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Semirara Mining and Power Corporation (SCC) Extended Graph Analysis

December 4th, 2019 Posted by Extended Analysis No Comment yet

About the Company

SCC

Semirara Mining and Power Corporation started as a Semirara Coal Corporation and transformed into a Philippine power industry committed in providing affordable and reliable electricity to the country. The Founding Chairman is David M. Consunji. 

Incorporated in the Philippines on February 26, 1980 with exclusive rights to explore, extract and develop the coal resources in Semirara Island, Antique Province, the right remains to this day. SCC is vertically integrated coal-fired power plants in the country. 

Semirara Mining and Power Corporation became a publicly traded company in 1983 under the Philippine Stock Exchange with the ticker symbol SCC. The company is headquartered in 3rd Floor Dacon Building, 2281 Chino Roces Avenue Extension, Makati City, Philippines.

 

Semirara Mining and Power Corporation (SCC) Extended Graph Analysis

 

1. SCC CASH FLOWS

SCC CASH FLOWS

2014 2015 2016 2017 2018 2019
Net cash provided by operating activities 11,925,643,441 10,683,869,034 16,420,476,772 18,206,968,085 9,503,158,826 18,846,489,534
Net cash used for investing activities -10,671,263,716 -5,115,627,968 -6,689,482,960 -7,281,852,466 -8,572,237,935 -8,802,225,466
Net cash provided by (used for) financing activities -2,388,159,045 -4,467,782,858 -7,316,857,789 -9,440,375,645 -7,489,807,103 -7,038,035,424
Capital expenditure -10,739,495,786 -5,036,739,075 -7,242,108,616 -6,324,077,517 -9,539,112,245 -9,780,999,781
Free cash flow 1,186,147,655 5,647,129,959 9,178,368,156 11,882,890,568 -35,953,419 9,065,489,753

Facts:

  • Cash from operating activities were Php 18.846 billion in 2019.
  • Net cash used for investing activities were Php -8.802 billion in 2019.
  • Net cash provided by (used for) financing activities were -7 billion in 2019.
  • Capital expenditures were Php -9.781 billion in 2019.
  • Free cash flow was Php 9 billion in 2019.

Explanation

  • Cash from operating activities although erratic in movement had a growth of 58 percent in five years.
  • Cash from investing activities were investment in property, plant and equipment; and purchases of intangibles.
  • Net cash provided by financing activities were debt issued, debt repayment and dividend paid.
  • Capital expenditure was investment in property, plant and equipment.
  • Free cash flow increases year-over-year except in 2018 where it suffered negative due to changes in working capital.

Interpretation

The company has an acceptable free cash flow, although suffered negative it increased from Php-36 million to Php 9 billion from 2018 to 2019. The company has efficiently managed to generate cash from operations in the last five years.

 

2. SCC BALANCE SHEET

SCC BALANCE SHEET

2014 2015 2016 2017 2018 2019
Total cash 3,683,125,544 5,205,842,396 7,114,141,283 8,521,640,371 1,954,063,676 1,954,063,676
Current assets 12,772,627,810 15,092,708,536 21,154,329,852 24,333,646,377 25,739,222,770 25,739,222,770
Net property, plant and equipment 36,366,478,374 39,758,121,302 43,352,166,628 43,014,048,021 43,519,724,033 43,519,724,033
Non-current assets 39,128,747,884 42,064,328,709 44,606,146,650 44,262,759,312 45,309,715,454 45,309,715,454
Total assets 51,901,375,694 57,157,037,245 65,760,476,502 68,596,405,689 71,048,938,224 71,048,938,224
Short-term debt 3,332,638,748 8,183,728,394 3,431,583,887 3,555,960,317 10,426,073,925 10,426,073,925
Current liabilities 12,138,201,589 15,555,721,715 15,652,536,957 14,407,272,446 20,372,103,747 20,372,103,747
Long-term debt 16,088,724,435 11,359,881,203 13,258,162,966 14,468,517,855 10,042,954,442 10,042,954,442
Total liabilities 29,195,164,178 30,255,955,086 31,474,165,253 30,917,026,549 31,116,251,620 31,116,251,620
Stockholders’ equity 22,706,211,516 26,901,082,159 34,286,311,249 37,679,379,140 39,932,686,604 39,932,686,604

Facts:

  • Cash was Php 2 billion in 2019.
  • Current assets were Php 25.7 billion in 2019.
  • Net property, plant and equipment was Php 43.5 billion in 2019.
  • Non-current assets were Php 45 billion in 2019.
  • Total assets were Php 71 billion in 2019.
  • Short-term debt was Php 10 billion in 2019.
  • Current liabilities were Php 20 billion in 2019.
  • Long-term debt was Php 10 billion in 2019.
  • Total liabilities were Php 31 billion in 2019.
  • Stockholders equity was Php 40 billion in 2019.

Explanation

  • Total cash was erratic in movement in the last five years and has a negative growth in five years. It fell 77 percent in one year from 2017 to 2018.
  • Cash represents 8 percent of current assets.
  • Current assets have doubled in five years. It represents 36 percent of total assets.
  • Property, Plant and equipment had increased 20 percent in five years. It represents 96 percent of non-current assets.
  • Non-current assets represents 64 percent of total assets.
  • Total assets increases year-over-year and has a growth of 37 percent in five years.
  • Short-term debt represents 51 percent of current liabilities.
  • Current liabilities represents 65 percent of total liabilities.
  • Long-term debt represents 32 percent of total liabilities.
  • Total liabilities was 44 percent of total liabilities and equity.
  • Total equity represents 56 percent of total liabilities and shareholders equity.

Interpretation

The company’s balance sheet shows that the management is efficient in running its business operation year-over-year. Further, it shows its growing in the last five years. And has sufficient current assets to pay current obligations in due time. 

 

3. SCC INCOME AND MARKET

SCC INCOME AND MARKET

2014 2015 2016 2017 2018 2019
Sales 28,585,341,089 24,680,171,579 36,584,375,140 43,943,489,219 41,968,512,823 45,234,431,331
EBIT 6,559,565,972 9,899,091,968 13,009,730,429 15,738,076,298 13,554,916,247 11,629,313,377
Net Income 6,861,294,479 8,486,909,081 12,040,669,988 14,209,139,819 12,025,381,058 11,608,835,822
Market Capitalization 151,763,000,000 145,884,000,000 138,529,000,000 156,710,000,000 97,975,000,000 99,250,000,000
Intrinsic Value 116,785,324,423 138,626,168,139 136,759,304,573 173,053,868,169 116,632,959,353 130,497,083,292
EBITDA 8,560,350,354 11,644,990,348 17,110,448,223 22,671,652,962 21,406,861,156 19,509,179,548

Facts:

  • Sales were Php 45 billion in 2019.
  • EBIT was Php 11.629 billion in 2019.
  • Net income was Php 11.609 billion in 2019.
  • Market capitalization was Php 99.250 billion in 2019.
  • Intrinsic value was Php 130.487 billion in 2019.
  • EBITDA was Php 19.56 billion in 2019.

Explanation

  • Sales has a growth of 58 percent in five years and it grows year-over-year.
  • EBIT growth was 77 percent in five years.
  • Net income growth was 69 percent in five years.
  • Market capitalization decreased by 35 percent from 2014, it decreases year after year from 2014 to 2018, in 2019 it began to increased by 1.30 percent..
  • Intrinsic value was erratic in movement in the last five years, further, IV is greater by 31 percent against market value.
  • EBITDA growth was 128 percent in five years.

Interpretation

The net income of SCC represents 26 percent of Sales which is impressive, it never suffered a negative bottomline in the last five years. The management has managed to generate sufficient and increasing sales on its operations. SCC is profitable.

 

4. SCC FINANCIAL RATIOS

SCC FINANCIAL RATIOS

2014 2015 2016 2017 2018 2019
Asset Turnover (average) 0.59 0.45 0.60 0.65 0.60 0.64
Return on Asset (ROA) % 14.20 15.56 19.59 21.15 17.22 16.50
Return on Equity (ROE) % 32.04 34.22 39.36 39.49 30.99 27.70
Financial Leverage (average) 2.29 2.12 1.91 1.82 1.78 1.72
Return on Invested Capital % 17.73 19.44 25.36 27.35 21.61 19.23
Interest Coverage 24.56 42.33 25.51 25.29 15.70 0.00
Earnings per Share Php 1.60 1.99 2.82 3.33 2.83 2.73

Facts:

  • Asset turnover was averaging 0.64 in 2019.
  • Return on assets was 16.5 percent in 2019.
  • Return on Equity was 27.70 percent in 2019.
  • Financial leverage was averaging 1.72 in 2019.
  • Return on invested capital was 19.23 percent.
  • Interest coverage was 15.70 in 2018.
  • Earnings per share was 2.73 in 2019.

Explanation

  • Asset turnover tells us that for every peso invested in assets the company generate 64 centavos of sales.
  • Return on assets indicates that for every peso in assets, the company generates 16.5 centavos of net income.
  • Return on equity tells us that every peso that was invested in equity it generates 27.7 centavos of net income.
  • Financial leverage indicates that for every peso in equity the company had Php 1.72 in total assets, Php 0.72 was borrowed.
  • Return on invested capital tells us that 19.23 percent is the return that the company makes over its invested capital.
  • Interest coverage tells us that SCC is able to make interest payments on its current obligations in due time.
  • Earnings per share means that if SCC distributed every peso of net income to its shareholders, each of their shares will receive Php 2.73.

Interpretation

Overall view of financial ratios indicates that the SCC is profitable.

 

5. SCC KEY OFFICERS

LIST OF KEY OFFICERS

NAME TITLE
Isidro A. Consunji CEO, Chairman of the Board
Maria Cristina C. Gotanum President, COO, Chief Risk Officer
Junalina S. Tabor CFO, Vice President
Jaime B. Garcia VP, Procurement and Logistics
Nena D. Arenas VP, Chief Governance Officer, Compliance Officer
Atty. John R. Sadullo VP, Legal Corporate Secretary, Corporate Information Officer
Antonio R. Delos Santos VP, Treasurer
Jose Antonio T. Villanueva VP, Marketing for Coal
Andreo O. Estrellado VP, Power Market and Commercial Operation
Ruben P. Lozada VP, Mining Operations, Resident Manager
Carla Cristina T. Levina VP, Chief Audit Executive
Jojo L. Tandoc VP, Human Resources and Organization Development
Kamine Andrea B. San Juan Assistant VP, Corporate Planning for Power

Explanation

  • Isidro A. Consunji is a BS Civil Engineering, University of the Philippines, Master’s Degree in Business Economics, Center for Research & Communication, Business Management, Asian Institute of Management, Advance Management from IESE School, Barcelona, Spain. 
  •  Maria Cristina C. Gotianun – BS Business Economics, University of the Philippines, Majored in Spanish, Instituto de Cultura Hispanica, Madrid, Spain
  • Jorge A. Consunji – BS Industrial Management, Engineering, La Salle University.
  • Cesar A. Buenaventura – Bachelor of Science in Civil Engineering as a Fulbright Scholar, Lehigh University, Bethlehem, Pennsylvania 
  • Herbert M. Consunji – Bachelor of Science in Commerce Major in Accounting, De La Salle University.
  • Ma. Edwina C. Laperal – BS Architecture, University of the Philippines, Masters Degree in Administration, University of the Philippines
  • Josefa Consuelo C. Reyes – AB Economics, University of British Columbia, Vancouver, Canada. Strategic Business Economics Program University of Asia and the Pacific.
  • Luz Consuelo A. Consunji – Bachelor’s Degree in Commerce Major in Management, Assumption College; Masters Degree in Business Economics, University of Asia and the Pacific.
  • Rogelio M. Murga – BS Mechanical Engineering, University of the Philippines; Senior Management Program, Harvard Business School, Vevey, Switzerland; Honorary Degree of Doctor of Science – Honors Causa, FEATI University.
  • Honorio O. Reyes-Lao – Bachelors of Arts Major in Economics, De La Salle University; Masters Degree in Business Management, Asian Institute of Management.
  • Antonio Jose U. Periquet – MBA, Darden Graduate School of Business Masters Degree in Economics, Oxford University, Bachelor’s Degree in Economics, Ateneo de Manila University.

 

6. SCC LOBBYING AND CONTRIBUTIONS

SEARCHED:

OpenSecret.org     The LOBBYIST

Result:

 

No Politicians or Lobbyists Found

 

 

7. SCC FINANCIAL STRENGTH

SCC FINANCIAL STRENGTH

DATA

PhP
Working capital 5,367,000,000
Total assets 71,048,938,224
Sales 45,234,431,331
EBIT 11,629,313,377
Market value of equity 99,250,000,000
Book value of total liabilities 31,116,251,620
Retained earnings 20,468,072,403

CALCULATION:

Ratio Score Result
A – Working Capital / Total Assets 0.08 1.20 0.09
B – Retained Earnings / Total Assets 0.29 1.40 0.40
C – EBIT / Total Assets 0.16 3.30 0.54
D – Market Value of Equity / Book Value of Total Liabilities 3.19 0.60 1.91
E – Sales / Total Assets 0.64 1.0 0.64
Z-Score     3.58

 

Formula: Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E

 

Explanation

Z-Score is a statistical measurement that compare data points from different sets of data to find correlations. This measurement by Dr. Edward Altman is a significant measure in determining the financial strength of the company because it relies on different weighted financial liquidity and profitability metrics to come up with the overall score. This measure indicates the probability of bankruptcy.

SCC has a Z-Score of 3.58. Dr. Altman’s grading scale of 3.0 and above indicates that the company will not declare bankruptcy. In other terms, the company is not close to insolvency. The main factors of this statistical measurement is the profitability, liquidity, leverage and efficiency.

 

CITATION

http://www.semiraramining.com/our_organization

https://www.opensecrets.org/search?q=Semirara+Mining+and+Power+Corp+SCC&type=indiv&__cf_chl_captcha_tk__=a00a32188a7f3f85f65452c421f7a694ce5249e0-1575258353-0-ATFtgwWRMeDvt4iMyEHln_cmUthyzcEwWakDM8CDWFAjnNJG8KO3g6Yaw3rSIVpxFgyMhJ–rRfewraXaenfBeE2dU82-napg4-yJybfimHrTRE3A3ZHas9hNcdpdQBNVRm5xEVdT_fXaBJuatWzwQfz-7fFllcCEzFjBR-ose_2rAR4yRUF6bY9kbiYEVm6zRLRjfa18O3HCW_yZqFXe79BvIXifojvt2tnGyahP7ySG9HljRu-jA6OYvZSjl9S0JUCvEZf7ZQYMvB77F54hdshRamoCkb3FFdKDMIlxtxkDZbm_1ORWkppCrt-Ie6mJdLDbA6Bq4ObUu52z4PuDMdEt-Ufi7bIPnsIbRA24eFCOCkuPAyw-iAxqy6r2TEM_xknvqfXWZWoCIxzyYPAHfooY7RAYkkR_qJFr7-VgEq6xBFRhnveinLwcTee4NyFGg

 

 

Researched and written by Criselda

Twitter: criseldarome

 

Vale SA

Vale SA ADR (VALE) Investment Valuation

January 23rd, 2013 Posted by Investment Valuation No Comment yet
VALE is a Brazilian multinational corporation engaged in metals and mining and the largest producer of iron ore and nickel in the world.
VALE Investing Approach  
This model is prepared in a very simple and easy way to value a company, it adopts the investment style of the Father of Value Investing Benjamin Graham. The essence is that any investment should be purchased at a discount, meaning the true value should be more than the market value. Graham believed in fundamental analysis and was looking for companies with a sound balance sheet and with little debt. The basis for this valuation is the company’s five years of historical financial records, the balance sheet, income statement, and cash flow statement. We calculated first the enterprise value as our first step. We believed this is important because it measures the total value of the company.

VALE Investment in Enterprise Value   

The concept of enterprise value is to calculate what it would cost to purchase an entire business. Enterprise  Value (EV) is the present value of the entire company.  Market capitalization is the total value of the company’s equity shares. In essence, it is a company’s theoretical takeover price, because the buyer would have to buy all of the stock and pay off existing debt, and taking any remaining cash.  The formula is given below:

Enterprise Value = Market Capitalization + Total Debt – (Cash and Cash Equivalent + Short Term Investment)

 VALE EV

Explanation

The market capitalization was erratic in movement with an average of $137 billion.  Its total debt represents 18 percent average, while its cash and cash equivalent represent 5 percent. Thus, enterprise value was greater by 13 percent against the market capitalization. Buying the entire business of Vale would be paying 13 percent debt and 87 percent equity.

If you are asking how much it would cost you to buy the entire business, then the purchase price of Vale to date, January 21, 2013, would be $180.6 billion at $56.96 per share.  The market price to date was$20.01 per share.

Benjamin Graham’s Stock Test           

Net Current Asset Value (NCAV) Approach  

The Net Current Asset Value (NCAV) is a method from Benjamin Graham to identify whether the stock is trading below the company’s net current asset value per share, specifically two-thirds or 66 percent of net current asset value. Meaning they are essentially trading below the company’s liquidation value and therefore, the stocks are trading in a bargain, and it is worth buying.

Net Current Asset Value (NCAV) Method   

VALE NCAVPS

The net current asset value approach of Benjamin Graham shows that the stock of Vale was trading at an overvalued price because the market price was greater than the 66 percent ratio from 2007 to the trailing twelve months.  The 66 percent ratio represents only 7 percent of the market price, thus the market price was overvalued.

What does it mean? It tells us that the stock of Vale was expensive and did not pass the stock test of Benjamin Graham.

Market Capitalization/Net Current Asset Value (MC/NCAV) Valuation  

Calculating market capitalization over the net current asset value of the company, we will know if the stock is trading over or undervalued. The result should be less than 1.2 ratios for Graham to buy stocks.

Market Capitalization / NCAV = Result (must be lesser than 1.2)
VALE MC NCAV

The MC/NCAV valuation tells us that the stock price of Vale was overvalued from 2007 to the trailing twelve months because the ratio exceeded 1.2. The result of ratios was 24.55 against 1.2 ratios, thus the price was considered very expensive. From here, we can say that it did not pass the stock test of Benjamin Graham.

Benjamin Graham’s Margin of Safety (MOS)   

The margin of safety is used to identify the difference between company value and price. Value investing is based on the assumption that two values are attached to all companies – the market price and the company’s business value or true value. Graham called it the intrinsic value. The difference between the two values is called the margin of safety. According to Graham, the investor should invest only if the market price is trading at a discount to its intrinsic value. Value investing is buying with a sufficient margin of safety. Graham considers buying when the market price is considerably lower than the intrinsic or real value, a minimum of 40 to 50 percent below. The enterprise value is used because I think it is a much more accurate measure of the company’s true market value than market capitalization.

Margin of Safety = Enterprise Value – Intrinsic Value

VALE MOS

Explanation

The margin of safety for VALE resulted at a 67 percent average which is equivalent to $166 average. Enterprise value was $46 average. As seen in the table above, there was a margin of safety from 2007 to the trailing twelve months except in 2009, where there were zero margins of safety.

VALE IV

Intrinsic Value = Current Earnings x (9 + 2 x Sustainable Growth Rate)

wherein;

EPS is the company’s last 12-month earnings per share.  G: the company’s long-term (five years) sustainable growth estimate. 9 stands as the constant representing the appropriate P-E ratio for a no-growth company as proposed by Graham (Graham proposed an 8.5, but we changed it to 9). And, 2 is the average yield of high-grade corporate bonds.

By looking at the table, intrinsic value result was $207 average. This is the true value of VALE’s stock. The formula factors the earning per share and the sustainable growth rate. The earning per share was $2.93 average while the sustainable growth rate was $28.56 average.

Earning per Share (EPS)

The term earnings per share (EPS) represents the portion of a company’s earnings, net of taxes and preferred stock dividends, that is allocated to each share of common stock.

   EPS

Sustainable growth rate (SGR) shows how fast a company can grow using internally generated assets without issuing additional debt or equity. To calculate the sustainable growth rate for a company, you need to know its return on equity (ROE). You also need to know the dividend payout ratio. From there, multiply the company’s ROE by its plow back ratio, which is equal to 1 minus the dividend payout ratio.

Sustainable Growth Rate (SGR)

The formula is Sustainable growth rate = ROE x (1 – dividend-payout ratio).
VALE SGR

The table above stated that the average return on equity was 31.55 percent. Payout ratio garnered 12.47 percent average.

Moving on, Return on Equity (ROE) is an indicator of company’s profitability by measuring how much profit the company generates with the money invested by common stock owners. It shows how many dollars of earnings result from each dollar of equity. 

  ROE

VALE Relative PE

As you can see, the relative approach in calculating Vale’s sustainable growth rate, produced almost the margin of safety compared to the average approach. The margin of Safety was greater when an average approach is a concern.

VALE Intrinsic Value Graph

VALE Graph

During 2009, the revenue and net earnings of Vale went down by 38 and 60 percent, respectively. During the 2010 period and the following year, its revenue and net earnings soared up to 94 and 229 percent, respectively. Then, in 2011 it soared up by 30 percent both in revenue and net earnings. The margin of safety was high in 2011 at 89 percent. For Vale, the average margin of safety was 67 percent using the relative approach.

VALE Relative Valuation Methods     

The relative valuation methods for valuing a stock is to compare market values with the fundamentals (earnings, book value, growth multiples, cash flow, and other metrics) of the stock.

Price to Earnings/Earning Per Share (P/E*EPS) 

This method will determine whether the stocks are undervalued or overvalued by multiplying the Price to Earnings (P/E) ratio with the company’s relative Earning per Share (EPS) and comparing it to the enterprise value per share, we can determine the status of the stock price.

  VALE PE EPS

Explanation

The enterprise value per share was lesser than the P/E*EPS ratio by 71 percent. It was overvalued for the rest of the periods because the price was higher than the P/E*EPS ratio. The market price was 175 percent of the P/E*EPS ratio, therefore, the stock price is considered expensive.

There are two approaches also in calculating the P/E*EPS valuation. It is the relative P/E approach and the average P/E approach. I have summarized the results of these two approaches in the table shown below.

VALE Relative

 

The Enterprise value (EV)/Earning per Share (EPS) or (EV/EPS)  

The use of this ratio is to separate price and earnings in the enterprise value by dividing the enterprise value of projected earnings (EPS), the result represents the price (P/E). The difference will then represent the earnings (EPS).

VALE EV EPS

Explanation

The price (P/E) was 44 percent average and the Earnings (EPS) was 56 percent average. This is the price a certain investor would pay in buying.

Enterprise Value (EV)/ Earnings before Interest, Tax, Depreciation, and Amortization (EBITDA) or (EV/EBITDA)                 

This metric is used in estimating business valuation.  It compares the value of the company inclusive of debt and other liabilities to the actual cash earnings exclusive of non-cash expenses. This metric is useful for analyzing and comparing profitability between companies and industries.  It gives us an idea of how long it would take the earnings of the company to pay off the price of buying the entire business, including debt.
VALE EV EBITDA

Explanation

The EV/EBITDA tells us that it will take 9 years to cover the costs of buying the entire business of Vale.  In other words, it will take 9 times the cash earnings to cover the purchase price. This valuation shows the profitability of the company. The net income of Vale was 33 percent average.

In conclusion: 

The market capitalization for Vale was erratic in movement with an average of $137 billion. Its total debt was 18 percent average. While the cash and cash equivalent were 5 percent average, thus the enterprise value was greater by 13 percent. Buying the entire business the investor would be paying 13 percent of its debt and 87 percent of its equity. The purchase price to date, January 22, 2013, for the entire business, is $180.6 billion at $56.96 per share. The current market price was $20.02 per share.

Net Current Asset Value (NCAV)

The stock price was overvalued from the period 2007 to 2012 because it exceeded the 1.2 ratios.  The NCVA approach indicates that the price was expensive and did not pass the stock test of Benjamin Graham.

In addition, the margin of safety for Vale was 67 percent average and its intrinsic value was $207 average. While the growth represents 29 percent for sustainable growth rate. And 66 percent in the annual growth rate. While the return on equity was 31.55 percent average.

P/E*EPS

Furthermore, the P/E*EPS indicate that the stock price was overvalued because the P/E*EPS ratio was only 57 percent market price. Therefore, the price was expensive overall. On the other hand, the EV/EPS valuation indicates that the price (P/E) was 44 percent. Moreover, the earnings (EPS) was 56 percent average.

EV/EBITDA

EV/EBITDA valuation tells us that it will take 9 years to cover the costs of buying the business of Vale.  In other words, it will take 9 times of the cash earnings of Vale to cover the purchase price.

Further, I recommend a HOLD in the stock of Vale SA (ADR).

Researched and Written by Criselda

Great Northern Iron Ore Properties

Great Northern Iron Ore Properties (GNI) Investment Valuation

December 20th, 2012 Posted by Investment Valuation No Comment yet

Great Northern Iron Ore Properties (GNI) was founded in 1906 and was headquartered in Saint Paul, Minnesota. This investment valuation on Great Northern Iron Ore Properties shows that the company has a very impressive gross margin and net margin.

GNI Value Investing Approach 

This model is prepared in a very simple and easy way to value a company, it adopts the investment style of the Father of Value Investing Benjamin Graham.

The essence is that any investment should be purchased at a discount, meaning the true value should be more than the market value. Graham believed in fundamental analysis and was looking for companies with a sound balance sheet and with little debt.

The basis for this valuation is the company’s five years of historical financial records, the balance sheet, income statement, and cash flow statement. We calculated first the enterprise value as our first step. We believed this is important because it measures the total value of the company.

GNI Investment in Enterprise Value   

The whole concept of enterprise value is to calculate how much it would cost for an investor to purchase an entire business. Enterprise Value (EV) is the present value of the entire company.

  GNI EV

The total debt was zero percent in the last five years and its cash and cash equivalent were averaging 6 percent. As a result, the enterprise value was lesser by 5 percent against the market capitalization. If an investor buys the entire business of GNI, the investor will be paying for 100 percent equity with no debt.

The purchase price of the entire business of Great Northern Iron Ore Properties to date, December 10, 2012, will be $101 million at $50.50 per share. The market price to date was $73.30 per share.

Benjamin Graham’s Stock Test

Net Current Asset Value (NCAV) Method 

Benjamin Graham is looking for firms trading with an undervalued price. The reason according to Graham is when a stock trades below the Net Current Asset Value Per Share, they are essentially trading below the company’s liquidation value. So, therefore, the stock is considered a bargain, and it is worth buying. The concept of this method is to identify stocks trading at a discount to the company’s Net Current Asset Value per Share, specifically two-thirds or 66 percent of net current asset value.

  GNI NCAVPS

Explanation

The net current asset value approach of Benjamin Graham tells us that the stock price of GNI was overvalued from 2007 to the trailing twelve months because the market value was greater than the 66 percent ratio. The 66 percent ratio represents only 1.4 percent of the market value, therefore, the price was so expensive.

It shows that the stock of GNI was trading above the liquidation value from 2007 to the trailing twelve months of 2012 which brings us to the conclusion that it did not pass Benjamin Graham’s stock test.

Market Capitalization/Net Current Asset Value (MC/NCAV) Valuation   

MC/NCAV is another stock test by Graham. The bottom line here is, if the result does not exceed the ratio of 1.2, then the stock passes the test for buying.

GNI MC NCAV

The MC/NCAV valuation shows that the stock price of Great Northern Iron Ore Properties was overvalued from 2007 up to trailing twelve months 2012 because the ratio exceeded the 1.2 ratios. It shows that the price was expensive and therefore, the stock did not pass the stock test of Benjamin Graham.

Benjamin Graham’s Margin of Safety (MOS)   

The margin of safety is used to identify the difference between company value and price. The difference between market value and the true value is called the intrinsic value.

Graham considers buying when the market price is considerably lower than the intrinsic or real value, a minimum of 40 to 50 percent below. “In my calculation, I used the enterprise value because it takes into account the balance sheet so it is a much more accurate measure of the company’s true market value than market capitalization.

Let’s see what the table below would bring us about GNI’s margin of safety.

GNI MOS

Explanation

The average margin of safety was 53 percent or $227 average while the intrinsic value was $105 average. For 2007 and 2010, there was a zero margin of safety for GNI because the intrinsic value was below zero. The company’s growth during 2007 and 2010 was negative, thus resulted in negative intrinsic value.

The formula for intrinsic value is given below.

Intrinsic Value = Current Earnings x (9 + 2 x Sustainable Growth Rate)   

GNI IV

Explanation

The explanation in the calculation of intrinsic value is as follows:

EPS: the company’s last 12-month earnings per share; G: the company’s long-term (five years) sustainable growth estimate; 9: the constant represents the appropriate P-E ratio for a no-growth company(Graham  proposed an 8.5, but we changed it to 9); and 2: the average yield of high-grade corporate bonds.

The earning per share was averaging $11.98. In addition, the earnings per share (EPS) and the sustainable growth rate (SGR) factor intrinsic value.

Sustainable Growth Rate (SGR)

Sustainable growth rate (SGR) shows how fast a company can grow using internally generated assets without issuing additional debt or equity. In calculating this, you need to know how profitable the company is as measured by its return on equity (ROE). You also need to know what percentage of a company’s earnings per share is paid out in dividends, which is called the dividend payout ratio. From there, multiply the company’s ROE by its plow back ratio, which is equal to 1 minus the dividend payout ratio. The formula: Sustainable growth rate = ROE x (1 – dividend-payout ratio).

    GNI SGR

Explanation

The return on equity was 158 percent average while the payout ratio was 98 percent average. Return on equity (ROE) is an indicator of a company’s profitability by measuring how much profit the company generates with the money invested by common stock owners. Return on Equity formula is:

 great northern iron ore properties-gni

Return on equity shows how many dollars of earnings result from each dollar of equity. There are two approaches in calculating the sustainable growth rate, these are the relative ratio approach and the average ratio approach.

Relative and Average Approaches

  great-northern-iron-ore-properties-gni

Results given in the table above shows that the margin of safety was greater by one percent in the average approach.

During 2007 and 2010, there was no margin of safety because the intrinsic value line was below the enterprise value line. There was a margin of safety because the IV line was on top of the EV line. The difference between the two lines is the margin of safety.

GNI Relative Valuation Methods     

Relative valuation methods’ core concept for valuing a stock, is to compare market values of the stock with the fundamentals (earnings, book value, growth multiples, cash flow, and other metrics) of the stock.

Price to Earnings/Earning Per Share (P/E*EPS)

This valuation will help us determine whether the stocks are undervalued or overvalued by multiplying the Price to Earnings (P/E) ratio with the company’s relative Earning per Share (EPS) and comparing it to the enterprise value per share. This will answer our question as to “What’s the status of the stock price?”

   GNI PE EPS

The P/E*EPS valuation shows that the stock price of GNI was undervalued. The enterprise value represents 67 percent of the P/E*EPS ratio. Thus, the price was cheap as a result of this valuation.

Relative and Average Approaches

Another way of calculating this valuation is by using the average approach.  The table below will show us the difference between using the two approaches.

GNI Relative PE

By using the average approach, the price to earnings ratio was greater by $1 and the percentage of P/E*EPS ratio was greater by 27 percent.

The Enterprise value (EV)/Earning Per Share (EPS) or (EV/EPS)  

The use of EV/EPS ratio is to separate price and earnings in the enterprise value by dividing the enterprise value of projected earnings (EPS). The result represents the price (P/E) and the difference represents the earnings (EPS).

 GNI EV EPS

The EV/EPS valuation, tells us that the price (P/E) was 9 percent and the earnings (EPS) was a 91 percent average. This might indicate that the price was cheap because it represents only nearly one-tenth of the enterprise value per share.

GNI EV/EPS Graph

 great-northern-iron-ore-properties-gni

The price was high than the earnings from 2007 to the trailing twelve months of 2012.

Enterprise Value (EV)/ Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) or (EV/EBITDA)         

   GNI EV EBITDA

The result of EV/EBITDA valuations tells us that it will take 8 years to cover the costs of buying the entire business.  In other words,  it will take 8 times of GNI’s cash earnings to cover the purchase price. Eight years is a long period of waiting. EBITDA represents only 13 percent of the enterprise value.

The company’s gross margin was 98.98 percent average while its net margin was 83.68 percent average. A very impressive ratio.

In conclusion,

The market capitalization of Great Northern Iron Ore Properties was stable. The company has a zero debt and its cash and cash equivalent were a 5 percent average. Thus, the enterprise value was lesser of 5 percent of the market capitalization. The cost of buying the entire business to date, December 10, 2012, was $ 101 million at $50.50 per share.  The market price to date was $73.30 per share.

Net Current Asset Value

The net current asset value approach tells us that the stock price was overvalued from 2007 to 2012. It indicates that the stock was trading above the liquidation value of the company. Therefore, it did not pass the stock test of Benjamin Graham. On the other hand, the MC/NCAV valuation shows that the price was overvalued because the ratio exceeded the 1.2 ratios. Therefore the stock did not pass the stock test as well.

Further, the margin of safety by Benjamin Graham shows a 53 percent average margin of safety. The intrinsic value was averaging $105 in the last five years. While the earning per share was $11.98 and the return on equity was 158 percent average. And the payout ratio was 98 percent.

Relative Valuation

The price was undervalued and the enterprise value represents 67 percent of the P/E*EPS ratio. Therefore, the price was cheap. On the other hand, the price (P/E) was 9 percent and the earnings (EPS) was a 91 percent average.

EV/EBITDA

The EV/EBITDA indicates that it will take 8 years to cover the cost of buying the entire business. The gross margin of the company was a 98.98 percent average. While its net margins were 83.68 percent average, a very impressive ratio.

The margin of safety was averaging 53 percent therefore, the price was cheap. In addition, the gross margin and the net margin of GNI was very impressive. Therefore, I recommend a BUY on the stock of Great Northern Iron Ore Properties (GNI).

Research and written by Cris

Note:

Research Reports can be found under the company tab.