Kathmandu (NZX:KMD) Overview – A Redo

After a bit of consideration, I’ve decided that I got my last valuation of the Kathmandu (KMD) stock price wrong. Initially I viewed KMD as a stock that doesn’t grow earnings, but looking at it’s history, it does. So I decided to redo my previous exercise of looking for value in the stock price with the perspective that KMD is a growth stock.

First thing I decided to do was to see how the company has grown earnings per year, so I can assign an appropriate target PE to determine value – because a company with higher growth deserves a higher PE.

Upon doing my research I noticed that Kathmandu seems to have grown earning significantly in the past 2 years. I decided to look into this so I could understand the growth story to try to judge how well it might continue. After a little research, it seems that KMD has grown NPAT by doing CR funded acquisitions. Outside of this, growth (positive and negative) has been very erratic.

Consequently, I’ve decided that I won’t view this as a growth stock, but instead view them as a dividend stock to be bought when they’re having a bad year in order to on-average get a higher dividend. Realistically, this stock is probably one that should be traded, rather than invested in. To that end, a trader could probably trade this stock based on a CM valuation or simply standard TA. Alternatively a cautious trader could apply some FA to the stock to determine when the trades are safe.

However, lets look to see if there’s any value in the current share price for an investor looking for dividend return.

Finding Value In The Current Market Capitalization (MC)

I will use the same methodology as last time, but with consideration to the new MC and higher NPAT, which I had previously averaged out across numerous years because I wanted to do a quick analysis to see if it might be worthwhile putting time in to do a full valuation.

Lets look at the figures: Current NPAT is $57.6m with Operating Cash Flow at $61.7m. I don’t want to spend time researching why there’s a difference when the two numbers are quite similar, so I’ll use the value of $60m profit because I’m feeling lazy. MC is currently $964m.

Given that they’re scrapping by this year, lets assume that there’s no dividend, so we’ll increase the MC by 8% to cover the opportunity cost of investing for the year. We’ll assume optimistically that they’ll return to generating $60m of free cash flow the following year. That gives a ratio of ~17.5, or a potential maximum dividend (if they pay out all cash) of about 5.7% after tax.

Probably not bad as a dividend play given the likely ongoing low interest rates (Term Deposits can be considered an alternative return for dividend income stocks). Alternatively this is also pretty good if you’re buying with the view to trading the stock when it increases in value down the road. If you believe that this stock is a growth stock, there is a lot of value here.

Personally, I think the above numbers are a little optimistic, given that they are unlikely to return to $60m FCF within a year, tourism is predicted to be reduced; and there is the possibility of another CR, which would be damaging if not used for growth. I do believe that this is probably a good stock to buy at this price for a trader looking at a 1 – 2 year time frame.

If we look at a slightly more pessimistic view to try to find value as an investor, we can assume the upcoming free cash flow will be $40m (30% reduction, which is what the airlines are predicting for 2 years time on tourism), that gives a ratio of 24.1 against the current MC. Of course, you could then view that as a growth stock until they return to their more usual trading. A stock at a ratio of 24 would have to only grow by 10% a year to make it good value in my opinion, making KMD a good purchase for an investor who wanted to buy and hold for however long the growth story lasted.

In summary, there is too much volatility to be sure of anything with KMD, and any investment would depend on an investors opinion of whether KMD is a growth stock or the term of the investment, and appetite for risk.

Addendum: Looking at historical performance, EPS growth from 2012 to present has been (on average) exactly 10% pa, meaning that a ratio of 24.1 puts them at about good value.


Scales (NZX:SCL) Quick Overview

I decided to take a quick look into Scales Corporation Limited (SCL) to see if there’s any value in the current share price.

SCL has continued their dividend and has stated that they are committed to maintaining that going forward. This can be construed as a vote of confidence, since they don’t seem to be paying that dividend out of debt.

Current Market Capitalization of SCL is $700.892m against a broadly flat underlying NPAT of $36.4m and $104.9m cash and equivalents in the bank.

The outlook for performance is flat, with the exception of the Food Ingredients aspect of the business which represents 32% of current NPAT. They are also well positioned for growth by acquisition, and are actively looking for opportunities – though this has been the case for a little while now, so I guess the right opportunity is yet to present itself. My general feeling about this company is that they aren’t wasteful and tend to make good decisions, so the lack of recent inorganic growth is unlikely to be due to anything untoward.

Revenue of $484.6m.
Revenue from Horticulture: $264.8m.
Revenue from Food Ingredients: $155m (up by nearly double since last year).
Revenue from Logistics: $87m.

Assuming they grow the Food Ingredients business by $20m – $100m this year and the rest of the business remains flat, that might translate to an NPAT of $40m – $45m (Lets say $40m with potential upside, as the logistics business may have suffered and there’s the possibility of a recession that could ebb demand).

If we take the ~$105m cash that you get when you buy at the MC of ~$700m, that leaves a MC of $595m. Divide by the NPAT and that gives a ratio of 16.3, with an outlook of 10% growth giving a forward looking ratio of under 15. Not bad for a stable company with the possibility to grow future earnings with smart acquisitions.

This share isn’t likely to make you rich quickly, but looks like a good option for a get rich slowly scheme or part of a portfolio of reliable dividends. It’s quite possible that in 5 years time, an investor would be looking at a 10% dividend after tax based on today’s purchase price. In short, the current share price has value in it to suit the right strategy, in this investors opinion.


Kathmandu (NZX:KMD) Quick Overview

The aim of this overview is to try to work out if there’s any value to be gleaned in the current Kathmandu Holdings Limited (KMD) share price. To be clear I’m only doing a quick overview – I don’t expect to be diving very deeply into KMD to determine what’s the most appropriate type of valuation for this company or the nuances of it’s operations, which an investor should probably be interested in. I’m simply skimming over this to see if there’s any value to be had, and on what terms.

So, as an investor rather than a trader, I’ll be looking at a longer term investment. I’m not looking to gamble on the short term prospects of state of the economy, market sentiment or the development of COVID19.

Therefore my approach will be to try to see if there’s any value in the current share price, based on the premise that in 2-3 years time KMD will be trading as it did in 2019. And in determining value in the current share price, I will be considering the opportunity cost of 2-3 years of investing lost to get back to the state of play in 2019, and whether there is likely to be another capital raise.

Working Out If KMD Will Do Another Capital Raise (CR)

KMD recently did a $207m CR and made ~$15m cost reduction initiatives, including rental costs and employer subsidies in NZ, AU and EU. I see that they managed to get just under $4m from NZ wage subsidies.

2018/19 Operating Expenses were $225.7m and $234.0m, respectively.

2019 Net Debt was $19.3m (down from 2018 by about $10m).

Gross Product Margin is about 60%.

The average NPAT over the last decade was $37m, not accounting for inflation. The past 2 years results were abnormally high compared to former years – probably should research why that it if I was going to dive deeper, but I won’t.

It looks like prior to the $207m capital raise, they didn’t have much in the bank to get them through (about $25m + $4m wage subsidy that’s not listed on the balance sheet) – out of which there are a bunch of current liabilities ($81m), which seem to rely on inventory being sold, as I understand the balance sheet.

A crude calculation suggests that they might have about $151m in cash + $123m in inventories ($65m of which need to be sold) to cover $219m worth of costs in the coming year.

The more I delve into this, the more I feel that it’s difficult to have any idea if they will likely need to raise capital (CR) again next year because there are too many variables to work out if they’ll be covered for the following year.

Nevertheless, they seem like they’re probably covered for this year, and the security of the following year will entirely depend on how well they do this year, or they’ll need another CR.

Finding Value In The Current Market Capitalization

Lets increase the current MC by 8% to account for the required rate of return to cover opportunity cost, then lets pessimistically assume that they do another CR next year, which dilutes shares, effectively increasing the price of them today by 30%. Then lets increase the MC by 8% again to account for the opportunity cost / required rate of return for investing for that year. This gives an effective current MC of $1,060m at todays price.

A MC of $1,060 against a future NPAT of $37m (which is the average across the past decade – a little low, I know, but coming out of a recession, profit won’t be amazing, so this value might be prudent), gives a ratio of 28 (3.5% dividend after tax, at best). Assuming that the year after, things return to recent year’s NPAT of ~$50m, this would be a ratio of about 21, which equates to a less than 5% dividend (after tax) in a couple of years time.

The prospect of a future 3.5 – 5% dividend (after tax) is not enticing enough to risk my money for, and get no 8% return for a couple of years prior.

Of course, this is the pessimistic view. Without a CR and with a small profit this year and a return to $37m NPAT the following year would give a ratio of just over 20 (5% dividend next year after tax, at best), or a ratio of ~15 if NPAT returns to $50m next year – giving a dividend of up to ~6.5% (after tax).

So, is there any value in the current share price? For me, not really, but it’s not that bad in a portfolio that wants a reliable OK (but not too exciting) dividend in a few years time. Addendum: Looking back, I originally said that there wasn’t value for me, but that was based on the belief that there wasn’t much growth in KMD. I now believe that this is wrong, making my projected PE a bargain (and still a good option for someone looking for a reliable dividend).

There’s a bit of a dividend trap there on the NZX website, which suggests that you could get a 15% dividend (before tax) based on previous dividends and today’s share price.

For me to be interested, I would want to be investing in KMD at about $0.50. Of course, it entirely depends on what your exit strategy is – someone buying as a trader may well find value here. Or someone looking at the numbers in their own way might find value – after all, this was a quick overview and I didn’t delve very deeply into any of the numbers, history or other factors that may effect my perception of value in KMD. Moral of the story, you may wish to do your own investigation to see if there’s value in KMD’s share price today.

Addendum: If KMD return to recent years NPAT, based on a Comparables Market valuation, one would expect that in a few years time, KMD would return to pre COVID19 share prices. If we assume no dilution during this period, an investor could see themselves doubling their money based on an exit strategy of a sale. If there’s a dilution of 30%, this could return only +40% (100% – 30% = 70% x 2 = 140%, or a 40% increase) during this period (Of course a 40% increase over 2 years is only 18% increase pa, compounding).

The downside risk would be two consecutive years of dilution, or no return to recent years performance. Alternatively the downside might be performance returning to recent years results, but not market sentiment. In which case, the above dividend return would be the exit strategy. Clearly any investment in KMD would be a sale with the view of a trade (depending on market sentiment) or an investment of 1-2 years, the fail scenario being if there were multiple consecutive years of capital raises before return to normal (100% – 30% = 70%, 70% – 30% = 49%, 49% x 2 = 98%; aka -2% change in value to portfolio).


Why The a2 Milk Share Price Soared During The Coronavirus Lockdown

As New Zealand went into lockdown on the 26th of March, share prices tumbled on the NZX while the a2 Milk (NZX:A2M) share price soared.

The a2 Milk share price has increased by ~17% since lockdown.

Since my last analysis of a2 Milk (A2M) (in which I found some value at a share price of about a dollar less than today’s prices), the share price has gone up nearly 17%, and all during lockdown.

The reason behind this appears to be due to reports of increased demand from China, but there’s more to it than that. Certainly Chinese consumers are stockpiling to avert supply side risks, but this shouldn’t be misconstrued for an increase in demand, as it will likely be followed by a corresponding decrease in demand as stockpiles are used and supply concerns are abated.

I believe that the real reason behind the increase in share price is due to changes in exchange rates.

The NZD is much weaker against the USD since NZ entered lockdown on the 26th of March.

As a company that benefits from a weaker NZD against the USD, a2 Milk stands to make more profit from recent currency exchange rates if this environment remains; which seems likely at this stage.

In terms of attempting a valuation, it’s a little late at night to do a full investigation as to whether it looks like there is any value in the current share price. Though I would expect that such an increase in revenue due to currency fluctuations, without any corresponding change in costs would translate favorable to underlying profit.

At a rough guess, I would say that the new share price probably reflects the same value that was found in my last valuation.


A Quick Look At The HLG Finances

A few glance at the half year interim report look to me as though HLG is a really solid retailer. Margins are good but competitive, they invest profits into new stores and pay what’s left to investors as dividends, holding a sensible amount of cash in the bank entering the next period.

A recent announcement stated that they are suspending future dividend payments due to the Coronavirus and will assess the situation at the end of the year.

It seems impossible to know whether HLG will need to do a Capital Raise (CR) because HLG have not announced if any arrangements have been made with landlords to reduce rent during the lockdown, I don’t know staff costs, or how long the lockdown will last.

We can see from the Wage Subsidy Employer Search that HLG have claimed about $5.2m over about 6 weeks, of which at least 80% must be paid to staff.

If we extrapolate that out, it looks like staffing costs for half a year would be about $22.5m of the $67m selling and administration expenses listed on the half year report (which is where I guess staff costs are).

This leaves $44.5m for rent and other things. Let’s randomly (because i can’t see any way of knowing) assume that $40m is the cost of rent for the first 6 months.

Optimistically, let’s assume that leasing costs have halved, as I’ve anecdotally heard that shopping mall land lords are shouldering half the burdon during the lockdown, in order to ensure business continuity.

If we add $4.5m (the 20% of the wage subsidy that HLG are allowed to keep) to the $12.8m cash and equivalents stated as owned at the end of the last period, that gives HLG $17.3m to spend on rent, which may be $20m.

Therefore it seems to me as though a CR or some debt facility is possibly not required, based on the above assumptions, but depending on how long the lockdown lasts, they may need to finance working capital.

Therefore, as the lockdown continues, we may see the value proposition of HLG shares decrease.

What are HLG shares worth right now?

It seems that profits will be somewhere in the region of low to negative by the end of the coming year, but it would be stupid to value HLG based on this because the forward potential of the following years is great. Therefore I will base my valuation of HLG on how I expect profits to be in 1-2 years time, minus the expected rate of return during those years.

Let’s assume that the lockdown will be on-and-off for the remainder of the calendar year and HLG will scrape by with near zero profits and no debt to work off. Hmmm… it’s hard to imagine if that could go on for another 6 months after that, or if we’ll be done with it by then… and by done with it, I mean that either there will be a vaccine or it will turn out that hospitals can handle the load and/or people lose interest in the virus and accept living with it.

In order to do a valuation on HLG, I need to be able to accurately predict the length of time the lockdown is in place, sentiment about the virus, and consumer sentiment post “apocalypse”. This is starting to look like gambling; the gamble being that I could get no return for a couple of years, or a double digit return in a year or two based on today’s slightly lofty share price.

Consequently I will assume pessimistically that the virus will cause an on-again-off-again lockdown over the next 12-18 months, during which time HLG’s profits will go from zero to low as consumers are able to buy, but commerce is sedentary due to virus fear.

My prediction is that within 6 months, governments will be funding the production of antibodies (not a vaccine) that will reduce the threat of the virus and enable hospitals to cope will the demand. I believe that governments will then distribute propaganda to reduce consumer fear, so they can stoke the economy and recover money for the treasury. A first iteration of the vaccine will follow 6-12 months from there.

Lewis Hurst

So if profits are similar in 2 years time, compared to the way they have been in the last year, in 2 years time I expect the share price to be similar to what is is now (about $4.00) to give investors a high single digit percentage dividend return. The valuation based on “high single digit dividend return” is founded on historic pricing. Also because as an aspect of my portfolio, I’d be happy with a high single digit percentage return on a stable company, as a “sure thing”.

If the price is $4.00 in two years, I want 20% ROI per year to get there. That’s made up of the 8% I wanted plus a risk premium of 12% (which includes my opportunity cost against other growth shares). This places the current value at about $3.00.

If we are generous and say that we’re happy to take 8% for 2 years growth, that would place the value at $3.40.

At most, a sane optimist would see value at $3.70, based on everything being fine next year and a forward PE of today’s value minus the 8% ROI in the price (because it’s not coming out of the dividend this year).

Therefore I see no value to be had in the current share price of HLG.

It’s important to try to understand why the price is what it is when your valuation disagrees with the market, to ensure that you’ve not missed something. So I don’t say this with any malice towards anyone, but I can only assume that the current price is being propped up by novice retail investors looking at this from a purely PE perspective based on the backwards PE stated on the NZX website, a dividend trap (having not read the recent announcement cancelling future dividends until further notice), a comparative reduction from former highs being misconstrued as a bargain, or because they like the company.

Addendum: Now that I’ve had a day to think about it, it could be that some investors assume that the country is done with lockdowns, now that we are moving into Level 2 and shops are potentially going to be reopening next week. Perhaps investors are expecting packed shops taking a month’s worth of revenues, like we have had with takeout food? Personally, I don’t think this will be such a factor. People aren’t desperate to cram into places like shopping centers, packed with other people, due to Coronavirus concerns. Also the lockdown has been depressing people, which increases propensity to eat junk food. Im not expecting the same demand for retail therapy.


Port Of Tauranga (NZX:POT) Quick View

The Port Of Tauranga (POT) has withdrawn it’s profit guidance (of $94m-$99m for the year, which was reduced from previous guidance due to the Coronavirus) because the Coronavirus problems increased and will be around for an indeterminable amount of time.

Prior to this announcement, it seems as though earnings were broadly flat compared to the previous half years (2017:$47.1m; 2018:$50m; 2019:$48.3m). Correspondingly zero dividend growth.

Net Debt as a percentage of Equity is also flat. Given that equity could have been growing due to the increase in NTA (which accounts for a good percentage of the share price), it’s safe to assume that debt could be increasing YoY, without investigating further. This gives rise to concerns over a dividend trap.

Significant CAPEX planned for coming years – No idea if these are earnings accreditive.

It seems to me from a quick overview, POT hasn’t earned it’s PE of 46-47.


Mach7 Technologies – Deep Dive Valuation

I started my deep dive into Mach7 Technologies (ASX:M7T) with the approach that I would read their company announcements in chronological order, so I could compile some historic financial data and learn how the company has grown over time.

I like this approach because you get an idea of whether they do what they said they would do in the previous announcements, and you get to see how successful they were. Reading announcements in order also lets you see how the reporting has changed, which gives a view about whether they might be trying to hide something or not.

Here is some of the historic data I managed to pull from their reports, please excuse the scrappy nature of it, perhaps I’ll get around to formatting the data nicely one day:

Deferred Revenue(2,367,797)(2,855,480)(2,715,538)(3,478,189) 
Net Current Assets(2,159,334)3,253,0922,503,373729,013 
Intangible Assets35,568,86917,843,21514,217,8078,382,384 
Deferred Tax Liability Arising On Intangible Assets(10,524,728)(5,329,432)(2,966,622)(2,202,642) 
Net Assets23,461,55915,938,77814,246,80010,365,222 
Capital Raising 9,000,0002,000,0002,800,000 
NotesAcquisition of Mach7 Technologies Pte Ltd to be amortized in Intangible Assets and Deferred Tax Liability over 5-7 years.Divestment of 3D Medical business ($93k). Debt paid from CR.This year saw a shift towards CARR model  
Cost BreakdownFY2016FY2017FY2018FY2019FY2020
Employee salaries, benefits & staff-related expenses8,363,25710,307,2589,069,748  
Professional fees and consultancy expenses1,963,1431,071,180491,482  
Marketing expenses1,358,190847,724499,029  
Travel and related expenses843,976679,156429,001  
Rent and occupancy expenses333,997380,847   
General administration expenses836,877439,856   
Notes  There was a discrepancy in the FY2017 market expenses stated on FY2018 report compared with the FY2017 results stated on the FY2018 report. They also changed the breakdown of what they report here vs last year.  
Number of EmployeesFY2016FY2017FY2018FY2019FY2020
Reseller and distributor expenses670,404856,564352,562Included in Operating Expense 
Operating Expenses13,699,44013,726,02111,577,91613113385 
Other Net Income(114,090)91,163296,318(108,458) 
EBITDA (Adjusted)(8,636,903)(4,222,491)(2,637,253)(3,874,697) 
Depreciation & amortisation(6,801,288)(6,262,660)(3,700,467)(3,707,228) 
Impairment charges(6,504,960)(11,675,171)  
Share-based payments expenses30,267454,495967,138(195,538) 
Income Tax Benefit1,994,1405,195,2972,362,810763,980 
NotesUnauditedCost are not capitalized Seems the CEO got replaced 
Directors Cost1,146,579    
Executives Cost2,415,183    
 no troffing between the period of 2026-present    

This years figures (so far) are as follows:

$23.3M cash, no debt. $20M of that came from a cap raise and will be used for acquisitions for growth and increased sales and dev. NPAT $0.7M. Revenue $9.1M. CARR $8.8M.

This half figures don’t include the Hong Kong sale that was made.

Could expect $1.5-$2M revenue growth per year based on previous growth. The sales pipieline is of 46 potential customers for $40M – the pipeline stats were not published in former years, so it’s difficult to have a punt about what percentage of those sales will get converted. There are currently 9 RFPs for $32.5M, so it’s possible that growth could be higher thana few million if things work out well.



The most recent report from the 20th of Feb 2020 states that they are now cash flow positive. Costs are not capitalized and all the financials are not out yet so it’s impossible for me to be sure that they will be breaking even from this date as the announcement infers. Also, despite continually growing CARR, total revenue is lumpy across the years, and they’ve stated that they managed to break even by trimming costs. It would have been nicer to see the company break even because of revenue growth, rather than poorly managed costs or risk of the companies activities simply not being profitable by nature of the industry.

As profits from this date will be invested in growing the R&D and S&M teams, and making acquisitions if the opportunity arises, they might accelerate growth. Alternatively the strategy might fail and they will be left with bigger costs and many more CR’s to come.


It’s very difficult to know how sales might grow, so I will look at a range of pessimistic and optimistic valuations. I’ll be keeping things very rough because there’s no point putting rough numbers (that are subject to volatility from big risks) through an exact and unnecessarily complex algorithm.

It’s also difficult to know how much of sales will contribute to profit. As the stated strategy for the coming year is to invest profits into growth, PE would not be an appropriate method of valuation. I see on the M7T website, they have published a DCF that has been done by a broker (Morgans). Since no one buys on a DCF valuation (except for legal reasons and a few others that aren’t relevant here), I’ll kindly use the brokers valuation of $1.16 per share ($210m) as an upper limited of value as guidance.

That leaves the most appropriate types of valuation as either a CM valuation or a multiple of CARR. While these valuations are appropriate for investments with a sale as an exit plan, in my opinion these types of valuation aren’t so good for working out the financial value in the company. For multiple of revenue, this is because revenue can be high and a company can never make any profit or even be capable of ever making a profit. As costs aren’t capitalized, it’s hard to have a punt at how much profit the revenue could translate to. Finally a CM valuation relies on trying to work out what value others place on the company. Useless if you’re looking for dividends, and a highly volatile measurement over any period of time as market sentiment changes. This is my least favourite type of valuation for these and other reasons – particularly bad in a bear market.

Therefore I will look at what PE could look like after removing cash from MC, with a few variations of forecasted growth and a multiple of revenue.

(To enable a PE valuation) I will assume that they weren’t to reinvest all profits into growth. Based on either $1m, $2m or a lofty $5m annual NPAT growth and on a forward PE of 25 (20 for the ROI + 5 for the growth), I see present day value as either $70m, $95m or $150m, respectively. I see the possibility to grow this in a years time to $95m, $145m or $295m on the same terms. However, this excludes any future capital expenditure, which could cause a year of not-so-good profit growth as PPE needs to be replaced.

For reference, on a multiple of revenue, the current MC represents a multiple of 12.72. Very high indeed. On a multiple of revenue basis, fairer value for the ASX market (I use 8x) would be more like $70m (which funnily enough, matches my lower target). In the event of things going sour, such a company could drop as low as $37m on a lower multiple of revenue (4.3x) or PE if investors see future sales as being incapable of turning into profit.

Therefore I think the current MC is slightly steep (as it always is on the stock market), however I can see value at the current MC of $112m but only if CARR growth continues to represent at least a few million per year as a multi year investment. Though my preference would be to buy at the $70m-$95m mark to ensure a fair value if the company doesn’t grow much.


Envirosuite – A Rough SP Analysis

I decided to do a very rough analysis of the current share price to see if Envirosuite Limited (EVS) was worth a more in depth analysis and valuation for the purpose of investing.

EVS operates on a customer subscription model giving an Annual Recurring Revenue (ARR), which I like the certainty of, and is growing it’s revenue (seems like 7% increase since last year based on the figures given in the most recent financial report, after deducting one off sales).

The current Market Capitalization (MC) is $127.28M on an ARR of $7M at the start of the year (as stated in the most recent sales update). A recent announcement stated that there has since been a new contract bringing $2.8M in the first phase of the contract. If we optimistically assume that this one off sale is reoccurring revenue (which it doesn’t seem to be), that puts EVS at a multiple of ARR of ~13. For me, this is way too high for a company that is only growing at a rate of 7%pa.

I really want to like this small cap company, but I’m finding it hard to see value without doing more analysis (perhaps there is more to the growth history that supports this valuation?); however I won’t do more analysis because it doesn’t seem worthwhile based on this rough first glance.

Addendum: Since I had the page open, I couldn’t resist flicking through the rest of the company report. Something caught my eye, which required a fresh analysis and suckered me into doing a more in depth (but still rough) investigation: EVS has raised an additional $84M capital since the financial report was release, which I had not considered in my former analysis. It seems this money was used to buy a subsidiary.

If we do the same analysis above, but subtract the additional $84M worth of equity from the MC (127.28 – 84), then divide that by the ARR (I’ll use a value of $7M for the ARR, because the valuation is not so obviously an unfavorable price, so no need to use overly optimistic numbers to prove how bad the value is), this gives a multiple of ARR of 6.2. We can probably round this down to 6, to factor in any growth for the start of the year. Truthfully, assuming EVS’s use of this additional equity will be accreditive to revenue, this multiple of 6x ARR is very likely to be less.

A multiple of ARR of 6 isn’t bad. It’s not great either. If I was buying a company privately this would be expensive, but as it’s on the ASX, it’s actually kind of comparable. It’s possibly worth doing a proper analysis on EVS to work out if it’s worth investing right now, but since I’m holding off to see how the economy goes, I probably won’t invest in EVS at this stage.

Addendum #2: It looks like historic growth in this company is high. It’s definitely worthwhile looking into EVS in more detail, specifically I’d be looking at ROI and whether the company could be profitable if money wasn’t going into growth – I think I’ll still wait to see how the economy looks after COVID19 before investing anything significant.


A2 Milk Ltd – A Rough Forward PE

The current Market Capitalization (MC) for The a2 Milk Company (ATM) is $12,664M, at the time of writing. The latest half year report shows an NPAT of $185M. If we double this to get a full year NPAT of $370M, then deduct the $618M cash that ATM has in the bank from the MC, this gives a PE of about 33 – not super attractive for an investor looking at a one year time period.

If we assume that the following year’s NPAT is ~$450M (~+21% to match current growth), this pushes the forward PE down to 27, which I think is arguably an attractive price to invest at for an investor looking at a multi year investment – excluding concerns of reduced demand from any possible upcoming recession. Given the lack of certainty of the global economic future, I won’t be buying at these prices.

Obviously this is a very sloppy calculation with some wild assumptions (such as no growth in the second half of the year), and I’m sure the purests won’t like me removing the cash in the bank from the MC.

However the purpose of this calculation is to try to see if the value in the current MC can be justified, and given the nature of valuations containing forecasting, I believe it’s best to accept that all values are rough, to be slightly pessimistic in my forecasting, and include points of value which we know about (such as cash in the bank).

Business Investing

How To Do A Business Valuation

There are a number of different ways to value a business, and although there are a few recognized methods, business valuations are as much of an art than a science.

This article discusses the types of valuation available, when to use each type and links to other articles showing how to do each respective type of business valuation.

Choosing The Right Type Of Valuation

The outcome of a valuation will depend on the type of valuation chosen, the values used in the valuation and the reason for the valuation. That’s why the first step in valuing a business is to choose an appropriate method of valuation.

The Football Field Approach

The Football Field approach isn’t really a type of valuation, more of a method of helping to choose a valuation type. Ironically, given that choosing the type of valuation is the first thing to do, a Football Field can only be done once you’ve done every other type of valuation available.

This isn’t my favorite way to choose what type of valuation to use, but it’s something that I do because it helps get your head around the valuation and give some sense of how the chosen valuation method fits in with alternative ways to value the business.

When I do a Football Field, I perform each type of valuation that can be done on the business thrice; once with a pessimistic view, once with an optimistic view, and once with a view of what the most likely outcome is. Then I place them all in a graph so I can see how each type of valuation compares.

You can then use this to see any commonalities between the different types of valuations and where the upper and lower values are.

Valuation Methods

Here follows a synopsis of various valuation methods, their appropriateness to different types of business and a link to a more in depth description of how to value a business using the respective method.

Discounted Cash Flow (DCF) Analysis

A DCF Analysis is primarily used by accountants to calculate the value of a business in terms of its total worth across a 5 year period. This valuation method is typically used when determining the monetary value of a business for the purpose of arbitration or contractual value. For example, it may be used to calculate the equivalent cash value of a shareholders stake in a company if that shareholder were to be subject to a Call or Put Option.

A DCF Analysis is less frequently used as a method to calculate the market value of a business because (while it may factor opportunity cost or depreciation of the value of money invested in the return in the business – AKA the “Discount”) it typically doesn’t consider a margin of profit for the buyer to entice a purchase.

That said, a DCF Valuation does provide the benefit of factoring in future growth of a company and therefore may be argued as a suitable way to value high growth companies; hence I use my own version of a DCF Analysis when valuing growth companies, which includes a margin of profit – a model that alters based on the exit strategy for the investment.

A DCF is probably the most complex method of performing a business valuation and is not relevant when profit is low compared to revenue (or if profit is negative), as there is value in such a company that is not apparent through the profit (such as goodwill, IP, etc.).

Here’s a Wikipedia article on how a DCF Valuation works.

Comparable Market Analysis

The Comparable Market Analysis (AKA Comparables Market / CM Valuation) involves finding historic sales prices of comparable businesses and using these to deduce what the business might be worth.

The Comparable method is typically used where there is a lot of sales data available in an open market – such as in a stock market or business broker.

The Comparable Market Analysis is heavily influenced by market sentiment and can result in wildly different valuations depending on when it’s done. This can lead to a Greater Fool scenario and also be subject to market manipulation. In the absence of these issues and a short investment time-frame, this is arguably one of the best valuation methods because it tells you what the business is worth at that time.

The problem I have with this type of analysis is that it doesn’t consider the return an investment can give you relative to the performance of the company in the absence of a sale or change in the market conditions, and it relies of the analysis of others.

Therefore, I posit that this type of valuation is most appropriate for stock market traders (but not stock market investors) and business brokers who have access to historic sales data and have some control over the market.

Discounted Dividend Model (DDM)

This is basically a DCF valuation based on dividend return instead of NPAT, which gives the perspective of value of a business based on the return to the investor in the absence of a sale. Truthfully I don’t use this method and don’t know much about it. There’s a really nice Wikipedia article on DDM if you’re interested to learn more.

I suppose this method could be useful for a retiree who wants to calculate Return On Investment (ROI).

Price-to-Earnings (PE) Ratio

The PE value of a company is calculated by dividing the Market Capitalization (MC) of the company by its earnings (Net Income – dividends). This can be done as a backward PE (where the last reported annual figures are used to calculate earnings) or a forward PE (in which the forecast earnings are used in the calculation).

More information on Price-to-Earnings ratios is available here.

Also, check out my own proprietary method for calculating PE.

Multiples Of Revenue

This is a common method of valuing businesses for sale by business brokers. It’s sort of a lazy method because it doesn’t attempt to calculate the value of a company in any depth. It doesn’t consider the effort required of the company to be profitable or the value of the assets that the company holds (though often business brokers will add the value of stock to this number). There are other methods of valuing a business that business brokers use, many of which consider a salary component for the owner, though these methods are beyond the scope of the type of investing I do; hence will not be discussed here.

The benefit of using multiples of revenue is that it does place some value on the company that is relative to its capacity to become profitable if that is not currently the case. Also the value of the goodwill, IP and other aspects could (lazily) be considered to be relative to the revenue of the company, which otherwise may not be recorded in the company’s profit.

This type of valuation is also often used when valuing companies whose customer base is on an Annual Recurring Revenue (ARR) pricing scheme.

I like this valuation method when based on multiples of ARR, but prefer to derive my own valuation method based on the component of a company’s ARR that has the capacity to be profitable (I blend elements of DCF in this method).

This is because I only want to invest in companies that are capable of being profitable so they can offer multiple exit opportunities (sale, Put Option, dividend return, etc.). Also, while theoretically a company could give a positive return on investment if the valuation is based on multiples of ARR, while the cost of growth is less than the multiple of ARR growth, this could lead to a Greater Fool scenario with no other exit than a sale.


There are a lot of methods to value a business, and I’m sure there are more than I have listed here, and after reading this you can probably appreciate why it’s important to chose a type of valuation that’s relevant to the purpose of your valuation.

Whether you’re valuing your business for sale, looking for investment or trying to decide what the business is worth so you can buy out a business partner at a fair price for all parties involved, there are many valuation methods to chose from. Though given the number of scenarios of requiring a business valuation and the variable nature of finding value in different businesses, there’s no single method for every case.

This is why I suggest that if you are an investor, you should come to your own conclusion about the method of valuations that you use, or make your own valuation methods as I have.

Addendum: An investor should also consider soft aspects of value in a business (such as IP or value in directors). An investor should also watch out for creative accounting and consider the reliability of forecast profit projections. There are a number of things to consider when valuing a business that are not discussed here, and they are learned with experience; hopefully this article sets you up with the basics to get started.