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Investing

Is Auckland International Airport A Buy Right Now?

With the global downturn, and the NZ tourism industry hit hard, contrarian investors might see AIA as a buy right now. Especially with the AIA share price being so close to the Net Tangible Asset (NTA) value, it’s easy to view this as a case of “buy some property and get a NZs largest airport business free with your purchase”.

But here’s why I am not so confident that AIA is a screaming buy right now:

  1. Property prices are set to tumble, which could deliver a significant blow to AIAs NTA.
  2. AIA have recently announced a Share Purchase Plan (SPP) valuing shares at $4.66 each, which is over a dollar discount to current value. Historically share prices typically follow the SPP price down, as opportunistic traders buy stock and are happy to sell at any price above their buy price to make profit, driving the price downwards.
  3. Finally, because lists are always nicer when there are 3 items, the NZ government have recently suggested that travel into NZ will likely remain locked down for months to come*. This will not have a positive effect on the share price.

*”…[Jacinda Ardern] reiterated that New Zealand would not be coming out of level four early and border restrictions would be in place for ‘a long time to come’…” Source: https://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=12324565

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Investing

Should There Be A Capital Gains Tax?

Capital Gains Tax (CGT) is a very emotive subject. Left leaning people believe that not having CGT is unfair because self centered people are allowed to use certain types of investment to earn money without paying tax, while others have to work to pay all the tax. Right learning people tend to see those left learning people as lazy brats with Tall Poppy syndrome who don’t work or save hard enough to invest.

There’s probably some truth in each side… and now that I’ve riled everyone up, lets accept that looking at CGT from an emotional perspective is the wrong approach.

Once we’ve calmed down and removed our emotion from the subject, lets look at another approach in deciding whether we should have a CGT. Let’s first consider what tax is for.

Why Do We Have Tax?

Tax is used to correct flaws in Capitalism. Without tax, pure Capitalism would be unjust and result in a less successful society by all measures. People would be unable to get things that should be available to all, such as education and medical care. Inaccessibility of such things is bad for society overall – workers are less efficient because they’re unwell, under-educated and society as a whole would ironically be less happy without tax.

But tax also has a negative effect, which is why we should tax as little as possible to achieve the governments goals. That said, that same negative effect can be a good thing as another purpose of tax is to dissuade the populace from things that have negative effects if left untethered. For example, a tax can be good on cigarettes (reducing consumption) or petrol (which causes people to think more if they need to make the journey; reducing the damage to the environment).

Do We Need A CGT?

Given the purpose of tax, we should try to take the emotion out of our discussion about whether we should have a CGT, and instead ask ourselves if we need a CGT. Lets look at the benefits and disadvantages of a CGT on investing in shares and property.

Remember: The purpose of tax is not to redistribute wealth (with the exception of Communist societies). The purpose of tax is not to take money*, it’s to put money into area’s where it’s needed to fix the failings of pure Capitalism (we don’t do pure Capitalism in NZ). If increased tax is required, money should be taken from places where tax will cause the least harm to society.

*The exception to this rule is where the aim of taxation is to adjust demand for something who’s restriction of demand does not consider the negative effects on society, like tobacco or petrol.

Do We Need A CGT On Investing In Shares?

The Advantages Of Taxing Shares

There is no advantage of specifically taxing shares over other things, because remember that the purpose of tax is not to redistribute wealth and we’re not aiming to damage the stock market by tempering demand.

The only advantage of taxing shares is that tax revenue would increase.

The Disadvantage Of Taxing Shares

Since there are different types of shares and different types of investors in shares, we’ll have to identify the differences so we can analyse the impact to each.

Firstly the IRD defines two types of investors in the stock market, Share Traders and Investors. Share Traders already effectively pay CGT as they pay tax on their share trading income at the end of the financial year, at the normal income tax rate. Investors do not pay tax on the sale of their businesses / shares. See this article for more information on the differences between investors and traders.

To add to the confusion, there are multiple types of investors within the group broadly classed as “Investors” by the IRD. Business owners own shares in their privately owned company, and then there are Angel Investors / VCs who buy shares in a company not listed on the stock market – which is implicitly a long hold due to the lack of liquidity.

The Disadvantage Of Taxing Stock Market Traders

Essentially traders play the stock market and have no loyalty to the companies they own. If the company needs additional capital, a trader will likely be gone well before the subject is even risen (this is a bit of an assumption – a trader may indeed find the offer of a capital raise attractive as an investment in itself). Therefore it’s arguable that Traders bring little benefit to the companies they own, except perhaps helping to push the price of stocks upwards, which is good for the economy as investors get better returns and this helps Joe Public (think: Kiwisaver, etc.). Some may argue that this doesn’t really help anyone because it doesn’t contribute to GDP.

While Traders don’t really bring benefit to the economy through their trading activity, they are wealthy entities, and a CGT could cause them to leave the country (to set up an entity, such as a business or trust, as a tax resident elsewhere). This would be highly probable as they already pay tax at typically 33%, an extra ~30% CGT would be too much. When I talk about that being too much, I’m not referring to it being unfair, because tax is nothing to do with what’s fair – just what people will accept. The net effect of increasing tax to traders would be a movement of money out of the country, which would be a bad thing.

The Disadvantage Of Taxing Stock Market Investors

Like traders, investors will be less likely to partake in investing if the risks are higher (as the ROI will be lower). This means that it will be harder and more expensive and more risky for companies to raise capital. This is obviously bad for the economy.

If the taxes for being a trader are the same as being an investor, all investors would be traders. This is also bad, for the reasons mentioned above in the section about taxing traders. We want to incentivize traders to be investors, if anything.

Additionally, as investors hold stocks for longer, a CGT would to some effect end up being a tax on inflation – effectively causing a loss in real terms. So investors would be less likely to sell, which is economically inefficient as money is not free to move around in the “free market” as is required for capitalism to be successful.

The Disadvantage Of Taxing Business Owners

Again, this would be a tax on inflation, disincentivising sales. This is bad for the well being of business owners because they would have to work longer before retiring (remember much of NZ is made of small businesses / sole traders). This is bad for young people trying to make their way up the chain or even enter the workplace in the case of industries dominated by sole traders, which is not good for the well being of the country and stifles innovation.

Do We Need A CGT On Property?

A CGT on property implemented on peoples homes would be catastrophic. It would mean that as home prices went up with inflation, after people sell their home, they wouldn’t be able to afford a new one. This would cause geographic inelasticity of labour as people wouldn’t be able to leave the place they live to work elsewhere, even at the prospect of a very large pay rise. The would obviously damage the economy and push up house prices due to supply shortage.

A CGT on investment property would have different consequences. We have seen in the last year that policies aimed to help renters at the cost of landlords have decreased the number of landlords in the market (myself included) which has caused an increase in the price of renting. It follows that a CGT on investment properties would increase the cost of renting.

Looking into the LINZ ownership data, I can see that most people who have their name on one title, also have their name on another title. From this we can conclude what we already annocdotally know: there are a lot of mum and dad property investors out there, and this is what most people put their retirement savings into. A CGT on investment property would damage peoples retirement savings, having the effects described to retirees and the economy in the above section on taxing business owners.

Other Considerations

More types of tax decreases the efficiency of an economy, creating more administration an associated costs, such as Accountancy and Tax Lawyers.

As mentioned before, CGT is also a tax on inflation. Imagine if you buy an asset that is worth $100, each year inflation goes up 3% and the value of that asset with it. At the end of 10 years, if you sold the asset, you wouldn’t be able to buy an equivalent asset. Selling would always be at a loss, which is bad when that’s what your savings are invested in. This would make the population poorer, taking a slice of peoples savings, not take a slice of their profits.

While people might feel that it’s unfair that there are ways of making money that aren’t taxed, those people should remember that later in their life, they will be in the position to make such gains, so if your motivation of wanting a CGT is still based on a perception of justice, you may want to do the sums and see how retirement looks after a CGT on popular retirement investments.

Summary

There are a lot of disadvantages of introducing CGT on property and share investments, and the only advantage that I can see is adding more money into the governments coffers. It seems to me that the first question is not “Should we have a Capital Gains Tax?”, but “Should we have extra taxes?”.

After deciding whether we want extra taxes, we should then look at all the different things that can be taxed, and analyse the impact (disadvantages and advantages) of each type of tax, rather than running to CGT because it seems the fairest – remember, tax is nothing to do with what’s fair, it’s what causes the least harm to the population and economy.

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Investing

How Much Does Sharesies Cost?

At the time of writing, Sharesies charge a fixed fee plus a fee on every share trade that you do.

Fixed Fee Cost

The fixed fee is charged either per month or annually, and is additional to the per trade cost that you have to pay (on top of the cost of the shares you buy).

The fixed fee costs nothing if your portfolio is less than $50; $1.50 per month if your portfolio is up to $3,000; or $3 per month for portfolios above $3,000.

Alternatively you can elect to pay $30 a year.

Cost Of Fees Per Trade

In addition to the above fixed fee costs, Sharesies also charges a per trade fee. This costs 0.5% per trade for the part of the trade that is up to the value of $3,000 and 0.1% for the part of the trade that is greater than $3,000. So for example, a $5,000 trade will cost $15 for the component that is up to $3,000 plus $2 for the remaining $2,000 of the trade; giving a total cost of $17 for the whole trade.

Additional Charges

Sharesies state that some of the EFTs that you can buy on the platform have their own fees that are built into the purchase price, and that these are outside the control of Sharesies as they are charges from the fund managers who run the ETFs.

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Investing

Putting Money In The Bank Costs You Money

You often hear banks talking about special rates and products that give exciting returns, like a Term Deposit with a high 5% rate that’s guaranteed to be the best interest rate around.

Unfortunately that high rate of 5% is only guaranteed to lose you money. Here’s why:

After Resident Withholding Tax (RWT), which is automatically taken by the IRD via the bank before you get your hands on your interest, that juicy 5% is only worth 3%.

The problem is that 3% is about in line with inflation. So even though you may see the numbers going up in your bank account, in real terms your bank balance isn’t changing at all. In other words, your savings which could have bought you a new car 10 years ago, are still worth about the same as a new car now.

But wait, it gets worse. Banks often have fees, odd ways of ensuring that you don’t qualify for the full 5% each month, and other such problems that mean you don’t quite get the return you were expecting.

And the worst of it all is the opportunity cost of putting your money in the bank. Your money could be earning so much more elsewhere.

Now I’m not saying that putting your money in the bank is the worst thing to do. It’s a perfectly suitable way to store money if for example you’re saving for something over a short period of time, can’t afford to risk money, are financially incompetent, or have so much money that you need to spread it over a number of places to reduce risk.

My goal in this article is to highlight the fact that (with the exception of periods of unusually high interest rates or zero to negative inflation), banks are not an investment that will grow your money.

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Investing

Investors Vs Traders In NZ (Tax Law)

You might have heard stock market investors talking about share traders and share investors. These are two different types of stock market investors in terms of strategy, but this also has a significant impact on an investors tax implications.

NZ Tax Law defines two types of investors in shares: Traders and Investors. As usual with tax, the difference is grey and separated by “intention” – though it’s the IRD who will ultimately decide what your intentions were, so you’re going to want your intentions to be crystal clear.

What Is An Investor?

An investor is someone who buys shares with the intention of keeping them long term. They are investing in a company to enjoy the growth of a company with a view to getting an income as an owner of the company or having a long term exit plan.

Being an investor is arguably less stressful because investors don’t sweat the daily ups and downs of the stock market caused by market sentiment, as much as Share Traders do.

Investors typically use Financial Analysis (FA) techniques to justify their purchase, and try to purchase quality well run companies with good growth prospects, or speculative stocks.

From a tax perspective, investors do not pay Capital Gains Tax (CGT) in NZ.

What Is A Share Trader?

Share Traders buy shares with the view of playing the share market. They buy the lows and sell the highs, with lots of trades. They use Technical Analysis (TA) techniques and spend a lot of time looking at graphs to determine where the share price of a stock might go. They may also do Short trades.

Share Traders tax on their earnings at the end of the year, but I assume can recover their costs if their investments make a loss (you’ll have to talk to an accountant to confirm this).

It’s possible to be an Investor and accidentally become a Share Trader, say if you buy shares with the intention of investing, but then have to sell because you need the money or market conditions become unfavorable and you decide to exit, or if you’re learning and make some incorrect purchases that you need to remove from your portfolio. Again, your accountant will be the best person to advice you on this.

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Investing

The Economic Future Of NZ

Following the Black Swan event of COVID19, NZ is left in a state of uncertainty while we await the response of the economy to see how the recovery will look. One thing that concerns me more than the possibility of recession caused by businesses failing to survive the lockdown, is the possibility of NZ’s economy being changed for the longer term.

Firstly, while I am the last person to support the Labour government and Jacinda Ardern, I have to say that from what I can see they’ve done a great job with COVID19. The number of cases in NZ has been easily handled, there has only been one death (which represents a very low percentage, and the person had other medical complications), and I think the financial stimulus response has been excellent (QE + Helicopter Money via the Wage Subsidy) – though I have to say that I’m not impressed with the abuse of the State of Emergency which they have used to pass irrelevant social policy, but that’s beyond the scope of this website.

The negative effect of QE and the Wage Subsidy is that the government will need to replenish their coffers once all this is over, which means increased interest rates, increasing government debt, and/or increased taxes. Each of these have their own negative implications for NZ.

Increasing Taxes

The implications of increasing taxes is fairly obvious – this weakens the economy. Taxes on people reduce available income and reduce consumer demand for goods and services. Taxes on companies cause companies to make more effort to avoid taxes, such as becoming tax residents of foreign countries. Both types of tax reduce demand for goods and services, which reduces demand for labour, reduces wages, reduces demand and prices of property, which reduces consumers overall wealth and borrowing capacity, etc.

One would hope the government would only be able to do this when the economy has fully recovered and is healthy, though I expect that the idea of CGT may raise it’s head again.

Increasing Government Debt

This is also bad because it defers and compounds the problem as debt levels increase over time.

Increasing Interest Rates

This is actually the option that scares me the most. The Reserve Bank of NZ (RBNZ) could increase interest rates to recover funds back into the government coffers. This would have a direct and almost immediate effect on peoples wealth, through higher mortgage rates for property, pushing down prices and increasing costs, putting people into a negative equity situation, increasing rental costs for businesses, reducing demand for goods and services as people have reduced spending capacity, reduced borrowing capacity causing risks that weren’t previously there.

In addition to this, it could cause the value of the NZ Dollar (NZD) to increase compared to other currencies. This would be a problem for exporting companies, and cause a shift in the way NZ does business and increasing the trade surplus.

All this is a big problem because NZ relies heavily on it’s exporting industries (dairy, forestry, meat, and to some extent tourism as NZ would be more expensive to visit). New Zealanders also rely heavily on property investment, which is the staple investment for the average Joe investor (mum and dad, and many retirees).

How To Invest?

Assuming that this doesn’t cause further economic collapse, and of course assuming that this all transpires, investors might react by investing in stocks that benefit from a strong NZD, Importers, and companies with little or no debt. At the moment I’m waiting to see how the economy and government react, and building up some cash reserves so I’m ready to move when the opportunity presents itself.

Addendum (10/07/2020): Thinking about it, as things get worse, money will likely retreat to the USA, so the NZD may actually become weaker, rather than stronger. It all depends on the state of foreign countries relative to the impact on NZ, which is quite unpredictable so far out.

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Investing

How To Calculate PE

PE, or Price to Earnings ratio is a measure of a company’s price, relative to it’s earnings. It can either be measured as a forward looking metric or a backwards looking metric.

To calculate the PE of a company, you divide it’s Market Capitalization (MC) by it’s earnings, or Net Income – Dividends. To calculate the forward PE, you use projected earnings (forecast by you or the company); to calculate the backwards PE, you use the earnings from the most recent financial report.

PE is a sort of valuation method to see if a company is worth investing in at it’s current price. You can think of the PE as the number of years you’d have to own a share in the company before the company earned enough money to cover the cost if your purchase (assuming earnings are the same each year).

For example, if a company’s MC is $100M and it’s earnings are $10M, the PE would be 10 (100 / 10 = 10). After 10 years of earning $10M, the company would have made $100M (excluding amortization & interest on the value of the money).

Assuming all this money is paid out in dividends, the investor would have made their money back. In this scenario, a PE of 10 might be considered as a 10% ROI.

Depending on several factors, such as risk, market sentiment, the growth rate of a company and expected return, an investor might be willing to buy a company at a higher or lower PE.

A fair PE for a company with zero annual growth might be 11, while a company growing at a fast rate might command a higher PE, such as 25 – 40. The PE that you are willing to accept is directly related to the amount of return you want to achieve on your investment – it is this factor that brings market sentiment into the equation.

It’s worth considering that this method of calculating value in a stock price doesn’t consider growth of a company sourced from investing profits back into the company before realizing them on a balance sheet, which is a tax efficient way to grow the company. PE is more suited to valuing mature companies, or growth companies with a significant profit margin. PE also doesn’t show value in a company that is not profitable.

This method is a provides a very real perspective of the Return On Investment (ROI) because it considers the part of the profits that are held by the company – though it’s important to ensure that if those profits which were held back are reinvested, that they do actually translate into growth. Otherwise they are just a poorly reported costs of doing business.

Finally, please feel free to check out my own proprietary method for calculating PE.

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Investing

A Glossary Of Investing Terms

Here’s a glossary of acronyms used by investors. I’ll add to the list as I go, and explain each term in more depth later on. In the meantime this should give you enough to go on, so you can do a proper Google search on the term.

  • 10 Bagger – This is a term coined by famous fund manager Peter Lynch, and finds it’s roots in the game of marbles, in which a 10 bagger was a marble that had won 10 games (hence had been put back in the bag of marbles 10 times, and not lost as ante to the opponent. In investing terms, a 10 bagger is a stock that has increased in value by a multiple of 10.
  • ARR – Annual Recurring Revenue. This is company revenue derived from a repeating source. Typically a subscription from customers which is renewed at regular intervals.
  • ATH – All Time High: the highest price a stock has ever reached.
  • Black Swan – An unexpected thing or event that causes misfortune, such as COVID19, which caused an economic crash.
  • CAGR – Compound Annual Growth Rate.
  • Capitalized Cost – Instead of recording the total value of a purchased asset, the cost of it’s amortized value is recorded over a period of years instead.
  • CARR – Contracted Annual Recurring Revenue. This is company revenue derived from a repeating (contracted) source. Typically a subscription from customers contracted over X years.
  • COGS – Cost Of Goods Sold.
  • CR – Capital Raise.
  • DCA – Dollar Cost Averaging. Buying more shares at a different value to have an average cost per share instead of an absolute cost.
  • DCF – Discounted Cash Flow. A method used to value a business.
  • DPS – Dividend Per Share.
  • DRP – Dividend Reinvestment Plan.
  • Earnings Accreditive – An overall increase in profit, typically from an event or transaction (such as the purchase of a new business unit).
  • EBIT – Earnings Before Interest and Tax.
  • EBITDA – Earnings Before Interest, Tax, Depreciation and Amortization.
  • EPS – Earnings Per Share.
  • ETF – Exchange Traded Fund.
  • EV – Enterprise Value.
  • FMCG – Fast Moving Consumer Goods.
  • Helicopter Money – The idea of throwing money out of a helicopter (not literally) to stimulate an economy by increasing capacity for demand.
  • NPAT – Net Profit After Tax.
  • NPV – Net Present Value.
  • NTA – Net Tangible Assets.
  • PE – Price to Earnings ratio.
  • PEG – Price to Earnings Growth ratio.
  • PCP – Prior Comparable Period.
  • PIE – Portfolio Investment Entity.
  • QE – Quantitative Easing.
  • ROCE – Return On Capital Employed.
  • ROI – Return On Investment.
  • SP – Share Price.
  • SPP – Share Purchase Plan.
  • WACC – Weighted Average Cost of Capital.
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Investing

How To Invest In The Stock Market (A Beginners Guide)

Investing in the stock market can be daunting, and is often an expensive learning curve. This article gives you an overview on how to invest in the stock market, what shares are, how to buy shares, how to research a company, etc. It won’t make you an expert, but it’ll give you the basic knowledge to get started.

How Do Shares Work?

When you buy shares (AKA stock), you’re actually buying a percentage of that company. There are different types of shares (that give different rights, such as shares with no voting power), but fortunately (as far as I’m aware) ordinary shares listed on the NZX and ASX all have the same rights.

Fun tip: If you’re buying shares in a non-listed company (in other words, a company not listed on the stock exchange), you’ll want to check the Company Constitution and shareholders agreement to see if you have the same rights as everyone else.

When a company is created (and registered with the Companies Office), that company decides how many shares it wants the company ownership structure to be split into. The owners are then recorded at the Companies Office and updated when shares are bought and sold.

When a company lists on a stock exchange, it’s no longer feasible to constantly update the Companies Office so the company hires a share registrar, such as Link Market Services or Computer Share. The share registrar will be connected to the stock exchange, and automatically update when shares are bought or sold.

Buying Shares On The Stock Market

Finding A Stock Broker

The first thing to do when buying shares is to find a broker. Brokers broadly fit into one of two categories: Those with value-add services and those that provide direct access.

If you want to buy shares in New Zealand and don’t want a value-add broker, your options are:

  • Sharesies – I understand that you don’t own the shares directly, instead they are held in a trust. This means that you can have a childs account, which I don’t think is otherwise possible in share ownership. See here for the cost of Sharesies.
  • ASB Securities – No annual fees, you own the shares outright, just pay for the trades you make.
  • ANZ – Same as ASB but with a slightly different fee structure.

If you want value-add services such as investment advice or drip feed automated selling for large volumes of shares, your options are:

Once you’ve signed up with a broker, you can then make a purchase through the broker. The next step is to choose a company to buy shares in.

Choosing A Company To Buy Shares In

The first step to choosing a company to invest in is to get a list of companies, which you can do from the ASX or NZX website. Once you’ve picked a company that you’re interested in, you’ll need to start researching that company.

How To Research A Company

To research a company, you’ll want to go to the respective stock market’s website (ASX or NZX) and search for the company. From here you’ll have access to all of the company’s announcements. Read through these, particularly the annual results and financial statements.

You should be looking to see if the director’s historic forecasts matched the following years results, to get a clue about how much credence should be put in this current year’s forecast. You should also be checking the finances to try to understand what’s going on.

Next take a look at the Companies Register to see who the major shareholders are and do a bit of research on them. Check up on the directors while you’re there too. Take a look into their other (including past) endeavors.

Next, have a look at some forums to see what others think or know that you might not. A great resource for the NZX is ShareTrader (There is one poster named “Beagle” who I particularly like, though there are many other wise folk there). A good resource for the ASX is HotCopper, though HotCopper seems to be comprised of a higher percentage of people who are blindly fanatical about particular stocks, so the conversation is less balanced.

Beware of any up-ramping or down-ramping of shares on stock market forums, as some posters may have their own agenda. Also be aware that not everyone on these forums is an expert.

I will also provide my own commentary and valuations for stocks on this website (see the ASX and NZX pages for details) and also news that I feel is relevant.

Finally, throughout all this, you should keep abreast of the news, and try to predict what might happen to the future of these companies. Factors like government policy, interest rates, foreign exchange rates, and property values play a significant part to influence the value of large companies on the stock market. Stats NZ is also another good source of broader economic data.

Valuing Shares

Once you’ve found a company that you think you might like to buy shares in, you’ll need to decide how much they’re worth – because if you think that they’re selling for more than you think they’re worth, the only way to make money on those shares is if there’s a Greater Fool.

I won’t go into how to value shares in this article because it’s a very big subject, but valuing shares is a vital part of investing and I highly recommend you do some research into this. Check out this article on how to value shares to start you off, and remember that there are two ways to invest, as either an Investor in shares (who holds for a long time) or a Share Trader (who does lots of trades [including stock shorting] to make money over a shorter period of time). The later type of investor pays capital gains, but has the opportunity to make a lot more money. Share Traders typically use Technical Analysis (TA), while Investors typically use Financial Analysis (FA).

Making Your First Share Purchase

Once you’ve decided what shares you want to buy and how much you want to pay, you’ll probably want to check the Market Depth before putting a bid in. The Market Depth tells you how many buyers and sellers there are, and what they are offering to pay / receive for their shares. This gives you a clue but beware that more often than not, there’s some manipulation going on there.

Once you’ve made a bid and you have waited until the bid has been accepted, you should receive something from the registrar in the mail (the registrar gets your details from your broker). Once you receive this, it will have your unique ID on it, which you can then use to register on the registrars website. This lets you update your details so you can receive company information through email, update your bank and tax details for dividend payments, sign up for Dividend Reinvestment Programmes (DRP), etc.

Final Words

Once you’ve learned how it all fits together, the next thing to do (which is really the first thing to do, but you probably won’t know how until you have some experience) is to decide what your investment goals are and make an investment strategy. For example, do you want to buy some shares so you can save up some money for a house; are you looking for long term investment income; or are you looking to exit your growth shares in X years so you can buy shares in stable dividend paying shares for retirement; or perhaps you’re rich and looking to use the stock market to spread your risk? Whatever your investment goals are should be defined first, because these will affect your purchasing decisions.

I hope this article helps start a few people off on their journey to becoming richer with shares. Remember that this article is just a quick outline, and you’ll have to do a lot of your own research.

Good luck.

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Investing

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.