The Experts

What is your WOW valuation now, Roger?

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With food prices on the way up and Woolies share price on the way down, I have received many requests for my updated valuation (my historical $26 valuation was released last year). Add to that Woolworths’ market announcement on 24 January 2011, and you will understand why I have taken slightly longer than usual to publish.

With Woolworths’ shares trading at the same level as four years ago (and having declined recently), I wonder whether your requests for a Montgomery Value.able valuation is the result of the many other analysts publishing much higher valuations than mine?

Given WOW’s share price has slipped towards my Value.able intrinsic value of circa $26, understandably many investors feel uncomfortable with other higher valuations (in some cases, more than $10 higher).

For a larger image, click here.

Without knowing which valuation model other analysts use, I cannot offer any reasons for the large disparity. What I can tell you is that no one else uses the intrinsic valuation formula that I use.

So to further your training, and welcome more students to the Value.able Graduate Class of 2011, I would like to share with you my most recent Value.able intrinsic valuation for WOW. Use my valuation as a benchmark to check your own work.

Based on management’s 24 January announcement, WOW shareholders can expect:

  • Forecast NPAT growth for 2011 to be in the range of five to eight per cent.
  • EPS growth for 2011 to be in the range of six to nine per cent.

The downgraded forecasts are based on more thrifty consumers, increasing interest rates, the rising Australian dollar and incurring costs not covered by insurance, associated with the NZ earthquakes and Australian floods, cyclones and bush fires. The reason for the greater increase in EPS for 2011 than reported NPAT is due to the $700 million buyback, which I also discussed last year.

Based on these assumptions and noting that WOW reported a Net Profit after Tax of $2028.89 million in 2010, NPAT for 2011 is likely to be in the range of $2130.33 to $2191.20. Also, based on the latest Appendix 3b (which takes into account the buyback), shares on issue are 1212.89 million, down from 1231.14 million from the full year.

If I use my preferred discount rate (Required Return) for Woolies of 10 per cent (it has always deserved a low discount rate), I get a forecast 2011 valuation for Woolworths of $23.69, post the downgrade. This is $2.31 lower than my previous Value.able valuation of $26.

If I am slightly more bullish on my forecasts, I get a MAXIMUM valuation for WOW of $26.73, using the same 10 per cent discount rate.

For a larger image, click here.

So there you have it. Using the method I set out in Value.able, my intrinsic valuation for WOW is $23.69 to a MAXIMUM $26.73.

Of course, I only get excited when a significant discount exists to the lower end of these valuations and until such a time, I will be sitting in cash.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published: Tuesday, February 15, 2011

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