Eureka Correspondence

Valuation variations, removing franking credits, ethical investing, LNG, and retail investors missing out.

Valuation variations

I manage my own investments and rely on information from several sources including Eureka Report.

Recently I was looking at your share recommendations page and noticed there is a calculation of intrinsic value close to $31 for Woodside (see article). I believe the methodology used from StocksInValue is to use return on equity (ROE) as the prime factor. Eureka Report has a sell recommendation. The current price is about $41.

However, when I look at the intrinsic value calculated by Morningstar the value is close to $50. I believe they use discounted cash flow (DCF) as the prime factor. Morningstar has an Accumulate recommendation.

I don’t know why there is such a difference in the intrinsic value calculated by Eureka versus Morningstar. Who am I to believe?

Name withheld

StocksInValue’s response: Thanks for your letter. Valuations generally differ due to three main reasons: the valuation approach (e.g. equity multiple vs DCF), future year forecasts (e.g. LNG and Oil production forecasts, development and exploration expectations), and the inbuilt assumptions (e.g. LNG/oil price and currency).

In evaluating different valuations, investors should satisfy themselves of the investment thesis and assumptions built into the valuation. More detail for our ‘rationale’ for our chosen inputs is included in our Eureka Report article.

At StocksinValue if an investor does not agree with our adopted variables they may change them to reflect their own view and derive their own valuation.

As Warren Buffett said: “Two people looking at the same set of facts, moreover--and this would apply even to Charlie and me--will almost inevitably come up with at least slightly different intrinsic value figures.”

Please note our Woodside valuation is under review following the announcement of Shell’s sell-down of its 23% stake to 4.5%.

The removal of franking credits

I read with more than a passing interest your articles on the value and the possible removal of franking credits. It came as quite a shock to me that England had a similar system of credits that lasted only a few years. I was also very surprised to learn that the Henry Tax Review recommended the removal of franking credits.

Having been an investor since the mid-1950s, I am fully aware of the harshness of double taxation on company profits when $1.00 of distributed company profits was lucky to leave me 44 cents after tax. At that point in time we were not burdened with Capital Gains Tax.

Should franking credits be abolished I would be forced at my advanced age to consider a change of residency. I notice a number of very successful business people are choosing Singapore as a permanent residence, while some of our well known sports people are choosing the Bahamas. One would assume these decisions are mostly tax driven.

As many of Eureka’s readers are either retired or near retirement, a change in franking credits might well encourage them to consider a change of residency. A few articles on countries with a low or nil tax rates to which dividends from Australia may be received without a deduction of withholding tax may be timely.

Gary Grennan

Ethical investing at Eureka Report

I'm tired of the promotion of coal re developing economies like India. Coal will not survive into the long-term future as an energy source and it is arguably immoral to be promoting it. If the new Indian Prime Minister has any sense he will launch as much as possible into renewables as he has indeed indicated. Perhaps Eureka Report should take a little more seriously the concept of ethical investment and become more of a leader and less of a follower and slave to immediate profit analysis only (see Will India spur a resources revival?).

JH

Choosing LNG exposure

With regards to Tim Treadgold's analysis of the energy pecking order, I have always considered mining as a typical primary production industry.

These industries mainly consist of unglamorous sections, such as meat and grain production, which return reasonable, low but consistent, returns over the long term and the frequent booms (often subsidized by governments) such as tulip bulbs, plantation forests, olives, alpacas and recently iron ore.

The latter are started by a conceived endless demand. Huge sums are expended on stock or mining infrastructure. Supply booms and demand doesn't. Prices drop and high cost participants go broke and disappear, often leaving environmental chaos, or are taken over by the few survivors.

There is a real danger that the same thing is happening in the LNG market with many countries such as Russia, New Guinea, North America and possibly Israel competing with Australia.

I am very happy to hang on to Woodside who are settling down to be one of the low cost producers with the real opportunity to pick up distressed capacity when it inevitably becomes available. In particular, the social and environmental problems facing Santos and other in the coal seam end of the business could make them very vulnerable.

Kyle Matheson

Retail investors missing out

With possible increased activity in the capital markets in the next year or so, a lot of shareholders who have sat waiting and holding shares should be considered by companies when raising additional share capital.

Companies should recognise the dilution effect and offer participation to small shareholders also.

It would be great if one of your writers could write on the effects for small shareholders when a slice of their business is effectively confiscated by the issue of shares to 'qualified institutional investors and sophisticated investors of the merchant banks and other financial adviser firms.

I have today written to the chief executive of Amcom Telecommunications (AMM), David Hinton, complaining about the recent issue announced on Friday last. There was no offer of even a 'crumb' in the form of say a $15,000 Share Plan.

Years ago companies used to have renounceable rights issues or even non-renounceable rights issues. Today many companies seem to just thumb their noses to the majority of shareholders on their register.

There is also the ASX book build but the ASIC/ company regulation around share issues is also total madness.

How do they expect loyalty from all shareholders when they treat them this way?

Name withheld

Abbott’s visit to Canada

Australia has some $1.8 trillion in accumulated superannuation funds. Why is the Prime Minister offering Canadian Pension Funds access to Australian infrastructure investments, when we at home would like the same opportunity to invest in our own country and diversify our portfolios?

DW

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