Cashing up at MYOB
Recommendation
Last year we happily backed MYOB's management in its efforts to build the business with new services and smart acquisitions. Our faith was eventually rewarded with the share price rising nicely through the year. But, in issue 143/Jan 04 (Hold for the Upside-$1.05) , we highlighted our concerns over the company's rising share price, despite the expectation of a good result for 2003. MYOB subsequently announced a 65% increase in net profit to $8.7m. Furthermore, the company expects sales growth in the range of 13-16% in 2004 and earnings before interest and tax to grow 30-40%. So why sell now if the outlook is so promising?
As usual, it goes back to the price/value equation. This is a stock that fell out of favour-to the point where it was selling at a price much lower than it was worth-but is now very firmly back in investors' good books. To summarise, we believe it's now selling at a price greater than its intrinsic value. It's a classic example of over-reaction on the downside and, as we've seen recently, the upside.
Over the year, 74% of revenue came from Australia, 12% from New Zealand and 8% from America, with the balance from elsewhere. With the Aussie dollar still sitting comfortably above US70 cents, sales growth in the US and Asia will be that much harder to achieve, leaving Australia and New Zealand with most of the responsibility for driving short-term growth.
No wonder, then, that the group is looking to acquisitions. The recently announced friendly merger with Solution 6, although we'd call it a takeover, entails an offer of 0.55 MYOB shares for each Solution 6 share, after Solution 6 distributes 20.7 cents a share to its shareholders. That currently equates to a price tag of around 88 cents per share. Given we slapped an enthusiastic, if poorly timed, SELL recommendation on Solution 6 in issue 141/Nov 03 (Sell-$0.64) , you can probably gauge our opinion of this acquisition by MYOB at a price 38% higher.
Guinness Peat Group, the investment vehicle of wily investor Ron Brierley, has agreed to sell part of its stake to MYOB and Brierley is not known for selling out cheaply.
Continuing to back MYOB is a bet we're not willing to take, particularly given the odds being offered, with the stock trading at a whopping PER of 36 times. This has been a very profitable recommendation for subscribers and we're getting out with our winnings intact. Subscribers should now SELL .