It is the beginning of a new year. Here in New Zealand an annual tradition is the media reporting of brokers views of the top stocks for the coming year. Here is one of the lists. We were not i

nvited to participate this year – maybe next year. We decided to put out our list of our most undervalued and most overvalued NZX stocks – based on valuations done on the Valuecruncher blog. Unlike the lists in the media – our list includes our assumptions.

Valuecruncher Five Most Undervalued (Cheap)

1. Air New Zealand – +34.78%

2. Michael Hill – +31.34%

3. Sky TV – +31.22%

4. Nuplex – +26.19%

5. Rakon – +24.00%

Valuecruncher Five Most Overvalued (Expensive)

1. Mainfreight – -8.84%

2. Auckland International Airport – -7.65%

3. Fletcher Building – -7.29%

4. F&P Healthcare – -6.45%

5. Steel & Tube – -5.56%

Our valuations have been completed since early October 2008. The percentage over or under valuation was based on the share price at the time the valuation was completed. The Valuecruncher interactive model allows you to play with our assumptions. If you disagree with our analysis – change our assumptions and tell us what you think.

Comparing our list with the traditional brokers. Four of the six brokers list Sky TV – which is one of our picks as most undervalued. But also three of the six list F&P Healthcare – while we have it as one of our most overvalued.

We will revisit these valuations as the year progresses.

Disclosure: None

Valuecruncher recently completed a valuation of Fletcher Building ($FBU.NZ). Since then the company has announced reduced earnings expectations for the 2009 financial year.

When Valuecruncher completed our valuation the $FBU.NZ was trading at NZ$6.20 – and we produced a valuation of NZ$7.24. Today $FBU.NZ closed at NZ$5.56.

With the additional guidance we decided to revisit our valuation.

We kept all our previous assumptions constant but revised our profitability assumptions. Reuters has $FBU.NZ’s EBITD margin at 13.0% last year and an average of 14.2% for the last five-years.

For our analysis we have lowered our 2009 EBITDA margin to 9.0% with 2010 at 11.0% and 2011 at 12.0%.

Revised Valuecruncher valuation model of FBU.NZ with interactive assumptions

This adjustment produces a valuation of NZ$5.98 – 7.6% above the current share price of NZ$5.56.

Our analysis incorporates the cash and debt the FBU.NZ balance sheet – Valuecruncher calculates a net debt number.

Play with our assumptions – what does your analysis say?

Disclosure: None

Fletcher Building (FBU.NZ) is New Zealand’s second largest company by market capitalisation. The company is a building materials manufacturer and distributor. FBU.NZ is trading at close to a 52-week low of NZ$6.20. Time to run some numbers.

Valuecruncher valuation model of FBU.NZ with interactive assumptions

Valuecruncher produces a valuation of NZ$7.24 for FBU.NZ. This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is 16.8% above the current share price of NZ$6.20.

Assumptions

• Revenue: Reuters aggregates nine analysts covering FBU.NZ and these analysts have mean estimates of 2009 revenues of NZ$7.1 billion. For our analysis we have used NZ$7.0 billion in 2009, NZ$7.25 billion in 2010 and NZ$7.5 billion in 2011.
• Profitability: We have used an EBITDA margin of 12% in 2009 and 2010 rising to 13% in 2011. Reuters has FBU.NZ‘s EBITD margin at 13.02% last year and 14.15% over the last five-years.
• Capital Expenditure: We have assumed capital expenditures of NZ$250.0 million flat moving forward.
• Discount Rate: 12.0%. The PwC New Zealand cost of capital report has FBU.NZ at a WACC of 13.4% with the wider NZ market at 9.5%. We feel that 13.4% is too high. We believe there is an argument for a discount rate anywhere in the 9-12% range for FBU.NZ.
• Terminal Growth Rate: 3.0%. The New Zealand economy has grown at an average rate of 2.6% over the last five-years. We see FBU.NZ growing broadly in-line with this moving forward.

Our analysis incorporates the cash and debt the FBU.NZ balance sheet – Valuecruncher calculates a net debt number.

Play with our assumptions – what does your analysis say?

Disclosure: None

Valuecruncher has placed a value of $12.84 per share of Fletcher Building stock. The current share price of $10.85 is below the mid-point estimate but well with the range of $7.43 to $18.65.

Key Assumptions 

Revenue Growth

The key assumption in this analysis is revenue growth of 15% for the 06/07 period and 10% growth for the 07/08 and 08/09 periods. Although revenue growth for the past three periods has been very high (ranging from 19.07% in the 05/06 period to 22.88% in the 03/04 period) this type of growth is not sustainable, and it is for this reason that we have steadily declined revenues growth towards the terminal growth rate of 3%.

EBIT Margins

EBIT margins have also been declining in the past two years (13.20% in 2005 and 12.23% in 2006). We have forecasted the EBIT margins for the next three years to be 11%, 10% and 9% of revenues.

Discount Rate (WACC)

The discount rate applied in the analysis is 10% (as in the September 2006 PwC Cost of Capital Report).

Terminal Growth

Terminal growth has been set at 3%

Flectcher Building Valuation