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

Mainfreight Limited ($MFT.NZ) is a global supply chain logistics provider (a freight company). At Valuecruncher we have previously looked at competitor Freightways ($FRE.NZ). $MFT.NZ is trading toward their 52-week low. How is this in relation to the intrinsic value of the company’s shares?

Valuecruncher valuation model of $MFT.NZ with interactive assumptions

Valuecruncher produces a valuation of NZ$4.33 for $MFT.NZ. This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is 9.8% below the current share price of NZ$4.80.

Assumptions

• Revenue: Reuters aggregates six analysts covering $MFT.NZ and the mean estimates of 2009 and 2010 revenues are NZ$1.23 billion and NZ$1.36 billion respectively. For our analysis we have used NZ$1.20 billion in 2009, NZ$1.35 billion in 2010 and NZ$1.45 billion in 2011.
• Profitability: We have used an EBITDA margin of 6.5% in 2009 and 2010 rising to 7.0% in 2011. Reuters has $MFT.NZ‘s EBITD margin at 7.0% last year and an average of 6.6% over the last five-years.
• Capital Expenditure: We have assumed capital expenditures of NZ$35.0 million in 2009 then NZ$30.0 million per annum moving forward.
• Discount Rate: 11.0%. The PwC New Zealand cost of capital report lists $MFT.NZ at 12.6% with the wider market at 9.5%. We believe a discount rate in the 10-12% range is appropriate. We have chosen the middle of this range.
• Terminal Growth Rate: 3.0%. The New Zealand economy has grown at an average rate of 2.6% over the last five-years.

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

Play with our assumptions – what does your analysis say?

Disclosure: None

Valuecruncher places a value of $7.53 on each Mainfreight share with a valuation range between $5.16 and $10.10. The current share price sits at $8.00.

Key Assumptions

Revenue Growth

Revenue growth has declined rapidly in the last three periods dropping from 58.05% in the 03/04 period to 3.44% in the 05/06 period. We have forecasted revenue growth to rise again as Mainfreight establishes itself in the US market. Our forecast is for revenues to grow by 7.5% in the 06/07 period and 10% in the 07/08 and 08/09 periods.

EBIT Margin

EBIT margins have increased steadily from 2.41% in 2004 to 5.73% in 2006. Because there is no indication that EBIT margins will decrease, we have forecasted these to continue to grow to 7%, 8.5% and 10% in the next three years.

Discount Rate (WACC)

The discount rate as applied is 13.6% (sourced from the September issue of the PwC Cost of Capital report).

Terminal Growth

Terminal growth is assumed to be 3%.

Commentary

The Valuecruncher valuation falls within a very wide range of values that have currently been forecasted by other market analysts. These forecasts range between $6.85 and $9.00 (http://www.stuff.co.nz/3887023a1865.html). We believe that the current share price may be slightly over valued due to Mainfreight’s exceptional performance over the past 18 months, and that the market is, perhaps, speculating on prolonged high performance from the stock. We believe that revenue growth will continue to grow at a steady rate for the next three years and that EBIT margins will increase. The reasons for these assumptions are due to an increase in Mainfreight’s operations in the United States whilst keeping operations in New Zealand.

Mainfreight Valuation