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Investing

Chinese Coronavirus Vaccine

I can’t find anything in the news media about this yet, but it seems that China may be distributing a vaccine. I take this news with a big pinch of salt, because the information is 4th-hand to me. My source is the colleague of someone I know, whose family living in Wuhan (the Chinese province from which Covid19 is said to have originated) tell him that they have been given a vaccine.

Unfortunately that is all I know – it could be that grandma doesn’t know the difference between a check up and a Covid19 vaccine, or perhaps it’s a wind-up, or perhaps it’s a general (non-Covid19) Coronavirus vaccine for other strains, or something completely different.

Nontheless, it’s interesting to hear stories of how people in China are coping with Covid19 via personal contacts as these often differ from what is in the media. For example, the stats from China suggest that they are quite on top of the outbreak, but personal accounts strongly suggest otherwise.

If this is true, this could negatively effect the performance of companies such as Fisher Paykel Healthcare who (as macabre as it sounds) benefit from the Coronavirus outbreak.

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Investing

Which Stocks Are Cheap Right Now?

There’s been a bit of a ripple across the stock market recently, so I thought it might be a good time to review which stocks have fallen back to (or below) my previous valuations, making them good value (or “cheap” as the titular question was crudely phrased).

ATM

Going alphabetically or by value, either way ATM is very great value right now in my opinion. Need convincing? Have a look through the ATM articles to catch up, or skip ahead and take a look at the last valuation I did on ATM.

Addendum: As a counter point to this, some believe that growth will not be as impressive in the next results announcement due to a drop in the Daigou market and full pantries from panic buying. Personally I am not waived by this because the market doesn’t seem to be pricing that in. Consequently, by the time announcements are made and investors have the chance to price that in, valuations will be forward looking for the next epoch, which will likely not have these issues and therefore it will never be priced in… assuming the Daigou market recovers or is expected to recover within the year.

Lastly, given the falling price, when is the best time to buy? Well, Beagle on ShareTrader has suggested buying when the price goes above the 100 day moving average price. I think this or some variation of this is probably smart, but as I’ve said before it doesn’t matter if the price falls below your buy price as long as you’re happy that there was value in the price you bought at.

SCL

Scales are suffering from difficulty to sell some their product due to coronavirus related logistical issues. It’s not going to be a very impressive end of year for them in the coming year (though I don’t think they’ll be running into any trouble. The dividend will just be reduced slightly).

That said, their ingredients business looks like it’s taking off, so when the issues with the other side of the business are resolved, this company should see a bit of a boost to its profits and dividends. Also the ingredients side of the business may open up other opportunities for this talented group of managers who thrive at growing businesses organically and inorganically.

For a minimum of a 2 year investment (one year to get past the aforementioned logistic / sales problems, then another year for growth), anything below $5.00 is good buying in this author’s opinion. Of course, it’s entirely possible that the share price could dip further, but I believe that recovery post-Coronavirus will see a little boom.

Addendum: Since writing this, I have read an article on the industry that has made me change my mind on the value in the current share price. Take a look through the Scales articles for more information or read about my new position on SCL.

M7T

This is a tough one to be sure of, but it has the capability to become a multi-bagger. They’re probably about fairly valued, which is a Market Capitalization (MC) somewhere between $148m (if you want to be pessimistic) and $273m (if you’re optimistic). The market valuation appears to be based on a multiple of future earnings vs current earnings. While that means they could drop significantly due to market sentiment, this would likely be due to a results announcement suggesting that they grew Free Cash Flow (FCF) to $5m without their biggest customer being behind that. The good thing about that, is that this would likely reset expectations for the following year to be the same rate of growth, which would put the MC back to the upper limit I specified earlier. Of course, this bars out failure to perform or some large CAPEX surprising investors and reducing FCF results.

Summary: Probably within the range of fair value. Don’t bet the farm on this one. Will probably become a multi-bagger within a few years, and possibly continue to grow.

Take a look at my previous articles on M7T for more information.

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Investing

Summerset (NZX:SUM) Sales Performance Investigation

There is a massive amount of research to do into retirement villages, as an investor and truthfully I find retirement villages a little mind boggling; not only do they adopt fairly complex business models, but there are so many different ways you can view the investment proposition.

I knew that I wanted to invest in a retirement village for the property exposure because aside from the large 4 bed home (which is ample for a single guy in his 30’s) I no longer have any exposure to property investment since divesting my rental properties a few years ago, but need to do more research before committing more than the few thousand bucks worth of shares I bought a couple of weeks ago.

I had a quick look into OCA and a chat with one of their finance employees a few years ago and decided that wasn’t for me, RYM seems expensive (though I need to do more research to confirm if any investment proposition reveals value there), and ARV’s share price had been going sideways for long enough for me to be disinterested in putting in the time to analyse the stock. I also have some background knowledge in SUM because I was a shareholder a few years back. I also like that they’re brick-and-tile buildings, and more of a property investment than some others (in my opinion).

Looking At Sales Performance

I recall reading on ShareTrader.co.nz that a number of people seemed to be unhappy with the “growing stock” of new retirement units being delivered (which is industry lingo for “built”) but not sold. I wanted to allay such concerns in my purchase, which I have done based on stats from past and current annual reports. Specifically, I am largely happy that:

  • Despite the drop off in sales of new units, the percentage of new units that are unsold against the units delivered each year is not too bad. I would expect that a certain amount of free stock needs to be held so it can be demonstrated during the sales process. I would also expect that unsold stock would appear on the annual results presentation if a retirement complex had just been built and not yet available to sell (as I recall being suggested in one of the annual reports). This point is quite a matter of faith, but less so when considering the two bullet points that follow this one.
  • Despite some shenanigans from COVID19, Underlying Profit is still positive.
  • Profit from new builds continues to be positive.
  • They’re looking to be paying in line with the top payers of the industry for staff. I think this is a good thing given the increased difficulty getting nursing staff after immigration law changes. Also (anecdotally) I recall reading a comment from Couta (who is respected on the forum as being the man on the inside for retirement village stocks – though I don’t know to what level he is “inside”) on sharetrader.co.nz that many Summerset sales staff left to work for Ryman.

It is my hope that with increased fiscal stimuli from the government, including lower interest rates, we will see inflationary pressures in NZ that will help house prices, effectively reduce debt and make it easier for people to move into retirement villages.

Please find my limited, incomplete research numbers in the table below. I share this with you as it took some time to gather. Perhaps you might like to fill in the blanks in the comments below this article, to help others.

YearUnits Delivered (Built)New SalesResalesUnsoldTotal Number Of UnitsDevelopment Margin % (% Profit on new builds)Profit from new builds
201935432932325408627.961m
2018454339301115373233.2
2017450382300683278
2016409414244-5
2015303333245-302419
2014261286172-25
Profit from new builds is estimated to be in the region of $43m to $55m for the year 2020

At the end of the most recent period, 266 resale units where unoccupied, which is 6.5% of the total number of units. This does not include the number of unoccupied new units. This number would have been heavily influenced by the COVID19 lockdown.

Probably more time needs to be spent analysing this share from different perspectives to try to understand how the market prices this stock. For example, what emphasis is put on the NTA vs Underlying Earnings? Understanding this would help ensure a better entry point to this stock, and make me more comfortable with the investment proposition on which I have bought and will buy in the future.

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Investing

Investing In A Cure For Covid19

There are a bunch of listed companies with prospective Covid19 vaccines that are quite popular investments at the moment. I just wanted to take the opportunity to warn investors of the risks of such an investment.

Pharmaceutical investment is a curious business. Costs are massively high in this industry and companies often run for many, many years with no results. Once (if) the company successfully researches a cure for something (and it gets past all the necessary hurdles), there’s big money to be made. Especially so if it’s a vaccine for something that everybody in the world needs to buy.

Because of the nature of this industry and the way Capital Raising (CR) works, this can create traps for investors.

As the cost of research is high, pharmaceuticals often need to raise money. In order to entice people to invest, they need to sell the story. This means taking every little positive thing and singing about it as loudly as possible. As the subject is highly technical, investors are usually in the dark about the significance of such announcements and are often led to believe that things are further along than they really are.

For example, a company researching covid19 might announce that they have found a substance that successfully attaches to the virus and not human cells. This might be a significant discovery but not necessarily get the company any closer to a vaccine.

The other problem with such CRs is that they dilute existing shareholders and directors. Therefore a company would want to increase the value of the shares before they announce a CR. They might time CRs after small (but not necessarily significant) technical wins or be deceptive about timelines (without lying) to investors.

For example they might say things like “we are now moving to human testing”. This could mean that they are on the brink of a cure, or it could be part of the normal process of testing multiple candidate drugs as part of normal research, or it could be referring to the testing of the efficacy of a delivery system to be used when they discover a cure.

Of course the above examples are bad, but my point is that they can truthfully and correctly use words that make it seem like they’re on the edge of greatness, but actually miles from success. This typically happens through scientific (or industry) jargon or process that is presented in a way to deliberately mislead potential investors in order to pump up the share price prior to a CR and get investor interest.

Of course I’m not saying that you shouldn’t invest in companies searching for a covid19 vaccine, but just warning that there are pitfalls to consider when investing in, or basing your investment decisions on a covid19 cure.

For this investor, I find this sort of investing too much like gambling. That said, I think that such an investment would be great for a trader or an ethical investor who doesn’t mind a gamble.

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Investing

EBO Update

It’s been a few months since I found value in the Ebos share price. Not much has changed, other than a note regarding refinancing and the performance throughout COVID19 (I felt that the important line in the announcement was that “… there is no indication that the Group will not meet its previous guidance for FY2020…”).

Based on this, there is no need to add debt to the Market Capitalisation (MC) when calculating the ratio of NPAT to MC, because the debt is renewed (derisked) and will be a BAU cost going forward.

Given this, with an estimated FY20 NPAT of $164m (no need to reduce that number for the effect from COVID19 since they’ve said that it hasn’t affected guidance), and an MC of $3,636m, this gives rise to a ratio of 22. Even with my more pessimistic estimate of NPAT of $130m, this is a ratio of 28.

All things being the same, I think EBO is still a good buy at the current share price, given the growth rate of this company. The note about the performance being within previous guidance and refinancing in a lower interest rate environment give rise to the opportunity for Ebos to outperform in the coming year (though I am still very concerned about an impending recession).

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Investing

The Immediate Economic Future Of NZ

In April I wrote an article about the economic future of NZ, in which I postulated that the economy could be changed for the long term and we could see some new / increased taxes in the future. Specifically, I believe that we are looking at a Capital Gains Tax (CGT) because it’s already popular with some folk who believe there’s a fairness issue at play, and the NZ government has a history of looking abroad for policy ideas (rightly or wrongly).

I’m not ready to revisit the accuracy of my predictions because things haven’t had time to play out yet, but I would like to take the opportunity to offer my thoughts about the immediate future of the NZ economy. I won’t cover the state of play currently, because that’s already covered very well by the likes of John Ryder (which I recommend you subscribe to), various sources of stats, and the general media. Instead I would like to offer my opinion of the share market recovery and whether it’s currently a good time to be investing / trading.

I recently read a very interesting opinion piece in Stuff about mortgage holidays, which I think gives insight into the timing of the bear market. To summarize the article, 114,000 people are experiencing post COVID-19 lockdown hardship and 52% of these have been given a mortgage repayment holiday by the banks. These mortgage holidays will be expiring after 6 months (September through December), at which point people may be entering positions of financial hardship in which they do not have the means to support themselves.

This will be coming into Christmas when people typically spend more money. Without this extra spending, businesses will struggle through the traditionally quiet months following Christmas. I suspect this grim time for business will cause us to see more business closures and job losses in early 2021.

Therefore I think the recovery we have seen in recent times will likely recind towards the end of the year, and we will once again be in a bear market coming into 2021.

That said, much of NZ’s tiny economy relies on trade with larger foreign economies, so perhaps a better way to predict the economic future of NZ would be to predict the economic future of larger, foreign economies such as the USA, China and Europe.

In any case, I think that it is wise for investors to be divesting and saving their cash for a real, full recovery; traders should cautiously enjoy the volitility as they always do; and employees should enjoy as much security as they can, by working hard to ensure the success of their employer and saving money in case things don’t go well.

Things To Remember About Stock Prices

It’s better to invest in bull markets than gamble by buying stocks selling at a fraction of their former price in the hope that they will return to previous values. It’s worth remembering that a stock that halves in price has to double in price to reach it’s previous value. For example, a stock that was a dollar has to fall by 50% to reach 50c, but a 50c stock has to increase by 100% to reach a dollar.

Buying during a bull market gives confidence that prices will continue to rise and is a safer investment which will be a better investment over a period of years. For example, an investor would rather be guarranteed 30% ROI per annum compounding for 5 years, than a year of the posibility to get 100% without any certainty, but at the same time have the risk of losing 50%. So be careful what you wish for if you are hoping stock prices will fall.

It’s also worth remembering that stocks aren’t “cheap” because they are selling for half their current value. A stock’s price is based on the company’s capacity to earn money, which may then be returned to stockholders in some fashion (which is how the stock price is derived – it’s all about ROI on your investment).

How To Invest

There’s a lot of stuff going on right now: turmoil in the USA with racial/police problems, riots in the streets, and COVID-19 out of control. Thinking about this calmly and unemotionally, these things probably won’t effect the economy. What will effect the economy are the trade wars happening with USA-China, trade issues with Oz-China, lockdowns in the USA, the effects of the previous lockdowns effecting tourism, the aviation industry, subsequent job losses, the prospect of falling commercial property prices as people work from home and businesses close, the prospect of falling residential property prices from reported economic hardship, the corresponding reduction in equity and borrowing capacity from falling property prices and the effect that will have on spending. The potential for governments to become financially over extended from stimulus packages could cause future taxes and austerity measures that would be detrimental to the economic recovery.

On the flip side there are massive stimulus packages.

Over all, I feel that this year is a good time to cash up if you can. I think that retail stocks carry particular risk because people will be saving, spending at Christmas will be low and the following months will be baron. I think that tourism and aviation will continue to struggle, and Oz mining stocks (and general economy) will suffer from the current relationship with China.

Generally there is a lot of risk in the market, and given the liquidity of stocks there is no need to take on the risk of investing right now. Trade as you will if you are a trader, but I think it’s currently a bad time to be investing. If you are intent on investing, I have mentioned that Ebos are well priced right now, Scales and A2 Milk are probably about fair value (apologies for the old analysis in the link), though there will possibly be better times to buy later next year (less risk, but with less gains). There may be some bargains available in the residential property market in coming times – which is probably the best bet given lower interest rates.

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Investing

US Unemployment Down

Good news for investors: Unemployment stats in America show that unemployment is down in May after 2.5 million jobs were added to the job market. This bodes well better for the global economy and will undoubtedly cause an increase in the value of the share markets as people look for indicators rates of recovery and the potential size of any recession.

Locally I am still struggling to find any employment data for NZ, post COVID19 (May 2020). Perhaps this will be delayed for some time due to reduced resources during the lockdown causing a backlog of work for Stats NZ?

Personally, I’m willing to forgo any (significant) gains this year in favour of waiting for more stability and information with which I can form better analysis to do my valuations. The prospect of losing half my money is worse than the prospect of doubling it, and I’m not interested in gambling. Obviously everybody’s situation and strategy is different.

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Investing

Thoughts On Forex Trading

Today I’ve been thinking about Forex trading, and thought I’d share some of my research and opinions on the matter.

What spurred all this off was an infographic that I received in an email this morning. It showed the countries that rely on tourism the most, which got me thinking – I’ve always seen Forex trading as a bit of a scam / gamble, but if I had started Forex trading the moment that I heard the news of the Lockdown, I figure that I would have been making easy money. This would no longer be gambling, it would be smart investing based on economic events. So I started investigating.

My first port of call was to look at the NZD vs USD price to confirm my idea and see how the market reacted to the news. Upon doing so, I immediately I saw a problem: the market had reacted to the news prior to the event occurring. This was either luck (unlikely), insider trading, or lockdowns were happening elsewhere prior to the NZ lockdown.

Looking into this, the NZD seems to have started going down against the USD 2 days after the first lockdown, which was announced in Italy and occurred a couple of weeks before NZ’s lockdown. Prior to the decline in the value of the NZD, Italy, Saudi Arabia and Mongolia had gone into lockdown. This is an indication of how well informed a trader should be, and also how quick to react / paranoid one must be. Though it does highlight that there are opportunities for someone who is keeping abreast of world news and is willing to have a punt.

The Downsides Of Forex Trading

Considering the above, you might think that Forex trading is worthwhile because you can just wait for such an event, then if you can act quickly enough you can make a quick buck. However there are some downsides to Forex trading that make it not so simple.

First of all, these events occur very infrequently, and previous events haven’t been so easy to time, like the GFC. Secondly, it’s hard to know for sure how each country will react – while global investors’ finances typically retreat back to the USD, causing increased demand (and therefore price) for the USD, it’s impossible to know which country will take the hardest stance on currency policy (not to mention guesses as to the magnitude of effect).

For example, you may think that currency X is worth investing in because they are experiencing inflation and are offering massive interest rates on holding accounts in that country; but the question is, how successful are that country’s monetary policies are subduing that inflation? If the inflation isn’t kept under wraps, the value of the currency is eroded away and it doesn’t matter that you’ve doubled the amount of money you have due to interest rates. You simultaneously have the same problem with the currency pair that you’re trading currency X against.

The fact of the matter is, that you have to know things that are absolutely impossible to know.

Speaking of trading in things that you can’t possibly know about, there are people in the market who absolutely do know – because they’re in control of currencies – such as countries with authoritarian leaders who will no doubt have worked out that they can place bets on the value of their currency changing, then manually change it.

Another problem is that (ironically) you’re not trading anything that has an intrinsic value against it. For example, it’s not like trading shares, where someone buys some shares, the company grows and the shares are worth more. The shares are then sold to the next person for more money, who then holds onto them for a while and benefits from the same growth. Currency doesn’t have an eternally growing value (actually in most [if not, all] countries, it’s value depreciates over time). This means that if things don’t go your way, you have to either accept the loss on the trade or hold, with years of opportunity cost and depreciation.

And how about those losses? Because currency doesn’t move by much, Forex traders use leverage when trading – meaning that they borrow a large amount of money relative to their own investment. This leads to either big gains or big losses, essentially magnifying the result of any trade.

Another concern I had when researching Forex trading was that there was only one company I could find in NZ that was registered as a Licensed Provider with the FMA. Perhaps more concerning was that on the Financial Markets Authority (FMA) website, the article about Forex trading basically advised people not to do it, and stated that they regularly receive complaints and enquiries from consumers who have lost money in online forex trading, and that was on the second line of their page about Forex trading.

To support this, according to Stuff, the FMA receives more complaints about foreign exchange schemes than any other type of financial service provider. That’s actually quite a good article on Forex trading and covers a bunch of points that I wanted to cover, but won’t because I’m realizing that this list is getting long. There’s also another good article on the NZ Herald if you want to read more about the negative aspects of Forex trading.

The Upsides Of Forex Trading

After a lengthy lambasting of Forex trading, if you’ve managed to get this far, firstly well done! You have the stamina of an octagenarian sugar addict who has confused his Tic Tacs with his Viagra medicine. Secondly, I do believe that Forex trading plays an essential role in international trade; hence should not be ruled out completely.

Forex trading (or rather hedging) is entirely appropriate for companies who are trading internationally and need to be able to ensure that the prices they charge their customers in one currency, can cover the Cost Of Goods Sold (COGS) accrued in another country. In fact, I would say that it is essential for such a company.

That said, it should not be used by such a company as a form of gambling on profitability from international trade.

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Investing

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).

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Investing

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.