At Valuecruncher we have just completed our most recent review of NZX companies in our dataset. This involves a review of the assumptions we are using in the valuations. We use consensus analyst estimates as t

he basis of our assumptions. For example – consensus analyst estimates of revenues for New Zealand’s largest listed company Telecom New Zealand ($TEL.NZ). Valuecruncher uses these numbers and our own assessments of other valuation assumptions such as the discount rate and terminal growth rate.

At Valuecruncher we then pull all of these variables together and place a valuation on the shares of the companies in our data-set and provide a recommendation. You can either simply look at our valuations – or for all the experts out there, you can change the assumptions we have used and modify the valuation. Modified valuations can be saved and shared.

With the completion of our monthly review of the companies on the NZX (New Zealand stock exchange) we decided to outline what we at Valuecruncher see as the most undervalued (the best buys).

We should note that you can always find a list of the Valuecruncher buy recommendations for the NZX from the most undervalued using our filters. The following list highlights the top five buys based on the latest review of the valuation assumptions.

Valuecruncher’s Top Five Buys On The NZX – June 2009

Number 1

Rakon ($RAK.NZ) is a New Zealand-based designer and manufacturer of high-performance frequency control technology. Valuecruncher currently values $RAK.NZ at NZ$1.87 – 24% above the current share price.

Valuecruncher Interactive Analyst Report For $RAK.NZ

Number 2

Sky Network Television ($SKT.NZ) is a provider of pay and free-to-air television services in New Zealand. Valuecruncher currently values $SKT.NZ at NZ$5.156 – 22% above the current share price.

Valuecruncher Interactive Analyst Report For $SKT.NZ

Number 3

Sky City ($SKC.NZ) is a New Zealand-listed gaming, hotel and entertainment company. Valuecruncher currently values $SKC.NZ at NZ$3.19 – 20% above the current share price.

Valuecruncher Interactive Analyst Report For $SKC.NZ

Number 4

Methven ($MVN.NZ) is a New Zealand company that designs and supplies taps and shower-ware. Valuecruncher currently values $MVN.NZ at NZ$1.65 – 20% above the current share price.

Valuecruncher Interactive Analyst Report For $MVN.NZ

Number 5

Steel & Tube ($STU.NZ) is a New Zealand-based steel and industrial products company. Valuecruncher currently values $STU.NZ at NZ$3.29 – 13% above the current share price.

Valuecruncher Interactive Analyst Report For $STU.NZ

Those are our top five buys for June 2009. You can also always find a list of the Valuecruncher sell recommendations for the NZX from most overvalued up using our filters.

Disclosure: None

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

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.

This week we want to try something new. We want to put some analysis in your hands this week. We are going to try a new feature on the blog – “Stock Of The Week“.

This is how it will work. We are going to identify a stock on Monday (today), provide some information around that stock (but not a valuation) and ask the readers of this blog to complete valuations of the company (using the Valuecruncher valuation tool). On Friday we will look at all the valuations completed for the company and provide our take on the valuation of the company.

Remember – you can be completely anonymous with the analysis. We won’t be making fun of any valuations – we want to hear what people think. We are keen to tap the wisdom of the crowd.

If you are looking for a quick tutorial on how to complete a valuation – here is an example using Microsoft.

Stock Of The Week

We have decided to start with a New Zealand stock this week. Rakon ($RAK.NZ) is a New Zealand-based designer and manufacturer of high-performance frequency control technology. Valuecruncher completed a valuation of the company at the end of October.

Since we completed our valuation the stock has dropped 39% on the back of rough financial results and guidance on future potential financial performance. We thought it was time to get some thoughts from you on what could happen next – and what that means for valuation.

Resources To Assist

Our valuation from the end of October is a good starting point. It gives a view of $RAK.NZ using information from analysts at that time. It is a solid starting point for inputs like discount rates, terminal growth rates and tax. Since that valuation $RAK.NZ has released information about their last six-months of performance and expectations moving forward. This presentation (especially slide 3) gives a good summary of where the company is at today. Some of this information could certainly feed into a new valuation. Finally here is the media take on the $RAK result.

So what do you think? Does the current share price of NZ$1.11 mean the shares look overvalued, undervalued or about right? Complete a valuation – and write some comments on your assumptions. At the end of this week we will review the view of the crowd and add our take.

As always the starting point is the $RAK.NZ company page – Here.

Rakon ($RAK.NZ) is a New Zealand-based designer and manufacturer of high-performance frequency control technology. $RAK.NZ had been a star performer on the NZX since listing in May 2006 (the company was started in 1967). The share price has however dropped significantly over the last 12 months. The current share price is NZ$1.82 – this is $RAK.NZ’s 52-week low. How is this in relation to the intrinsic value of the company’s shares?

Valuecruncher valuation model of $RAK.NZ with interactive assumptions

Valuecruncher produces a valuation of NZ$1.99 for $RAK.NZ. This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is 9.3% above the current share price of NZ$1.82.

Assumptions

• Revenue: Reuters aggregates four analysts covering $RAK.NZ and the mean estimates of 2009 and 2010 revenues are NZ$212.4 million and NZ$270.4 million respectively. For our analysis we have used NZ$210.0 million in 2009, NZ$265.0 million in 2010 and NZ$315.0 million in 2011.
• Profitability: We have used a flat EBITDA margin of 15% to 2011. Reuters has $RAK.NZ‘s EBITD margin at 14.0% last year and an average of 14.75% over the last five-years.
• Capital Expenditure: We have assumed capital expenditures of NZ$20.0 million in 2009 then NZ$25.0 million in 2010 then NZ$20.0 million per annum moving forward.
• Discount Rate: 11.0%. $RAK.NZ is not included in the PwC New Zealand cost of capital report. PwC puts the discount rate (WACC) for the NZ market at 9.5%.
• Terminal Growth Rate: 5.0%.

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

Play with our assumptions – what does your analysis say?

Disclosure: None