Amalgamated exceeds expectations
Recommendation
When we upgraded Amalgamated Holdings just over two years ago in Hush, and hear Amalgamated's charms (Buy – $7.76) we said 'Based on its fully franked dividend yield of 5%, the lion's share of returns (7.1% of the 9%) will therefore come from dividends and franking credits. This isn't a stock for investors seeking 15% returns but risk averse income investors may find their appetite whetted.'
How wrong we were. The stock has increased 55% since then for a total return (capital gains plus dividends) of 68% excluding the benefit of franking credits. A mix of steady profit and dividend increases with a big increase in its valuation has produced returns that a growth investor would be pleased with considering the 26% return of the All Ordinaries Accumulation Index over the same period.
With the share price bouncing around our Sell price – and rising above it recently – the question now is whether to hang on or sell and move on.
Key Points
Trades at record valuation
Business is performing well
TIme to consider selling
On every normalised valuation measure Amalgamated is trading at a record high. That's understandable, as the company's operating performance has been good, it's got no net debt, it's conservatively managed for the long term, and low interest rates have made the company's steadily growing dividend even more attractive than usual.
There's also a modest growth story. Amalgamated is opening 85 new cinemas and is expanding its suite of hip QT hotels in major cities, such as Melbourne. That should help offset the pain from its regional markets that are suffering from the slowing mining sector, such as Townsville and Gladstone.
The company also enjoyed a bumper 2014 ski season, with the interim profit from the Thredbo resort in New South Wales almost doubling to $17m.
Our expectation is that interest rates will fall further, which may benefit high dividend paying stocks like Amalgamated. But the flipside of low interest rates is that it's a sign of a weakening economy, and even though the company's performance didn't skip a beat during the GFC thanks to the mining boom its stock was far less expensive in 2007.
That means there is currently much less room for disappointment, which might be especially important over the next few years as Amalgamated is highly exposed to discretionary spending, which could fall as the mining sector and the wider economy weaken.
Amalgamated is also capital intensive, as Australian property doesn't come cheap, but even if Thredbo just suffered a dismal ski season the current forecast price-to-earnings ratio of 20 could increase to an even loftier 22. That's a big multiple for a stock that shares much in common with an A-REIT, though it's reflective of the times. So what action should you take?
Action items
First, we're going to stick to the recommendation guide. If interest rates are cut soon, or the company turns in a better than expected full year result, then it's likely the share price will breach the Sell price of $12.50 again shortly. If neither occurs, another good ski season and the opening of some new hotels and cinemas should ensure it happens eventually provided the economy holds up.
Second, we've suggested taking profits as the share price rises was a sensible option, and it remains so. Given the recent strength in the share price and the risks associated with such a high valuation, though, you might now consider selling out entirely, which is what we're doing in the model Income Portfolio. The stock has performed far better than we imagined and we're comfortable potentially leaving a bit of value on the table for someone else.
The fully franked forecast dividend yield has also fallen to 3.6%, which will be much more attractive for some than others depending on your alternatives and personal financial situation.
But until the stock settles above $12.50 we'll stick with Hold, just note that we've got one eye on the exit due to the stock's valuation rather than any major issues with the business itself. We'd love the opportunity to upgrade this well run business again at a cheaper price, but for now we're sticking with HOLD.
Note: The model Income Portfolio is selling 675 shares for $12.05 netting proceeds of $8,133.75.