation.
Mortgage Choice is a company with low overheads, low capital expenditure and no debt. While property markets in Australia are under pressure from high interest rates and ever looming risks of slowdowns and recessions, they have proven to survive. With only 3.5% market share, the company has room to grow. While uncertainty surrounding property markets, credit markets and commissions present a risk, at today's closing price of $1.03, the 63% discount to our best valuation and 20% discount to our worst valuation presents a good opportunity.
Mortgage Choice Limited operates as a mortgage broker forming a nexus between mortgagees and mortgagors. The business helps prospective home buyers and residential property investors find suitable products out of those offered by a panel of 29 lenders.
Mortgage Choice approaches its customer base through a network of loan consultants and franchisees cumulatively called brokers. Brokers run their own operation affiliated to the Mortgage Choice brand. In return for customers, lenders offer Mortgage Choice upfront commissions and on-going trailing commissions. Brokers are remunerated with a part of these commissions.
Limited overhead costs, an emphasis on property ownership in Australia, high property prices relative to income necessitating a loan, and a large number of lenders without store fronts make this mortgage broker's business a candidate for investigation.
Mortgage Choice is a company with low overheads, low capital expenditure and no debt. While property markets in Australia are under pressure from high interest rates and ever looming risks of slowdowns and recessions, they have proven to survive. With only 3.5% market share, the company has room to grow. While uncertainty surrounding property markets, credit markets and commissions present a risk, at today's closing price of $1.03, the 63% discount to our best valuation and 20% discount to our worst valuation presents a good opportunity.
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