In November 2006 - Telecom New Zealand ($TEL.NZ) announced plans to sell their directory business in a competitive process. Analysts placed a range of values between NZ$1.5 billion to NZ$2.2 billion. I ran some numbers and came up with a NZ$850 million valuation - using Yell Group ($YELL) in the UK as a comparator. In my analysis I wrote the following paragraph:

I believe these numbers (NZ$1.5-2.2 billion) are fantasy.  The top of our valuation – based on sensitivities – is NZ$1.1 billion.  Using the current 13.8x Yell multiple gives a valuation of NZ$1.21 billion.

As a result of some discussions I revised the analysis 24 hours later with some more aggressive assumptions. My updated valuation was NZ$1.10 billion with a range of NZ$867 million to NZ$1.36 billion.

But hey - there was a fully-fledged private equity boom going on. What did I know.

In early 2007 to get to the short-list of potential acquirers for the Telecom New Zealand directory business required a NZ$2.1 billion bid. I wrote yet another piece - with the following excerpts:

But it appears our valuation was wrong.  The rumours in the market were that it took NZ$2.1 billion to make the short-list and the four finalists are all private equity players.  Our valuation was NZ$1.1 billion – that is a long way short of NZ$2.1 billion.

Here at Valuecruncher we back our analysis – and when we are that far out we want to know why.

and

This has been bugging me – I don’t like being this far out on valuations.  I like to think it isn’t typical.

Then I proceeded to explain the bid valuation as best I could (summary - really cheap debt).

In March 2007 with the closing of the sale to CCMP I noted:

Valuecruncher believes the result is an excellent one for Telecom.

Since 2007 it hasn’t been an easy time for owners of highly leveraged directory assets. Debt isn’t as cheap as it was (check out this Bloomberg piece from February 2007 - the world has changed). Another strange thing - people are also using this internet thing where they previously relied on services like directories. That means there is pressure on key directory revenue streams (like advertising).

There is a long piece in the New Zealand media today (Sunday Star Times written by Tim Hunter) about the challenges facing the directory business - now called Yellow Pages Group. It quotes a number of unnamed sources using Yell Group ($YELL) in the UK as a valuation comparator (”Yell in the UK has just restructured and trades at seven times earnings“). With Yellow Pages Group having EBITDA of around NZ$130 million - that places an enterprise value on Yellow Pages Group of “NZ$750-$800 million“. Note the article has senior debt holders being owed NZ$1.2 billion - ouch. The article is a good piece of analysis by Tim Hunter.

Our Valuecruncher interactive analyst report for Yell Group backs up this analysis (have a play with the DCF tab as well). A 6.3x EV/EBITDA multiple for Yell Group and a NZ$130 million EBITDA gives an enterprise value for Yellow Pages Group of NZ$819 million. Enterprise value is the value of the whole business (equity and debt).

Hold on - isn’t that just about where I started?

Lesson: Do robust analysis and run the numbers - and back that (even in the middle of a private equity boom).

It has been a tough and challenging 2010 for Telecom New Zealand ($TEL.NZ) - New Zealand’s largest listed company. $TEL.NZ is trading close to a 52-week low at NZ$2.24. There has been widespread outages on their mobile XT network and yesterday a group of New Zealand entrepreneurs (including Valuecruncher investor Lance Wiggs) announced a new international broadband initiative to complete with the Southern Cross Cable Network (of which $TEL.NZ is the largest shareholder). Time to look at some valuation numbers - where is $TEL.NZ coming out?

Valuecruncher Interactive Analyst Report For $TEL.NZ

Discounted Cash Flow Valuation

We have completed a discounted cash flow valuation using our interactive tools (there is a “discounted cash flow analysis” link just under the company name on the company page). We have populated our model with a mixture of consensus analyst estimates and Valuecruncher estimates. Our analysis produces a valuation of NZ$2.70 for $TEL.NZ - 20.5% above the current share price. We see $TEL.NZ undervalued at the moment. But how about compared to a peer group?

Comparator Analysis

I am going to look at only one of the metrics we use at Valuecruncher - EV/EBITDA. Enterprise Value (EV) is simply market capitalization plus net debt [long-term borrowings less cash]. We use EV to capture the impact of debt and cash on a company’s balance sheet - market capitalization doesn’t capture different capital structures when comparing companies. EV/EBITDA shows how a dollar of profit (measured in as Earnings Before Interest Taxes Depreciation and Amortization) is being valued by the market against the comparator set.

On an EV/EBITDA basis $TEL.NZ is trading at 3.7x ($TEL.NZ is being valued at 3.7x last year’s profit at the EBITDA line). A dollar of $TEL.NZ EBITDA is worth less than a dollar of $T, $VZ, $VOD.O or $TLS.AX EBITDA. $TEL.NZ is a smaller scale but broadly similar business - $VOD.O is perhaps an outlier.

If we raise the $TEL.NZ EV/EBITDA multiple to the average of $T, $VZ and $TLS.AX (4.7x) then this gives a share price of NZ$3.17 - 41.5% above the current share price. This valuation is in line with our DCF analysis - but even higher.

Summary

Based on our DCF valuation - $TEL.NZ looks undervalued. Looking at some comparators - the market is valuing $TEL.NZ lower compared to the peer group. $TEL.NZ looks cheap at current prices - even with the challenges the business is facing.

Disclosure: no positions.

We tend to get some complaints when we write about New Zealand-based issues. This post is one of those New Zealand focused ones. Feel free to skip it if that isn’t what you are interested in.

Dear NZX

We like your work – we really do. The relevance and professionalism of the New Zealand share market has improved by an order of magnitude over the last ten years.

But we also love the quote from Il Gattopardo (The Leopard) – “If we want things to stay as they are, things will have to change”

We know you get that – for New Zealand to remain competitive we need stronger capital markets. The Capital Market Development (CMD) Taskforce has some good thinking – which needs the political support to implement. However, looking at the majority of suggestions – they are 20^th century solutions. Do they need implementing – absolutely. But for a small market like New Zealand we need to be looking at different solutions as well – what works in a big market doesn’t necessarily work here. We need to be looking at more innovative solutions – and again, I do think you get this. Adding Rod Drury to the NZX board is a step in the right direction.

We are in the broad equity research space – and we were disappointed by sections of the CMD Taskforce report. The CMD report (from page 69) outlines a situation where there is limited traditional equity research coverage of smaller listed companies. The CMD report offers solutions including public and private funding of additional equity research (supplied by traditional research providers) – because that is what other markets are doing. There is discussion about a “small levy on trades” (page 70).

Really. That is the best solution we have got. New Zealand is a very small market – quoting the CMD report:

“INFINZ data show that 30 stocks are covered by all six major New Zealand brokerages, and a further 37 stocks are covered by some of those firms. There are 47 (41 percent) NZX companies without any analyst coverage at all, and a further 15 have only one or two analysts covering them. There is generally no coverage of small stocks, and no coverage of the companies on the smaller exchanges, the NZAX or Unlisted.”

“All six major New Zealand brokerages”. Unless the plan is to make a significant investment in research (more than one analyst per company) – and that doesn’t seem possible – why are we bothering? The traditional large market research model doesn’t seem to be relevant here. Never mind that most traditional research reports are virtually impossible for the average retail investor to comprehend – anecdotally the consumption of research reports by retail investors in New Zealand is low. NZX knows where retail investor education is in New Zealand – the large electronic ticker going around the NZX Centre in Wellington uses full company names and the share price not ticker codes and the share price. That is the right thing for NZX to do by the way – but it shows how far we have to go.

Why not start with a plan to provide base financial information and valuation resources for the market? Let’s initially make information and tools available - how people use them is the next step. NZX.com is the logical home for those resources.

There will be traditional coverage where the market deems it worthwhile – the largest companies on the NZX only. For the rest not covered by traditional research (in fact for all of the NZX companies) NZX should be following Jeff Jarvis’ rule from What Would Google Do – “do what you do best and link to the rest”.

Most investors in New Zealand go to the NZX website for information on listed companies. NZX has added news feeds from Fairfax to encourage more engagement – but where is the financial information and analysis? NZX should make base financial information and valuation resources available. NZX.com is in a position to be the default portal for listed company information in New Zealand. There are options available to NZX where other parties are providing free access to information and tools to fill the current gaps on NZX.com.

Example 1 – Reuters

It isn’t well known – but the free Reuters website has good coverage of NZX listed companies. We can use New Zealand’s largest listed company Telecom New Zealand ($TEL.NZ) as an example.

For New Zealand companies all you need to add is a “.nz” suffix to the ticker code and there is a quantity of quality free information. The information is comprehensive – and in a single location. Using $TEL.NZ as an example – consensus analyst estimates, historical financial statements, charts and even paid research options. It isn’t only the large NZX companies – for example Xero ($XRO.NZ) even though they have no analyst coverage.

Example 2 – Valuecruncher

At Valuecruncher we provide interactive valuation tools for listed companies. This already includes 156 companies on the NZX. These are comparator based tools. Using $TEL.NZ as the example again.

Valuecruncher Interactive Analyst Report For Telecom New Zealand ($TEL.NZ)

Our algorithms choose the peer group from an international selection. But you can change the peers to a New Zealand focused group. The tools are interactive.

Disclosure: Yes – one of the solutions is Valuecruncher. In case there is any doubt – that is the company associated with this blog.

NZX – do what you do best and link to the rest. What would Google do? Google Finance uses links to Reuters for deeper data.  NZX.com can be the default financial information and valuation resources location for New Zealand as a first step to a potentially bigger future. It is time to look for specific solutions for this market - not simply copying the actions of larger markets.

Regards,

Mark Clare

Valuecruncher CEO

Apple ($AAPL) announced quarter one results today.  With the $AAPL share price over US$200 - 52-week range US$82.33-215.59 - we decided to have a quick look.

Valuecruncher Interactive Analysts Report For Apple ($AAPL)

We have the comparator group set as Microsoft ($MSFT), IBM ($IBM), Google ($GOOG) and Hewlett-Packard($HPQ). You can change these peer companies on the site. For example you could add:

1. Research In Motion ($RIM) - Interactive Analyst Report For $RIM
2. Palm ($PALM) - Interactive Analyst Report For $PALM
3. Qualcomm ($QCOM) - Interactive Analyst Report For $QCOM

So what do we think?

Discounted Cash Flow Valuation

We have completed a discounted cash flow valuation using our interactive tools (there is a “discounted cash flow analysis” link just under the company name on the company page). We have populated our model with a mixture of consensus analyst estimates and Valuecruncher estimates. Our analysis produces a valuation of US$189.23 for $AAPL - 6.7% below the current share price. We see $AAPL overvalued at the moment. But how about compared to a peer group?

Comparison Analysis

I changed the peer group companies to $IBM, $RIM, $QCOM and $GOOG.  I am going to look at only one of the metrics we use at Valuecruncher - EV/EBITDA. Enterprise Value (EV) is simply market capitalization plus net debt [long-term borrowings less cash]. We use EV to capture the impact of debt and cash on a company’s balance sheet - market capitalization doesn’t capture different capital structures when comparing companies. EV/EBITDA shows how a dollar of profit (measured in as Earnings Before Interest Taxes Depreciation and Amortization) is being valued by the market against the comparator set.

On an EV/EBITDA basis $AAPLT is trading at 18.6x ($AAPL is being valued at 18.6x last year’s profit at the EBITDA line). A dollar of $AAPL EBITDA is worth more a dollar of $IBM (more than double), $RIM, $QCOM or $GOOG EBITDA. This is despite $AAPL making less margin at the EBITDA line than any of these comparators ($AAPL made a 22.8% EBITDA margin last year comparded with 23.0% at $IBM and 41.6% at $GOOG). There are still some steep expectations being priced into the current share price.

If we lower the $AAPL EV/EBITDA multiple to 17.5x (a slight premium to $QCOM) then this gives a share price of US$187.57 - 7.5% below the current share price. This valuation is in line with our DCF analysis.

Summary

Based on our DCF valuation - $AAPL looks overvalued. Looking at some comparators - the market is valuing $AAPL highly compared to some peers. We believe if you are investing in $AAPL at the current price - you are paying a full price and there are cheaper options available. We know that we will hear about that from the $AAPL fans out there however.

Disclosure: no positions.

On-line retailer Amazon.com ($AMZN) closed yesterday at an all time high of US$135.91. $AMZN is up 218% in the last 12 months - better than Apple ($AAPL) at 122%, Google ($GOOG) at 88% or the broad NASDAQ at 41% [visual]. Time to have a look at a superstar performance.

Valuecruncher Interactive Analysts Report For Amazon ($AMZN)

We have the comparator group set as Wal-Mart ($WMT), Google ($GOOG), eBay ($EBAY) and Yahoo ($YHOO). You can change these peer companies on the site. For example you could add:

1. Overstocked.com ($OSTK) - Interactive Analyst Report For $OSTK
2. Barnes & Noble ($BKS) - Interactive Analyst Report For $BKS
3. Netflix ($NFLX) - Interactive Analyst Report For $NFLX

So what do we think?

Discounted Cash Flow Valuation

We have completed a discounted cash flow valuation using our interactive tools (there is a “discounted cash flow analysis” link just under the company name on the company page). We have populated our model with a mixture of consensus analyst estimates and Valuecruncher estimates. Our analysis produces a valuation of US$99.04 for $AMZN - 27.1% below the current share price. Using a DCF calculation we see $AMZN overvalued. But how about $AMZN compared to a peer group?

Comparison Analysis

I kept the first three peer group companies as $WMT, $GOOG, $EBAY and changed $YHOO to $BKS.  I am going to look at two of the metrics we use at Valuecruncher - Enterprise Value (EV)/Revenue and EV/EBITDA. Enterprise Value (EV) is simply market capitalization plus net debt [long-term borrowings less cash]. We use EV to capture the impact of debt and cash on a company’s balance sheet - market capitalization doesn’t capture different capital structures when comparing companies.

EV/Revenue shows how a dollar or revenues is being valued by the market against the comparator set. On an EV/Revenue basis $AMZN is trading at 2.8x ($AMZN is being valued at 2.8x last year’s revenues). This compares to $WMT at 0.6x, $GOOG at 7.8x, $EBAY at 3.4x and $BKS at 0.2x. $AMZN’s profit margins (at the EBITDA line) were 6.2% of revenues last year.  A dollar of $AMZN revenues is being valued more than 4.5 times a dollar of $WMT revenues - despite that dollar of revenues producing less profit (on an EBITDA basis) than the $WMT revenues.  A dollar of $AMZN revenues is being valued just less (15%) than a dollar of $EBAY revenues - but $EBAY produces over five times the profit (on an EBITDA basis) on each dollar of revenues as $AMZN does ($AMZN EBITDA margin 6.2% vs 33.3% for $EBAY).  Wow - based on previous performance $AMZN is trading a a massive premium.

Now $AMZN does have a range of additional services like their AWS offering that big future growth are expected from. But that is some significant future growth that is being valued in.

EV/EBITDA shows how a dollar of profit (measured in as Earnings Before Interest Taxes Depreciation and Amortization) is being valued by the market against the comparator set. On an EV/EBITDA basis $AMZN is trading at 47.0x ($AMZN is being valued at47.0x last year’s profit at the EBITDA line). A dollar of $AMZN EBITDA is worth more than double a dollar of $GOOG EBITDA ($GOOG has EBITDA margins of 37.3% vs $AMZN’s 6.2%).  $GOOG makes over 6 times the profit on each dollar of revenue that $AMZN does - but each dollar $AMZN’s profits are worth over double the comparable $GOOG profits.

This appears crazy.

Summary

Based on our DCF valuation - $AMZN looks significantly overvalued. Looking at some comparators - the market is valuing $AMZN very highly compared to some peers. We believe if you are investing in $AMZN at the current price - you are paying a full price which includes significant future growth.  We like $AMZN as a company - but not at these valuation levels.

Disclosure: no positions.

I know we are a little late to recognising this - but we believe it is important. The New Zealand Stock Exchange ($NZX.NZ) have added technology entrepreneur Rod Drury to their board. Rod is the CEO and founder of on-line accounting provider Xero ($XRO.NZ).

For a small market like New Zealand - technology is going to be very important moving forward. To compete NZX needs to find ways to use data and information better.  Adding Rod to the strategic discussions around the NZX board table is a major step in the right direction.

A good challenge for Rod and a smart move for NZX.

Umair Haque is an on-line strategist - we are big fans of his work. His latest column on the Harvard Business Blog focuses on finance. It is written as a letter to Google ($GOOG). In it he asks if they can build a better global financial architecture. It is his usual great stuff. At the end of the piece he lists three examples of companies on the “leading edge of a revolution“. One of the three examples that he uses is Valuecruncher.

Tracked, ValueCruncher, StockTwits, and many more are the leading edge of a revolution — a revolution in what finance has been for the last several centuries, and what it must become in the 21st.

That is really cool.

We have previously looked at a view of the future of on-line finance. In that analysis we looked a range of scenarios:

One of the scenarios being Rock Stars.  We described the Rock Star scenario as:

Rock Stars – Retail investors seek advice from communities of other investors and are willing to pay. Investors make their trading accounts transparent on-line. Successful investors open their accounts to act as virtual fund managers. Virtual fund managers and community owners split a management fee paid by investors. Winners – Covestor, KaChing.

Last week Dan Carroll and the team at KaChing announced their new offering - and started to show how this scenario may play out. There was a feature in the NY Times which described the business model.

Customers will be able to open a brokerage account with Interactive Brokers and link their account with their choice of investors on KaChing. KaChing charges customers a single management fee of 0.25 percent to 3 percent, set by each investor. KaChing keeps a quarter of the fee, and the investors get the rest.

Each time the investors make a trade, KaChing will automatically make the same trades for the customer. Customers can log on whenever they want to check their portfolio’s performance. They can send the investor private messages and receive alerts if the investor does something unusual. With the click of a mouse, customers can stop mirroring an investor.

KaChing has an A-list team of investors behind them. The on-line finance space has a lot of interesting experiments going on - but we think this is a particularly interesting one. A lot of us will be watching closely how KaChing goes.

Disclosure: I met Dan and Jonathan from KaChing at the FinovateStartup09 event in San Francisco in April 2009. We had the stand next door. Good guys, smart guys - doing interesting things.

Kathmandu is an out-door goods retailer. Kathmandu was founded by New Zealander Jan Cameron in 1987.  The company has 84 stores with 45 in Australia, 32 in New Zealand and the remainder in the UK. Goldman Sachs JBWere and Quadrant Private Equity acquired Kathmandu (then 46 stores) from Cameron in 2006.  That transaction valued Kathmandu at around NZ$275 million.

The company is planning an IPO on the NZX (New Zealand Share Market).  Gareth Vaughan in The Independent has a good summary of the details. There is a Prospectus expected in the next week. We thought that we would get in early and put out some high-level estimated numbers. We have not seen anything that has not been in the media - these are high-level estimates only. Commentators are estimating the IPO will value the company at around NZ$450 million.

Our base case assumptions are NZ$400 million of 2009 revenues with a 10% EBIT margin. We have also assumed capital expenditures of NZ$30 million per annum. We have assumed that revenues grow at 10% per annum and that profitability (at the EBIT line) remains constant at 10%.

Valuecruncher has completed a base case valuation and three separate scenarios for Kathmandu. The first scenario (EBIT 8%) assumes EBIT margins of 8% against 10% in the base case. The second (Growth 5%) assumes 5% growth not the 10% of the base case. The third (CAPEX $40m) assumes CAPEX of NZ$40m compared to NZ$30m in the base case.

This base case and three scenarios give an enterprise value range of NZ$354 million to NZ$460 million (8.9 to 11.5x estimated 2009 EBIT). Valuecruncher gave a 25% weighting to each scenario which gives a NZ$411 million valuation (10.3x estimated 2009 EBIT). This NZ$411 million is our mid-point valuation of Kathmandu.

An enterprise value is the value of the whole business - debt and equity. To calculate the value of the equity in Kathmandu we need to deduct net debt (long-term borrowings less cash). Without these numbers available we have only calculated a value of the whole business - debt and equity. The ultimate value of the equity would depend on the debt and cash on the balance sheet.

When the actual numbers are released it will be worth looking at some comparators. We have a range that you can look at – you can choose your own. But here are some suggestions:

Nordstrom ($JWN) - Interactive Comparator Analysis

The Gap ($GPS) - Interactive Comparator Analysis

Limited Brands ($LTD) - Interactive Comparator Analysis

Below is a link to the static Valuecruncher valuation report for Kathmandu. The report outlines more details about our initial valuation. It is a piece of high-level analysis based on limited available information.

Valuecruncher-Valuation-Report-Kathmandu-IPO-Estimates-20091007

It has been a crazy 15 months for the Apple ($AAPL) share price. On the 22 August 2008 $AAPL was trading at $176.79. By 16 January 2009 $AAPL had dropped to $82.33 - down over half (53% down) in under five months. Today $AAPL closed at $190.01 - up over 130% in under nine months. The graph below shows the closing prices over the period. So what do we think about $AAPL?

Valuecruncher Interactive Analysts Report For Apple ($AAPL)

We have the comparator group set as Microsoft ($MSFT), IBM ($IBM), Google ($GOOG) and Hewlett-Packard($HPQ). You can change these peer companies on the site. For example you could add:

1. Research In Motion ($RIM) - Interactive Analyst Report For $RIM
2. Palm ($PALM) - Interactive Analyst Report For $PALM
3. Qualcomm ($QCOM) - Interactive Analyst Report For $QCOM

So what do we think?

Discounted Cash Flow Valuation

We have completed a discounted cash flow valuation using our interactive tools (there is a “discounted cash flow analysis” link just under the company name on the company page). We have populated our model with a mixture of consensus analyst estimates and Valuecruncher estimates. Our analysis produces a valuation of US$176.16 for $AAPL - 7.3% below the current share price. We see $AAPL overvalued at the moment. But how about compared to a peer group?

Comparison Analysis

I changed the peer group companies to $IBM, $RIM, $PALM and $QCOM.  I am going to look at two of the metrics we use at Valuecruncher - Enterprise Value (EV)/Revenue and EV/EBITDA. Enterprise Value (EV) is simply market capitalization plus net debt [long-term borrowings less cash]. We use EV to capture the impact of debt and cash on a company’s balance sheet - market capitalization doesn’t capture different capital structures when comparing companies.

EV/Revenue shows how a dollar or revenues is being valued by the market against the comparator set. On an EV/Revenue basis $AAPL is trading at 4.5x ($AAPL is being valued at 4.5x last year’s revenues). This compares to $IBM at 1.7x, $RIM at 3.5x, $PALM at 3.4x and $QCOM at 5.8x. $AAPL’s profit margins (at the EBITDA line) are 20.9% of revenues.  A dollar of $AAPL revenues is being valued more than a dollar of $RIM revenues - despite that dollar of revenues producing less profit (on an EBITDA basis) than the $RIM revenues.  A dollar of $AAPL revenues is being valued less than a dollar of $QCOM revenues - but $QCOM produces nearly twice the profit (on an EBITDA basis) as $AAPL.  We would expect the difference between the multiples for $QCOM and $AAPL to be larger - in $QCOM’s favour. There are some big growth expectations for $AAPL - on an EV/Revenue basis there appears to be a premium being paid for $AAPL against the peer group.

If we lower the $AAPL EV/Revenue multiple to 3.75x (a slight premium to $RIM) then this gives a share price of $163.30 - 14% below the current share price.

EV/EBITDA shows how a dollar of profit (measured in as Earnings Before Interest Taxes Depreciation and Amortization) is being valued by the market against the comparator set. On an EV/EBITDA basis $AAPLT is trading at 21.51x ($AAPL is being valued at 21.5x last year’s profit at the EBITDA line). A dollar of $AAPL EBITDA is worth more than double a dollar of $IBM, $RIM or $QCOM EBITDA ($PALM is losing money at the EBITDA line).

If we lower the $AAPL EV/EBITDA multiple to 17.5x (a slight premium to $QCOM) then this gives a share price of $160.06 - 16% below the current share price.

Summary

Based on our DCF valuation - $AAPL looks overvalued. Looking at some comparators - the market is valuing $AAPL highly compared to some peers. We believe if you are investing in $AAPL at the current price - you are paying a full price and there are cheaper options available. We do recognize that there are a lot of $AAPL fans out there however.

Disclosure: no positions.