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 invited 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

Michael Hill International ($MHI.NZ) is a New Zealand listed jewelry retailer and manufacturer. $MHI.NZ has existing operations in New Zealand, Australia and Canada. $MHI.NZ has recently moved into the US-market. The company’s founder Michael Hill was last week named New Zealand’s 2008 entrepreneur of the year. $MHI.NZ is trading toward the bottom of their 52-week range - $MHI.NZ did a 10:1 stock split in November 2007. How is this in relation to the intrinsic value of the company’s shares?

Valuecruncher valuation model of $MHI.NZ with interactive assumptions

Valuecruncher produces a valuation of NZ$0.88 for $MHI.NZ. This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is 33.3% above the current share price of NZ$0.66.

Assumptions

• Revenue: Reuters aggregates three analysts covering $MHI.NZ and the mean estimates of 2009 revenues are NZ$412.2 million. For our analysis we have used NZ$410.0 million in 2009, NZ$440.0 million in 2010 and NZ$480.0 million in 2011.
• Profitability: We have used a flat EBITDA margin of 12.0% to 2011. Reuters has $MHI.NZ‘s EBITD margin at 13.5% last year and an average of 12.1% over the last five-years.
• Capital Expenditure: We have assumed capital expenditures of NZ$16.0 million per annum moving forward.
• Discount Rate: 10.0%. The PwC New Zealand cost of capital report has $MHI.NZ at a WACC of 7.8% with the wider NZ market at 9.5%. We believe a discount rate in the 8-10% range is appropriate. We have chosen the top of this range to reflect the more difficult current retail trading environment.
• Terminal Growth Rate: 3.0%.

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

Play with our assumptions – what does your analysis say?

Disclosure: None