Valuecruncher has placed a mid-point valuation of $3.94 per share with a range of $3.40 to $4.49 on the Freightways Ltd. Freightways was trading at $4.40 at the close on Thursday 29 March.

The current share price is at the upper end of the Valuecruncher valuation range and equates to an EV-EBIT multiple of 13.9 compared to the Valuecruncher mid-point of 12.8. The average multiple of a selection of domestic and international comparables is 12.9. Mainfreight is the closest listed domestic comparable and it is currently trading at an EV-EBIT multiple of 16, this reflects the significant EBIT growth expected for the current financial year. International express delivery companies FedEx and UPS currently trade at EV-EBIT multiples of 11-12.

Valuecruncher has forecast Freightways revenue to grow at 10% per annum for the next 3 years at the current EBIT margin of 20%. Freightways has made a number of acquisitions including Australian information management firm DataBank. These acquisitions have the potential to deliver higher growth rates and margins that could justify Freightways trading at the upper end of the valuation range. Using a short-term growth rate of 12% Valuecruncher values Freightways at $4.23 per share.

Valuecruncher Terminal Growth Rate: 3%

Valuecruncher Cost of Capital (WACC): 11%

Valuecruncher has valued each Vector share at $2.94, with a range of $2.37 to $3.50. The share price closed at $2.78 on the 7th of March.

Vector is subject to significant regulatory uncertainty in it’s core businesses of electricity distribution and gas distribution and transmission. Vector’s electricity distribution is subject to a price path threshold through until 2009 with no regime finalised beyond this point. Threats from the Commerce Commission to take control of Vector’s electricity distribution assets have compounded this uncertainty. These factors restrict the ability to forecast Vector’s revenues and cash flows.

A key valuation variable associated with Vector is the expected capital expenditure. Issues surrounding the regulatory environment resulted in Vector instigating an internal review of all of their potential capital expenditure projects. Valuecruncher has projected capital expenditure to continue at the current level.

Revenue Growth

Due to the regulatory uncertainty and price path thresholds imposed on Vector’s electricity distribution Valuecruncher has conservatively forecast revenues to grow at 2%.

EBIT Margins 

EBIT margins are projected forward at the current rate of 32%.

Discount Rate (WACC) 

The WACC used for this analysis is 10%. 

Terminal Growth 

Terminal growth has been set at 2%.    

Vector Valuation Report                                 

Valuecruncher has valued each Sky City share at $5.10, with a range of $4.13 to $6.13. The share price closed at $4.85 on the 28th of February down 23 cents following the announcement of the interim results for the 6 months to December 31. 

Revenue Growth 

Revenue growth is forecast to decline steadily at 9%, 7% and 5% for 2006/07, 2007/08 and 2008/09 respectively, converging to the terminal growth rate of 3%. The declining revenue growth projections reflect the limited opportunities Sky City has to expand gaming operations in New Zealand. 

EBIT Margins 

Sky City’s result for the 6 months to December 31 revealed an after tax profit of $45 million down 23.2% on the same period a year ago. A key contributor to the lower profit was adverse VIP/commission outcomes (theoretical returns on revenue gambled) for the period. Expected profit margins are based on achieving the theoretical returns on revenue gambled, in the long run these theoretical predictions hold but in the short term returns can be volatile. The adverse VIP/commission outcomes for the 6 months to 31 December are incorporated in the forecast EBIT margin of 29% for the 2006/07 year. A conservative EBIT margin of 32.0% is forecast from 2007/08 onwards based historic levels. 

Discount Rate (WACC) 

The WACC used for this analysis is 10%. 

Terminal Growth 

Terminal growth has been set at 3%.  

Sky City Valuation             

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

Valuecruncher has placed a value of $8.50 per share of Ryman Healthcare stock – ranging between $6.20 and $10.99. The current price of $9.70 is in the upper end of our valuation range.

Revenue Growth

The revenue growth for Ryman has been variable over the last three periods, falling from 16.10% in the 03/04 period down to 10.65% in the 04/05 period, and then up to 17.80% in the 05/06 period. We have forecasted an average growth rate of 15% for the next three periods, in line with the goal stated by the management of Ryman in the 2006 annual report to double the size of the company every five years.

EBIT Margins

EBIT margins have been increasing since 2003, rising from 17.9% to 25.04% in 2006. We believe that these margins will remain around 25% for the next three years, translating into an annual compound growth rate of 15% (the same as the outlook stated in the 2006 annual report). Our assumptions for revenue growth and EBIT margins suggest that Ryman Healthcare will continue to be a strong player for at least the next few years.

Terminal Growth

Terminal growth is assumed to be 4%, slightly higher than the long-term economic growth rate, but representative of the stronger growth opportunities available (such as the demographics of an ageing population) for Ryman Healthcare.

Discount rate (WACC)

The discount rate applied is 8%.

Ryman Valuation

Valuecruncher places a value of $3.58 on each F&P Healthcare share with a range of $2.92 to $4.30. The current share price is $4.27.

Revenue Growth

Revenue growth has been increasing rapidly from 3.09% in the 03/04 period to 20.36% in the 05/06 period. We have forecasted growth to increase to 30% for the next period, and then decrease to 25% and 20% in the 07/08 and 08/09 periods.

EBIT Margins

EBIT margins have been hovering around 36% for the past four years, ranging between 35.45% and 37.31%. We have forecasted EBIT margins to remain stable at 36% for the next three years.

Terminal Growth

Terminal growth is assumed to be 3%.

Discount Rate (WACC)

The discount rate applied is 10.8% (as stated in the PwC Cost of Capital Report).

Commentary

The current share price of $4.27 is 20% higher than Valuecruncher’s mid-point estimate. Valuecruncher is valuing F&P Healthcare based on their current cash flows. The higher share price reflects investors’ views that there may be valuable options beyond current cash flows available for F&P Healthcare.

FP Heathcare Valuation

Valuecruncher has placed a value of $4.21 on each F&P Appliances shares, with a range between $2.77 and $5.74. The current share price stands at $3.94.

Revenue Growth

F&P have experienced revenue growth rates of 12.43%, 10.66%, and 16.40% for the past three periods, and with the implementation of a wider variety of products and expansion in the US, it is likely that comparatively high growth rate will be seen in the next few years. We have forecasted growth rates of 16%, 14%, and 12% for the 06/07, 07/08, and 08/09 periods, respectively.

EBIT Margin

EBIT margins have decreased from 13.84% in 2004 to 9.08% in 2006. Margins will continue to be pressured by a strong New Zealand dollar and high raw material prices. “Aggressive cost saving strategies” (as stated in the F&P Appliances 2006 annual report) are currently being implemented to ease this pressure. We have projected EBIT margins of 9% for 2007 and 8% for 2008 and 2009. This is slightly higher than the margins currently seen at Whirlpool of around 6%. However, historically, F&P have operated at higher margins than Whirlpool.

Terminal Growth

Terminal growth has been set at 3%.

Discount Rate (WACC)

A discount rate of 10.1% has been applied (sourced from the PwC Cost of Capital Report).

FP Appliances Valuation

Valuecruncher has placed a value of $5.74 per share of Sky TV, with a range of $4.40 to $7.21. The current share price of $5.91 falls marginally outside the mid-point valuation.

Revenue Growth

Revenue growth has been very stable over the past 3 financial periods (12.61%, 11.7%, and 11.5% in the 03/04, 04/05, and 05/06 periods, respectively). However, with Sky TV already present in 42% of households in New Zealand, we have forecasted growth to steadily decline from 11% in the 06/07 period to 9% in the 08/09 period, heading towards terminal growth of 3%.

EBIT Margin

EBIT margins have been rapidly increasing from a low of 7.3% in 2003 to 25.8% in 2006. We have forecasted EBIT margins of 30% for 2007, and 35% for 2008 and 2009 as there is no indication that EBIT growth will stop growing in the next few years. These high margins can be attributed to the continually increasing number of subscribers, but, perhaps more importantly, the decline in churn (the number of people that disconnect from the service). In 2006 churn was at an all time low of 13.6%, down from 15.8% in 2005.

Discount Rate (WACC)

The discount rate used in the analysis is 10% (Sky TV 2006 Annual Report calculates WACC at 9.7%).

Sky TV Valuation

Valuecruncher has valued each Sky City share at $5.42, with a range of $4.41 to $6.51. The current share price is $5.03, close to the mid point valuation of Valuecruncher.

Revenue Growth

Revenue growth for the past few years has been –7.34% (03/04), 18.9% (04/05) and 11.3% (05/06). We believe that this growth will slow, as Sky City has just completed its first 10-year period, it will experience slower future revenue and earnings growth. We have forecasted the growth for the next 3 periods to decline steadily at 10%, 9%, and 8%, mowing towards terminal growth of 3%.

EBIT Margins

EBIT margins have been relatively stable at 36.5%, 32.0%, 33.3% and 32.4%. To be on the conservative side of valuation, 32% EBIT margins have been used for the next 3 years.

Discount Rate (WACC)

The WACC used for this analysis is 10%.

Terminal Growth

Terminal growth has been set at 3%, following the historical long-term growth rate.

Sky City Valuation

Valuecruncher has placed a value on Telecom of $4.47 with a range of $3.71 to $5.26 - driven primarily by revenue and EBIT margin sensitivities. This is slightly below Telecom’s current trading price of $4.50.

Yesterday, 28 November 2006, Parliament’s finance and select committee released the telecommunications amendment bill, recommending that Telecom separate into three operational business units: fixed network services, wholesale, and retail. The regulations surrounding the unbundling of Telecom’s bitstream service were also included in the amendment with recommendations that Telecom face limited competition only three years after the implementation of the Bill. In other words, Telecom will be facing full exposure to competition in the first three years of unbundling their network. So what does this mean for Telecom?

Using the Valuecruncher model, we have come up with a value range for Telecom. For this analysis we have used figures from pre-2006, that is, starting at 2005. The annual figures from the 2006 annual report were not, in our opinion, representative of the long-term nature of Telecom’s operation.

The key assumptions are outlined as follows:

Revenue Growth

Revenues grow at 3% p.a. This is down on the growth seen in the 03/04 and 04/05 periods of 3.80% and 7.72%, respectively, but is in line with the forecasted terminal growth of 3%. This assumption is based on Telecom’s ‘utility-like’ characteristics, which suggest that its long-term growth will follow the economy’s average long-term growth. Under the conditions set in the Telecommunications Amendment Bill, it is unlikely that Telecom will see revenues growth above 3%.

EBIT Margins

EBIT has been projected to decrease by a total of 25% over the next three periods (2006, 2007, and 2008). Under increased competition and regulatory intervention it is likely that Telecom will face increasing pressure on their margins. In 2005, Telecom’s EBIT margins were 28.3% of revenues. We have forecasted these to decrease to 25%, 22% and 19.5% over the next three years.

Discount Rate (WACC)

The discount rate used in the analysis is 11.0%.

Telecom NZ Valuation 29 November 2006