I have been gradually working through some of stocks Mel and I bought in our first S&S ISA, since early this year, and trying to value them, in order to i) recognise how impetuous we may have been and ii) help us figure out at what market prices it would be worth topping any of these up.
The latest stock I've analysed using EPV is Manx telecom (MANX). This has turned out to be a fairly unusual one since:
1. It only floated in 2014
2. Although sales growth has been either marginal or non-existent, cash flow / per share has grown quite strongly (well I think it has!)
3. For some reason (Isle of Mann?) the company pays no corporation tax.
4. I think they are continuously restructing themselves
Anyway, what I did was to grab 5 sets of figures, then look over the sales, capexes and A&D entries. Although the sales look fairly predictable, the capex and A&D seem to jump around so I formed average capex and A&D per sales used these against 2017 sales figures to get smoothed out results for these entries. Since I couldn't see any sales growth I did not add back any growth allowances to the adjusted earnings. As per EPV mantra, I ignored any interest charges+gains.
Immediately below is the workings I did to calculate the idealised capex, and A&D. With the capex about 10% higher than A&D they seem quite sane to me.
Earnings power value MANX
Year 2013 2014 2015 2016 2017 Work
Sales 76029 79254 79598 80823 78491
Capex -9947-12294-10116 -5700 -8935
Other Capex -34 -345 -41 -725 -117
Pension contribs -2600 -2100 -1200 -1200 -600
Total Capex -12581-14739-11357 -7625 -9652
Capex/sales -0.17 -0.19 -0.14 -0.09 -0.12 -0.14
Capex for 2017 on average -11168.31
Depreciation 9188 9299 8886 8934 9438
Amoritisation 137 191 193 208 256
Impairment charges 2673.00592.00 0.00464.00 102.00
Total A&D 11998 10082 9079 9606 9796
A&D/sales 0.16 0.13 0.11 0.12 0.12 0.13
Theoretical A&D required for 2017 10089.81
Then I got the EBIT from the 2017 and marvelled at the fact that MANX pay 0% corporation tax! Why - is this an Isle of Mann thing? So to this EBIT I added back the average A&D and removed the average capex, leaving me with the adjusted earnings.
EBIT 13361
Tax rate% 0
EBIT after tax 13361.00
Add back A&D 23450.81
Take off capex 12282.50
Adjusted PAT 12282
Then I looked at the short term cash / debt position, since a firm with excess cash in the bank is a firm with more distributable cash - hence has higher EPV. Since MANX have a sum of cash = about 15% of their annual sales in the bank, I subtracted "finance leases" and "interest rate swaps" current liabilities, and since they also have large amount of LT debt (about 85% of sales), I also removed 8% from this cash position. I'm not sure whether this is an astute measure EPV-wise, and of course, the whole EPV thing is probably a little abstract as is
.But anyway, even after reducing the free cash from £12.3m to £6.5m, this is still a large amount of cash, so (this is a documented technique) I reduced this by 1% of sales since, it is said that business require a minimum of cash of about this order to function day to day.
Finally I added the residual cash and the adjusted earnings to derive distributable cash profits, divided by 8% discount rate to get EPV, and then by the number of shares to form an EPV/share value.
Cash 12341 LT debt
Short term debt -14
Short term debt -290
“Payable in a year long term debt” -5543.04 0.08 -69288
Net cash/short term debt 6493.96
Less 1% of sales from remaining cash -784.91
Distributable cash profits 17991.55
Discount rate 0.08
Earnings power value 224894.32
Number of shares 114810.00
EPV per share 1.96
I'll be very interested if anyone on TLF has any opinions on this e.g. the 0% tax thing, and my consideration 8% of LT debt as worthy of decrementing the overall free cash position.
Matt