We have had a good response to our first Stock Of The Week.
Rakon ($RAK.NZ) has has had a torrid time. $RAK.NZ has been as high as NZ$4.22 in the last year and at NZ$1.03 i
s just above the 52-week low of NZ$1.00 from yesterday.
In late October Valuecruncher put a valuation of NZ$1.99 on $RAK.NZ with the share price at NZ$1.82. With $RAK.NZ now trading 43% below that share price – it was time to revisit the valuation.
In asking you what you thought – we got some really interesting responses. We had valuations ranging from NZ$3.61 to NZ$0.92.
It appears the reason that the price of $RAK.NZ dropped so sharply was the realease of the latest half-year results and guidance on expected future results. This presentation (especially slide 3) gives a good summary of how $RAK.NZ views the near future. This is worse than most comentators expected.
Factoring in this information – what did your analysis say?
Revenue: Our original valuation had revenues rising from NZ$210 million in 2009 to NZ$315 million in 2011. The view from the valuations this week is that looks overly optimistic now. Sam had revenues rising from NZ$160 million in 2009 to NZ$225 million in 2011. Isambard had revenues rising from NZ$140 million in 2009 to NZ$200 million in 2011. Jamess (with the NZ$3.61 valuation) had revenues of NZ$169 million in 2009 rising to NZ$240 million in 2011.
Our Revised Take: Revenues rising from NZ$155 million in 2009 to NZ$225 million in 2011. Interestingly Reuters has the five analysts covering $RAK.NZ giving mean estimates of 2009 and 2010 revenues of NZ$201 million and NZ$257 million respectively (with a low estimate of 2009 of NZ$175 million). You are more pessimistic – and so are we.
Profitability: Our original valuation assumed a flat 15% EBITDA margin. Hmmm – probably not looking at the latest information. We had a range of opinions on profitability (EBITDA margin). Isambard was negative in 2009 rising to 15% in 2011. Tiger was 12% in 2009 rising to 18% in 2011. Sam was 8% in 2009 rising to 12% in 2011.
Our Revised Take: A wide range to consider there. We think 2009 is going to look pretty rough (not negative) but something like an 8% EBITDA margin. 2010 is going to be better at around 11% . This will rise to around 14% in 2011 – still not the 15% we previously projected.
Discount Rate: We have done a post explaining about discount rates and it is a good place to start when thinking about them. PWC issues a cost of capital report for New Zealand that lists discount rates (in the form of WACC). PWC calculates the NZ market WACC at 9.5% – and that feels “about right”. You would expect to see WACC's (discount rates) as low as 7% for an energy utility and as high as 15% for a research/intellectual property company like Genesis ($GEN.NZ). Within that range – where do you put $RAK.NZ? We used 11% with our previous valuation. Sam uses 12%.
Our Revised Take: 12%. As the post says – “a combination of science and art“.
Terminal Growth Rate: Again we have a post on terminal growth rates. It is a hard concept to get your head around – beyond year three what sort of growth should we be forecasting? The terminal growth post has the following table that is a good guide:
If we calculate the year three growth (using revenues) – in our case: NZ$190 million growing to NZ$225 million. That is a year three growth rate of 18.4%. We need to extend the table – but assuming we use 15% year three growth and assume that the stable on-going growth rate for $RAK.NZ is 4% (assuming the company will long-term grow faster than the New Zealand economy – that averaged 2.6% over the last five-years). This gives a terminal growth rate of 5.0%.
Our Revised Take: 5.0%.
If we bring all of these revised assumptions together we get a new valuation for $RAK.NZ of NZ$1.24 – 24% above the 52-week low of NZ$1.00.
Updated Valuecruncher valuation model of $RAK.NZ with interactive assumptions
$RAK.NZ are already reacting to their challenging situation.
Thank you for your analysis.