Transcript QAV 110

File name: QAV 110 club

Duration: 1:00:33

Cameron Reilly [00:02]: Welcome back to the QAV podcast. My name is Cameron Reilly. If you’re listening to this for the first time. This is a show where I talk with my mate, Tony Kynaston about how to think like a millionaire Tony’s a very successful investor in Sydney. G’day Kyno.

Tony Kynaston [00:21]: Hey, how are you?

Cameron Reilly [00:22]: I’m good. I just thought at the beginning of the shows now we should do a bit of an intro so people know what’s going on if this is their first time listening. We’re going to talk about Tony’s investment methodology. How he thinks about things. Tap into his brain. But one thing you should know, we say this in every show, you should not take anything you hear on this podcast as financial advice. We’re not financial advisors. Tony’s very very knowledgeable, very very good at what he does. He’s teaching me. I’m a complete idiot. He’s teaching me what he does, you get to listen. But this isn’t financial advice. If you want financial advice go, see a financial advisor. But this is more about financial literacy, education, learning how to think. Like Tony thinks about investing. Not about breeding racehorses because apparently you still suck at that Tony.

Tony Kynaston [01:20]: I do. Yeah. But we have lots of fun. We went to Adelaide on the weekend to watch our horse race in the Australasian Oaks, and a horse that’s called See What She Brings. And I think she ran 14th. She was ranked outsider in terms of bidding, but we thought she might do well. But didn’t happen. So back to the drawing board for her. She’ll win some good races but not this time.

Cameron Reilly [01:42]: Well, let’s talk about picking stocks, instead of picking horses. A few weeks on the podcast. So what we do if you’re brand new is. We talk a little bit about financial news in the markets and then we get down and dirty and we take a company. Pretty much at random off the Australian Stock Exchange and we break down its financials. Tony teaches me what to look at. How to understand its financials. And we put it through Tony’s checklists, that he’s developed over the years. And we decide whether or not we think it’s a good, solid bet as an investment.

Not that you should follow what we do. But just to teach you how Tony thinks about it. A few weeks ago we looked at a company called Apollo Tourism and Leisure. They manufacture, sell, and rent out recreational vehicles. RVs, camper vans, that kind of thing. Based here in Brisbane, I think. And we just talked about how they were, that they were coming up. I think he’d said you’d own them then you sold them and then you bought back in. And we sort of set a bit of a watching brief they were kind of borderline, but I think they just got over the checklist. Turns out in the last couple of weeks, they’ve had some new news and it has not been good for their share price.

Tony Kynaston [03:06]: No, that’s right. So, they did a profit downgrade last week. And to put it in context is what is known as concession season, at the moment. So I guess I was a bit brave in talking about this stock. Going into concession season. Because it’s often when things can come out of the woodwork and surprise you. Particularly on the downside. So it has happened before, to me that this kind of thing has happened. We’re about three months out from the end of the financial year. So it’s around the time when CEOs and boards are starting to get a feel for whether they’re going to achieve their declared targets for the year. And because the ASX has rules on full disclosure. If they’re not going to meet their targets materially, then they have to come out and make an announcement to that effect.

And that happened with Apollo last Thursday, I think it was. Like today’s the sixth of May. So towards the end of April, the start of May. They came out and said they wouldn’t  [inaudible04:08]. And specifically, reading their announcement. What is dragging them down is the sale of new recreational vehicles. And they’re not the first seller of vehicles to come out and say that. Most of the were two listed car dealerships on the ASX. They’ve both come out and said that they are down. This year compared to last year and prior years. And just also recently, there’s a motorcycle dealership which has come out and said the same thing.

So a lot of other companies in the game of selling new vehicles are all having a downturn at the moment. Some economists and some market watchers say that could point to a recession. It’s oftentimes the bellwether or the canary in the coal mine for a downturn in the economy. But you know we’ll see about that. In time, but there is a general trend that’s come out in the last few weeks. That vehicle sellers are not doing good at the moment. And people are pointing to, you know, downturns in property prices. That people who own houses are not feeling as well to do, as they have in the past for property prices are rising. And so they’re slow to replace their vehicles. And vehicles are, are reasonably a discretionary spend if things aren’t looking good for me financially. I might replace my car. Next year, rather than this year.

But if I’m feeling fairly bullish because my house is going up in value, my shares are going up in value or whatever. Now I might bring that purchase forward and change my car over sooner. So that’s the kind of context for that. I think, just in general in terms of the QAV checklist, the checklist kind of good. We did it last time. And now we’ve had a downgrade the checklist, probably won’t be as good. And what I normally do in these situations is to sell the stock because the sentiment is going against it. And then to wait for the next or the financial results to come out and I can do an assessment at that time.

Cameron Reilly [06:15]: Right. If I look at the three-point trend that, we often talk about when we’re doing the checklist. If I look at their graph and look at the three-point trend in their prices. Well, have truly dropped below the three points of the lowest right.

Tony Kynaston [06:32]: Yeah, and I think when we did the checklist originally, we said it was, there was a bit of a hockey stick forming. That the sentiment overall is going down. But it just picked up in the last little time. The last period that we looked at. But that’s turned against us now with these downgrades. So it didn’t keep going, unfortunately. It’s unfortunate too that we’ve used this as one of our first analyses, to get a good score on the QAV checklist. One of the first. But to put that into context. If you have a portfolio that should hold 10, 15 stocks at least. This one’s dropped 30 or 40% in the last week. That would work out as about, you know, a 3 or 4% impact on the overall portfolio. So it’s good to keep things in context with this example as well.

Cameron Reilly [07:18]: One of the things we talked about I think in our last episode. When we were already a little bit cautious about Apollo. I think in our last episode we’re saying that it was the share price has dropped a little bit. And so we will, you were going to be watching it pretty closely. Is whether or not, you say okay well. This is just a blip, a glitch, and we’re going to hold for the long term. I remember when we had Steve Sammartino on. He was saying, he just does an average, dollar cost averaging over time. Whether the markets up or the markets down. That’s not what you would do in this situation. I think you told us this last time. You would actually sell if it’s in decline rather than just hold and say listen it’ll come back and I’m in it for the long haul.

Tony Kynaston [08:02]: Yeah, that’s right. For a couple of reasons. One because the long term can take a while for it to come back to the level that we sold it at. And, generally, you can use the, you can deploy the money in a better situation while you’re waiting. So you still might come back into Apollo tourism leisure. But it will be when the sentiments turned up and we’ve got some more results to analyze.

Cameron Reilly [08:25]: It just strikes me while I’m editing this. That is probably one of the reasons why Tony’s portfolio outperformed Steve Sammartino’s portfolio. If you don’t know what I’m talking about with Steve Sammartino. He’s another mate of mine who is a very successful investor that we had on the show as a guest. Back around episode five or six or something like that. His methodology is very different from Tony’s. He just buys index funds and he’s been doing that for decades. With very good results. But Steve talks about his objective is to achieve, about a 10% on average per annum return, on his portfolio.

Whereas Tony’s objective if you’ve listened to our first couple of episodes is to achieve a 19 and a half percent average annual return. So almost twice what Steve’s going for. Now Steve’s method is very hands-off. He just buys an index fund, and you can listen to the interview and if you don’t know what that is. And he’ll explain it in more detail. It’s very hands-off he just buys it a month in month out. Don’t think about it. Buys it, holds it, pretty much forever. Good times, bad times. Feels like I should break into a song there. But he’s very hands-off with it. Because he didn’t want to think about it too hard. Tony is more hands-on, and in doing so is able to achieve higher results.

Tony Kynaston [09:51]: And in that intervening period. Hopefully, we’ll find something else to put that money to work in. And be in a better position to reinvest in ATL. If and when it gets an upturn. The other thing that I’ve found too is that. Oftentimes the first downgrade is not the last downgrade. So, they’ve had a downgrade now, it’s, it’s before the results are out, I wouldn’t be surprised at all. If they have some other kind of downgrade in those results. But I don’t have a crystal ball I can’t forecast it. And we did mention too, and we’re doing the QAV checklist for ATL. That you got to be careful not to try and catch a falling off. And that’s the situation we’re in at the moment. So I don’t know how far the share price will go down. So I’d rather wait for it to start coming back up. Before we decide to look at it again as an investment.

Cameron Reilly [10:39]: Well, we did reach out to the directors of Apollo after that last podcast. And invite them to come on and have a chat. They may not be feeling inclined to do so at the moment, but maybe they will. If they’re listening to this, we invite them to come on and chat about their business a little bit more. I think that’d be fun.

Tony Kynaston [10:57]: Yeah, I agree. It would be good. It’d be good for them to clarify how things are going, why issue the downgrade. How long do they think it’ll take before things turn around. And also, if they want to debate, my analysis or our analysis too. That’d be fine as well.

Cameron Reilly [11:15]: So, what else in terms of news, did you want to talk about this week, Tony. Before we get into our stock analysis.

Tony Kynaston [11:23]: Well the first thing is. We had spoken about Myer, I think in the last episode. So we need to keep our eye on that. Just to look at sentiment and to watch for any news coming out of Myer with this concession season. I think the shares are down slightly from when we looked at them last time. But not enough to be of concern at this stage. But yeah, let’s keep an eye on them. Two big things have happened in the market in the last week as far as I’m concerned. The first one was Berkshire Hathaway’s AGM as it’s often called Woodstock for capitalists in Omaha, Nebraska.

Cameron Reilly [11:58]: Now, if this is your first episode, and you haven’t heard our earlier episodes. And you’ve never heard of Berkshire Hathaway or Warren Buffett, go check out episodes one and two of our QAV series. Where we talk about them in some detail, essentially Warren Buffett. One of the wealthiest people in the United States. Very successful investor, he and his partner, Charlie Munger have been building their investment company, Berkshire Hathaway since I think the 50s or the 60s, I can’t remember exactly. They are worth many, many, many, many 10s, hundreds of billions. And Tony’s approach to investment has been inspired to a large degree, by the sorts of practices that Warren Buffett teaches.

Tony Kynaston [12:51]: I was very fortunate enough to go along. I think about three years ago when it was the 50th anniversary AGM. And it is just a fantastic day, an amazing day. It’s a real three-ring circus, doors open, there’s a mad scramble to get into the stadium. The stadium holds about 30 to 40,000 people. Omaha Nebraska is not a big town. The stadium there I think is for the college basketball side. Yes, I hold 30 to 40,000 people. It’s full within about 10 minutes. And they have, if you don’t make it into the stadium, they have an overflow. They have overflow rooms and all the hotels in town where you can watch a live feed. So luckily enough I made it in. You sort of mark your seat, and you know put a program or whatever on the seat. But then you go back outside into the Hall of in the hall.

Where Warren Buffett and Bill Gates and other people on the board are wandering around. They’re doing holding contests like tossing newspapers onto the front stoop of one of their kid’s homes. One of the companies in Berkshire Hathaway stable owns. And so, you know, Warren Buffett takes on all comers, because he used to be a paper where he was a kid. Rolls up newspapers and throws them on the porch and you try and get closer to the front door than him. He takes on people, bridges and ping pong, and all sorts of things. So it’s a really entertaining morning. Then you go onto the whole. The first thing they do is show you this movie which they had made for them.

Because I think they own. They own ABC and I think they own one of the big studios like Paramount or something like that. And so he gets all the top directors and actors to produce this film for him. And the one I saw, and it’s not broadcast anywhere else. It’s showing for 15 minutes, 20 minutes at the Berkshire Hathaway AGM. And they burn the print basically. And this is, the one that I saw starred Jamie Lee Curtis. It was, it was trying to convince Warren Buffett he should start investing in tech stocks. And the running gag was that she couldn’t convince him. But in the end, you see, Charlie Munger lying in bed with a big smile on his face. And Jamie Lee is on the phone with Warren. She’s got the sheet pulled up across her naked chest saying, Warren I’ve convinced Charlie. Now it’s over to you.

Cameron Reilly [15:09]: For people who listen for the first time. We’ve talked about this before, but Charlie Munger is how old?

Tony Kynaston [15:17]: 95

Cameron Reilly [15:19]: And Buffett’s. Not much younger than him, right? Late 80s.

Tony Kynaston [15:26]: It’s a very funny show. And they had scenes with him. With Warren Buffett going toe to toe with Mayweather. Floyd Mayweather the boxer. Yeah, because that was a big fight that was going on in Vegas at the time. So it a very very funny show. And that goes straight into the AGM and, like the business part of the AGM takes five minutes. When I say can we approve the minutes from last year? And can we approve the remuneration for directors and blah blah blah? That’s all over and done with.

And then there’s like five or six hours of questioning. And if you want to ask a question, you line up behind one of the six or seven mics in the auditorium. And you get a chance, and the questions, you know, range from the, from the very simple. Like how do I get a job with Berkshire Hathaway too, you know, what’re your insights on China? And through to people who want to protest. You know, does Berkshire Hathaway think it’s killing Americans by owning Coca-Cola. Which is forcing sugar down the throats of consumers and things like that. So is very eclectic and Buffet and Munger are very good at answering the questions. And very thoughtful and insightful. It’s a great, great day to be there.

Cameron Reilly [16:41]: Did you ask a question?

Tony Kynaston [16:43]: I didn’t no.

Cameron Reilly [16:44]: So I have two questions for you. Number one, what did you do to get there. What’s the cost of entry.

Tony Kynaston [16:52]: You got to buy a share in Berkshire Hathaway. And so that’s expensive because their shares have never been split so. [inaudible17:02] in Australian dollars,

there must be around $300,000 per share.

Cameron Reilly [17:06]: Just on the US markets, Berkshire Hathaway shares currently trading on the New York Stock Exchange for $327,765 and 62 and a half cents, US. And on the last day, it went up by 1.1%. So three and a half $1,000 is the price fluctuated in a day. So if you bought it one day and sold it the next day, you pocketed three and a half $1,000 in profit. That’s, not a bad day’s work. So 327,000 US dollars at the moment is still around [crosstalk 17:57]. $400,000 for a share. So my second question was, did you throw your panties on the stage. When you were there. Okay. Because I know, Warren Buffett’s a little bit of a rock star for old white rich guys like you. He’s basically your John Lennon Right.

Tony Kynaston [18:19]: Yeah. Well, John Lennon is my John Lennon, but yeah, no he is, I know what you mean. And yeah, just a great day. And getting back to this year’s AGM. A couple of things. I’ve had some problems with a big shareholder in Kraft Heinz. I think we spoke about one of the episodes at Kraft Heinz valuation that went down about 30% this year. Took a big write-down on its brand values. And just explaining that companies can take some goodwill on their balance sheet which equates to the benefits of owning their brands. Like Kraft & Heinz beans and Kraft ketchup and things like that. They’ve had to write those down because they haven’t been as profitable. In the last little while.

I think from memory Berkshire Hathaway owns about 30%, I think of Kraft Heinz. And so they’ve taken a hit. So the share price is actually [inaudible19:17]. This year by about 7%. And that’s partly because of Kraft Heinz. But also partly because Berkshire Hathaway is sitting on a huge pile of cash. Well, over 100 billion dollars in cash. And Buffett’s always denying the fact that he can’t find places to put it. But last week he did find the place to put some of it anyway. I think he put 10 billion into a company called Occidental. Which is looking to take over another oil company.

Occidental is another oil company in the states. Looking to take over another oil company. And Buffet did a deal where he lent them some money, which has a high-interest rate I think 8%. And has the right to convert that into shares at today’s price. And so that’s possibly one of the reasons why the share price went up over the weekend. But it could also just be that people were enamored with the AGM as well.

Cameron Reilly [20:12]: I was reading some news about Buffett last week. And I found a couple of quotes from him I don’t know how recent they are. But I thought they mapped well to what you’ve been talking to us about on the show. Here’s the quote intelligent investing is not complex, though, that is far from saying that it is easy, what an investor need is the ability to correctly evaluate selected businesses. Note that word selected. You don’t have to be an expert on every company or even many. You only have to be able to evaluate companies within your circle of competence.

This apparently was a quote of his from 1996. His annual shareholder letter. The size of that circle is not very important, knowing its boundaries, however, is vital. Buffett said that maybe 5% of the companies or 10% of the companies. At most within an area inside of his circle of competence, they are something I should be able to understand. Your goal as an investor should simply be to purchase at a rational price. Upon interest in an easily understandable business whose earnings are virtually certain to be materially higher, 5, 10, and 20, years from now, he said. That sounds very familiar.

Tony Kynaston [21:30]: It does but it doesn’t. I mean, ATL is a good example of, why we don’t follow that process. And it turned around and bit us. But certainly, I have no circle of competence in recreational vehicles although selling. My circle of competence, I think, is in using the checklists. Is in using statistics to find good companies to investigate and potentially buy into. And that’s different from Buffett’s. Buffett tends to stick to companies that he sees as having a moat. So that’s something which is a brand that is difficult for competitors to lockdown. And I guess the best definition of a moat is that you can raise prices, even though the economy may not be rising. So it’s the ability to raise prices regardless of whether the economy is going up or down.

And that’s because of the strength of the brand so his circle of competence is in buying companies like Kraft Heinz. They tried to take over I think Gillette during the year. But got rebuffed quite heavily by Gillette and they walked away. And if you look at the companies that he does have big shareholdings in. They’re either insurance companies or companies that have a strong brand. In the retail space and some of them, some of the brands are known in Australia like see’s candy. But they’re pretty strong in the US. And I guess is the third leg to his circle of competence. He’s now, investing heavily in infrastructure. So a large part of Berkshire Hathaway now owns railroads.

And also owns energy companies, which is, I guess, partly why he’s feeling comfortable lending money to Occidental, which is an oil company. And he views his circle of competence in those energy companies in particular in the ones that he already owns has been. He can add value because of the Berkshire Hathaway name because a lot of energy companies, particularly power companies are regulated by. They’re either state governments or federal governments, and they tend to view Berkshire Hathaway as an owner. As being a good operator and someone who cares about not tarnishing their brand. And therefore will do the right thing for their consumers. And so he sees that as being within his circle of competence as well.

Cameron Reilly [23:50]: Anything else you want to touch on before we get into the nitty-gritty.

Tony Kynaston [23:54]: Yeah, one last thing is to say that I think three of the major banks possibly four of them in the last anyway. Three in the last week have produced results. I have had a look at them quickly. During the QAV checklist across one of them. And it’s coming out very poorly at the moment in terms of scores. And that’s not unexpected because the banks are doing it tough. Both from the point of view of having to pay. Large hundreds of millions of dollars back to customers for poor financial advice in the past. And secondly, because the property market is in decline in Australia at least and that’s ripping their incomes. And so their reports haven’t been very strong at all. This last season.

And I just raised it because banks are a large part of the ASX in terms of market cap. I think there are at least two in the top 10 and probably all four in the top 20. In terms of companies by market cap. So they’re very important. I would think most people who have superannuation or run their own superannuation fund would have shares in banks by default. Because they’re a part of the index funds. Like someone like Steve Sammartino will be, will have a large part of his capital tied up in banks, by virtue of the fact that he’s bought the index, and they’re not doing it very, very well at the moment. So, you know, I guess the opportunity is for us to continue to watch them. And when they bottom out to buy-in. But also to steer clear of them and for the moment at least as far as I’m concerned. I mean they’re good companies but they’re facing lots of headwinds at the moment.

Cameron Reilly [25:33]: Yeah, okay good to know and I just wanted to thank all of the people that subscribed to our show. In the last week. For those of you who aren’t brand new, you’ll know the last week we started our premium subscription service. So for people who really want to get into the nitty-gritty of the financials with us every week that’s the show for them and particularly want to thank our very first subscriber who was Hamish from Christchurch. So thank you, Hamish for your support. Thank you to everyone else who jumped in with their support for the show, it’s going to be a fun ride, and I’m looking forward to it.

Tony Kynaston [26:13]: Thanks Hamish. Thanks. Thanks for being our first listener and welcome aboard.

Cameron Reilly [26:18]: Yes. Didn’t you use to live in New Zealand? Where did you live when you’re over there?

Tony Kynaston [26:22]: In Wellington

Cameron Reilly [26:23]: Wellington is that far from Christchurch?

Tony Kynaston [26:25]: Oh, yeah, about an hour’s drive.

Cameron Reilly [26:29]: Which one, which is the one that gets the earthquakes?

Tony Kynaston [26:33]: Wellington initially, but Christchurch had the bad one, about three or four years ago, maybe six or seven years ago. Yeah. And of course, they had the mass shooting. Just recently, which was a terrible thing.

Cameron Reilly [26:45]: A couple of blows.

Tony Kynaston [26:48]: Yeah, but it’s a very pretty town, lovely place. Christchurch, I really liked it, really enjoyed going there. It’s kind of, it’s what’s the biggest city on the south and the south is very very pretty. So if anyone ever wants to go to New Zealand, make sure you. Well, make sure you’re hiring Apollo Tourism & Leisure RV. And go for a drive around the south, it’s really good.

Cameron Reilly [27:09]: Yeah, Chrissy and I keep talking about going over there and just doing some hiking, but just don’t know.

Tony Kynaston [27:16]: I’ve never done the [inaudible27:17] soundtrack, but everyone kept raving about it.

Cameron Reilly [27:19]: Alright well the company that we’re going to look at this week for our Premium subscribers, so you picked this one. MSV is the share code on the stock exchange. Mitchell Services, I did do my research on them. The interesting company they’re mining. This is what the website says Mitchell Services is a leading provider of drilling services to the global exploration mining and energy industries. These services extend across three key drilling divisions exploration, mind services, and underground. Mitchell’s proud history dates back to 1969, since its inception. We have built a reputation for delivering safe, efficient, and proactive drilling services in over 12 countries. Our state-of-the-art fleet is currently positioned in key exploration and mining centers around Australia. Including Queensland, New South Wales, South Australia, and Western Australia. From these regions, we can mobilize to all corners of Australia. As well as internationally, and they’re based here in Queensland. So, why did you choose MSV to look at this way, Tony?

Tony Kynaston [28:32]: Yeah, so we spoke about the way I find leads, in terms of new companies that can investigate. I haven’t investigated Mitchell Services until last week. It’s, but they have just cropped up on the Australian Financial Review 52-week high list. Which gets printed in the paper every week. And they were making a new 52 week high. And that’s something which I look for and then need to do some analysis on them. I think also too, we should mention that. Again, we’re not recommending stocks on this podcast. And some of our listeners, not all of them. But some of them will also have a desire to invest in ethical companies, regardless of what their definition is of ethical. So we should. At the outset side of a company like Mitchell Services. Is inherently involved in the mining industry. And I think from memory, they also do drilling for costing gas companies as well as coal companies. So MSV you might want to do some investigation further. If you are into ethical investing.

Cameron Reilly [29:44]: Yeah, we should do an episode of how to approach that at some point.

Tony Kynaston [29:49]: Sure. Okay so given that we found them. And we started to investigate them. Do you want to go through the checklist?

Cameron Reilly [29:54]:  Yeah, well I guess I’ll just say at this juncture that this is where the free podcast episode ends. We’re going to get into the real nitty-gritty stuff now going through the checklist. That’s for premium subscribers. If you’re listening to the free feed and you won’t listen to the premium feed. Just go up to QAV podcast.com. Then you click on the Register button and you can sign up for the premium fee. We’ll also be sending out a weekly newsletter with some of the stuff that we talked about on the podcast. And a couple of times a year, when Tony’s in town, or down the east coast. We’ll probably do little events for our Premium subscribers. Maybe some drinks, maybe some dinner, a chance to catch up and have a chat. So that’s the plan for the QAV club, as I’m calling it. I hope that’s okay with you. I didn’t ask if you’re okay to have dinner with subscribers, Tony. But I just dumped you in.

Tony Kynaston [30:46]: Of course.

Cameron Reilly [30:48]: I know you like a dinner and a drink, so I figure, you know. It wouldn’t be too hard to twist your arm for that. Okay, so getting into this. Now, my free 14-day trial of stock doctor expired. I did expect them to reach out to me on the basis of this podcast and say hey listen we’ll give you a VIP account, they didn’t. But yet, but it’s good though because I had to go back and try and find these numbers using some of the other methods. Using Reuters and Yahoo Finance that we had discussed several weeks ago. But it was tricky. It was a little bit hard. So I’m interested to compare my numbers to your numbers and see how much they compare. Speaking of numbers I just want to issue a correction for our last episode when we were doing the financials on Meyer holdings.

Our very first subscriber Haymitch emailed us yesterday and pointed out that around the 20-minute mark, where we were doing the price per share to cash per share ratio. We came up with a figure of about 2.65. When it should have been around about five, I think 4.89. He said, how did you come up with that we looked at? We looked at our spreadsheets and we are nowhere there, and it’s probably wrong. I think I actually, in retrospect, pulled that out-of-stock doctor. And it may have been some old data and it didn’t map to the data, rest of the data we were using in the checklist. Tony confirmed it at the time. But I think he was looking at the wrong figure as well. The wrong column.

Fortunately, when you get through to the part of the checklist where you create a score. Based on that particular figure, it wouldn’t have made any difference to how Meyer turned out in the end. Which by the way was positive if you didn’t flow it through. We ended up giving it a positive rating. So anyway, just wanted to issue that correction. I’ll if you go back and download that episode now. I’ll have fixed it. I’ve gone in and did a little bit of clever post-production, editing to fix that. So we don’t confuse people, just in case you’ve already listened to it and you’re like hey, where did that number come from? You can thank Haymitch. We are human, we will make mistakes. But if you point them out to us, we will also correct them at the soonest opportunity. So anyway, back to MSV, Mitchell Services.

Tony Kynaston [33:28]: Sure. I mean it’s a small company. Its market cap is currently 160 million and given its share price has probably doubled in the last year, last two years. Some of the reports you’re looking at. Are for a company worth about 50 or 60 million dollars. You’re not going to find a whole heap of information. Generally available for them.

Cameron Reilly [33:51]: Right. Well, I did go up to also they’ve got their annual report. And try to interpret it as best I could. So let’s compare some numbers. So the first data item that I have on my list is net cash flow. I have negative 1.274318 million.

Tony Kynaston [34:11]: Yeah, that’s the full year, June 18 annual result number. The half-year number for December is 16.32551 million.

Cameron Reilly [34:24]: Right, so you’re using the most recent numbers then.

Tony Kynaston [34:30]: Yeah. Half-year numbers. And that’s the reason why I would think that the big rise in the share price, it’s gone from having negative cash flow to 16 million cash flow in 6 months.

Cameron Reilly [34:41]: So, you annualize that then. Using the last half of the last annual report?

Tony Kynaston [34:47]: Oh yeah, that 16 million number is an annualized number.

Cameron Reilly [34:50]: Okay, so give me that full number again.

Tony Kynaston [34:54]: 16.32551.

Cameron Reilly [34:58]: All right, well, I will put that in my spreadsheet, that’s going to make a huge difference to my numbers. I assume, right. Yeah. No, I could have got that even without stock doctor, right. I could have probably got that off their websites. They would have to put out a half-yearly report, right?

Tony Kynaston [35:19]: They would yeah. I mean I haven’t gone through and checked it. But it should have the cash flow for the half. And then get back to the annual report and get the second half cash flow. Yeah.

Cameron Reilly [35:31]: Yeah. Well, I’ve got on a financial report. I’ve only got annual reports here. Here we have, I did find it. It’s under presentations on their website. Investor presentations not under financial reports. Okay, well, let’s move along, then the next data point I’ve got is the number of shares on issue. Now, this might also change I’ve got roughly 1.7 billion.

Tony Kynaston [36:00]: Yes, I do too 1738.

Cameron Reilly [36:04]: I’ve got 1735. It’s not going to make a huge amount of difference I imagine.

Tony Kynaston [36:11]: No it won’t.

Cameron Reilly [36:13]: Cash per share. Well, based on these new numbers. I now come in at point 09 cents. Point 00 $9. And then the share price when I was doing this last night was point 067. That’s what I’m using, which means my next data point share price, divided by cash per share comes in at $7.12.

Tony Kynaston [36:40]: Yeah, so I get 7.03 is that what you have?

Cameron Reilly [36:41]: 7.03 is close to 7.12. So the next line I’ve got here is looking at the sentiment the share price graph, three-point trend line, looking positive. To me.

Tony Kynaston [36:54]: It is very much so.

Cameron Reilly [36:56]: Now, dividend yield and again this was coming off the last annual report. I had zero, no dividends ever. Have you got something different? No. Okay. No dividends and I also had a price-to-earnings ratio of zero. Getting that off of Reuters and Yahoo Finance.

Tony Kynaston [37:14]: Just let me check that one.

Cameron Reilly [37:16]: Well I probably put zero because they were making, they were losing money, they had zero net cash flow. I just assumed that.

Tony Kynaston [37:24]: Your right. But in the half and they had positive cash flow. The PE reporting with 6.06 it’s currently 11.49.

Cameron Reilly [37:34]: Right I had 11.06 coming up on Reuters and I was like. How the hell can that be right. They’re losing money, by not knowing, not realizing that I had to look at the half-year number. That didn’t change so much. Okay, so I’m going to. That’s TTM trailing 12 months. Is that all right to use?

Tony Kynaston [37:54]: Yeah. that’s fine.

Cameron Reilly [37:56]: Okay, but it was zero before that. Okay. Okay, we’ll do the grading of the software providers later on. Net, equity. now again my numbers might be adding. Because I’m getting it from the annual report. I had net equity of just over 21 million.

Tony Kynaston [38:18]: Yeah, it’s gone up, it’s 33.17343 at the half.

Cameron Reilly [38:24]: And minus one, that 21 million in minus 214 and a half million. So it’s growing.

Tony Kynaston [38:31]: Yeah, but it’s been growing up and down so if I put the half. So the stock doctor has the six-monthly equity. So going back to December 15, it was 20.8, then it drops to 17.9. Then again rose to 18.3 then dropped to 14.6, then 22, then back to 21 and now it’s 33. So it’s up and down.

Cameron Reilly [38:54]: But you’re looking at where it is half by half or annual by annual?

Tony Kynaston [39:00]: Yes, half by half. But even if I look at annual by annual. June 2016, it was 17.9. June 2017 was 14.6. And then June 18 was 2103.

Cameron Reilly [39:17]: Yeah now 33. So, okay, I see, so the one before the 14.6 was high. I get what you’re saying, yeah.

Tony Kynaston [39:24]: Yeah so, it’s not consistent.

Cameron Reilly [39:27]: Okay. Net equity per share, I now have as 0.012.

Tony Kynaston [39:37]: Okay, I’ve got 0.019 but that could just be a difference in our figures slightly, but one-two is fine.

Cameron Reilly [39:43]: Yeah, one cent basically. Roughly one cent a little bit, one to two cents. So now I’ve got the price to book ratio. The share price is divided by that net equity per share number. I’m getting about $5.53.

Tony Kynaston [40:00]: Yeah, I’ve got the equity per share, the share price has been 225% over.

Cameron Reilly [40:06]: Okay, so let me stop the proceedings there and just explain that we then spent about 10 minutes working out why my figures were different from Tony’s figures. At this juncture, and basically, what it comes down to, I think, is this line in the checklist. I have been misunderstanding for the last month. I’m missing a calculation. I don’t know how we got this far without picking that up, but we have. So, there’s an extra step in coming up with this price-to-book ratio. Whereas previously I was doing the price divided by the net. The net equity per share that we calculated in the previous step. The new calculation, so go up and get the new checklist, off of or just this line of the checklist at least. Off of the website to the podcast are coming to you.

The new calculation here is the share price minus the net equity per share. You subtract the net equity per share from the share price, then divide that result. Again, by the net equity per share. And that gives us a number, which is a ratio of how many times the first figure. The difference basically between the price and the net equity per share, the ratio between that and the net equity per share. Okay so learning as we go people if that’s confusing for you join the club. But we’re trying to find a ratio figure here let me try. I’ll try and explain it one more time.

If you’re smarter than me skip ahead 30 seconds. We’re trying to find a ratio here between the book value I guess the net equity per share and the price. And we’re doing that by finding out the difference first of all between the price of the net good and net equity per share. And then dividing that by the net equity per share. Anyway, I’ve done the calculation I’ve done the Excel for you, it’s up in the new spreadsheet. And that’ll hopefully help us get more accurate results. When we get to the end of the checklist. Okay. Now, earnings per share. Now my annual report numbers are going to be off here obviously as well. So Reuters, I already had noted here, Reuters said, 288 million, trading 12 months. What are you showing there?

Tony Kynaston [42:36]: So you’ve got the earnings there. Rather than earnings per share. Earnings per share of point five-eight, which would be.

Cameron Reilly [42:46]: So the earnings is the cash flow or actual income?

Tony Kynaston [42:50]: Actual income. It’s the net income per share.

Cameron Reilly [42:56]: Okay, first half, 2019 revenue of 63.29 million.

Tony Kynaston [43:03]: Where did you get the number from?

Cameron Reilly [43:05]: Their half-yearly report.

Tony Kynaston [43:07]: What is that? Is that EBIT or impact?

Cameron Reilly [43:12]: Revenues it says, first-year revenue.

Tony Kynaston [43:16]: Yep, revenue okay.

Cameron Reilly [43:19]: Yep, is that we’re using your net income?

Tony Kynaston [43:20]: No revenues just sales.

Cameron Reilly [43:22]: Yeah, so you want net income here.

Tony Kynaston [43:25]: Yeah, I was trying to look through their report and see what they’re giving us. It’s either going to be EBIT or NPAT.

Cameron Reilly [43:31]: They’ve got EBITDA, which is 14.2 for the first half.

Tony Kynaston [43:37]: I think that would be the number they’re going to use probably. Let me just check that against stock doctor. It’s different from the stock doctor but okay I’m getting 10.5 as net profit after tax, that’s the number that we need. So I don’t know, it’s in stock doctor as net profit after tax. I can’t see it in the half-year reports.

Cameron Reilly [43:57]: Yeah, this EBITDA. On the page, 12 cash flow summary it’s got income tax paid. But no other taxes maybe.

Tony Kynaston [44:07]: On the p&l.

Cameron Reilly [44:09]: Profit and loss is page 10.

Tony Kynaston [44:10]: Page 10 yeah. That’s what we want. And see the impact number there. That’s the one that the earnings per share are based on. So net profit after tax is 11.728. And if we divide that by the number of shares which was 1.7. billion. Then that ties back to the stock doctor number of point five eight earnings per share. So it reconciles, so make sense.

Cameron Reilly [44:44]: Yep, let me just do my earnings per share. That divided by that. 0.1. What have you got?

Tony Kynaston [44:59]: That’s about half a cent. It’s I’ve got 0.58

Cameron Reilly [45:07]: So 0.68 I’ve got.

Tony Kynaston [45:09]: So it should be a 10.5 NPAT?

Cameron Reilly [45:13]: The NPAT is 11.7. [cross talk 45:18]

Tony Kynaston [45:18]: Okay, it’s different to stock doctors. I’m not sure what that difference is.

Cameron Reilly [45:21]: It’s probably not going to make a huge difference.

Tony Kynaston [45:24]: No, it won’t. And I’m not sure what the difference is.

Cameron Reilly [45:33]: Okay. So earnings per share, roughly point 005, 006 half a cent. Point 06, something like that. So, return on equity, then is earnings, divided by equity. I’ve got point, 557.

Tony Kynaston [45:53]: I’ve got 30.39%.

Cameron Reilly [45:59]: Percent?

Tony Kynaston [45:59]: Yeah.

Cameron Reilly [45:59]: Yeah. So another change to the worksheet there folks. Down I think right about row number 40. Changing return on equity. Return on equity to a percentage. Calculation actually hasn’t changed, and I was using figures from different earnings earlier in the spreadsheet. But anyway change that to a percentage so again when you’re updating your worksheet, make sure you probably just grab the whole thing or at least pay attention to the return on equity row. Okay.

Tony Kynaston [46:36]: It’s the earnings per share divided by the equity.

Cameron Reilly [46:40]: Of the 35%. That’ll do. Future earnings per share, Reuters are saying 70 cents.

Tony Kynaston [46:48]: Really, I don’t have one in the stock doctor. I haven’t included a projection.

Cameron Reilly [46:52]: Sorry. so another post-production note here, we then got confused for quite a while about this figure in Reuters. Whether it was 70 cents or point seven of a cent. Or seven cents. Reuters didn’t really give us. Didn’t really explain what fraction of the currency, we were looking at here. So, we sort of shook our heads and scratched our heads for a while. We ended up deciding that it was point seven of a cent. So $.007. Which sort of maps fairly closely to what the current earnings per share are. The current earnings per share are point 0068. And that meant that the forecast was a little bit above that Tony. And rightfully figured that going from point 00, going from point 0068 cents to 70 cents, was a huge forecast increase. So that’s how we figured Reuters was probably writing it. Not obvious if you look at Reuters though, it just says 0.70, which looks like 70 cents but with point seven of a cent, not point seven of $1.

Tony Kynaston [48:31]: I think if it was 70 cents it just looks realistic to me. And they’re

Cameron Reilly [48:37]: They’re expecting to have massive growth. And they’re not a mining company. They sell mining services. So then it’s not like oh they’ve just hit the jackpot and discovered a new goldmine and they’re going to make $10 billion next year.

Tony Kynaston [48:54]: That’s right. Yeah, that’s one of the good things about a company like this is that the old adage of selling picks and shovels in a gold rush is the way to make money. It’s what they’re doing, they’re not going to be worried about who finds what where. They just going to sell them some drilling services. I think that’s point seven cents per share.

Cameron Reilly [49:14]: Okay, well, you’re the, you’re the expert point 00 $7.

Tony Kynaston [49:21]: Yes. That’s right.

Cameron Reilly [49:22]: Which means the intrinsic value number two is 0.09 versus the intrinsic phase. Number one is 0.03. So, is it a star stock on stock Dr. Tony?

Tony Kynaston [49:37]: No.

Cameron Reilly [49:37]: Is it an A one B two and share analysis?

Tony Kynaston [49:40]: No.

Cameron Reilly [49:41]: Is the share price beneath the stock doctor intrinsic value?

Tony Kynaston [49:46]: We don’t have one.

Cameron Reilly [49:49]: Okay, well,

Tony Kynaston [49:50]: I was given a score of zero out of zero. A score of zero. But there’s no potential for scoring above zero. Because we don’t have a score.

Cameron Reilly [50:00]: Is it below my intrinsic value. If I use a 19 and a half percent hurdle rate. Well, my intrinsic value number one came out at three cents. It’s currently trading at six cents, six to seven cents. So, it gets a zero there. Is the share price below the forecast intrinsic value number two? Yes, it is.

Tony Kynaston [50:31]: Yeah.

Cameron Reilly [50:31]: So we’ll give it a one or two for that. Just a one.

Tony Kynaston [50:34]: Just the one.

Cameron Reilly [50:37]: Okay. Is the share price, less than 30% above the net equity per share, I have the equity per share at one cent, and the share price at seven cents. So, no. It’s massive it’s seven times, the 700% bigger. Does the share price have a positive trend, a positive gets a two. And yes, it does.

Tony Kynaston  [51:06]: Yes.

Cameron Reilly [51:06]: Is it the lowest PE in three years? Well, I have to change this. because I said yes. Because I had zero PE. But now it’s no. It’s got the first PE it’s ever had.

Tony Kynaston [51:19]: Yeah, so again it’s a score of zero, but a potential score of 0, so 00.

Cameron Reilly [51:24]: Really?

Tony Kynaston [51:24]: Yeah, well you’re going to have five or six PEs before you get a trend.

Cameron Reilly [51:29]: Okay. The fact that they never paid one before and they’re now paying one before, doesn’t give them a point?

Tony Kynaston [51:35]: No

Cameron Reilly [51:35]: Okay. Growth of earnings per share, as a percentage over PE as a number. So my EPS is right as well, right based on my numbers point 0067 future EPS is point 007, the growth is point 00024. So that as a percentage is 4%.

Tony Kynaston [51:58]: Okay. And the difference is. As you say I had point 0058 as the current EPS from stock doctor. Okay.

Cameron Reilly [52:05]: Right, now I need to. Now I want to divide that by the PE. Gives me point 003, you’ve probably got a different number, but either way, it’s not higher than 1.5.

Tony Kynaston [52:23]: Yeah, my number is, but I’m happy to use yours.

Cameron Reilly [52:25]: What?

Tony Kynaston [52:26]: Yeah, I get 1.8 because I.

Cameron Reilly [52:28]: Really?

Tony Kynaston [52:28]: Well I had 21% as the growth.

Cameron Reilly [52:31]: Yeah, right.

Tony Kynaston  [52:33]: Yeah, and then putting it out, 11 as a PE. You’re getting up around 20. Yeah,

Cameron Reilly [52:37]: So the difference between, you’ve got an impact of 10 and a half mil. I’ve got an impact of 11.7. That amount of difference changes that number, that highly.

Tony Kynaston [52:49]: Yeah, that’s right. It chances the growth number highly, yeah.

Cameron Reilly [52:51]: So a million dollars. Wow.

Tony Kynaston [52:54]: But we’re talking small numbers, with this company.

Cameron Reilly [53:00]: Yeah. You know, if we don’t have a stock doctor and we’re using numbers based on their half-yearly report. We’re getting a different result.

Tony Kynaston [53:06]: So I think you should go with your numbers. Because they are the ones that are generally available. And I haven’t reconciled stock doctor back to that presentation pecking. When I had a look just before I couldn’t say, chances are, because behind these presentation pecks. They’ll be all the financial p&ls, etc. So I’m guessing there’ll be something that million dollars will be abnormal or something like that. Which they haven’t called out in the presentation peck.

Cameron Reilly [53:33]: Well let’s drill down and see what we get here at the end of the day. See, if your result differs from mine. So I want to do, the next one I have is, does the company have consistently increasing equity? I know that we said before though that, it didn’t. Well, so we’ll give it a zero for that. Is the PE less than the yield? Let me find my PE here.

Tony Kynaston [54:06]: Well, there’s no yield, so zero.

Cameron Reilly [54:07]: Still no yield so zero. Does the dividend yield higher than the mortgage rate? Well, zero is not going to be higher, so zero. Is the financial help from the subscription services stable or increasing, Tony?

Tony Kynaston [54:18]: So it’s increasing, in the stock doctor. It’s going from what they call marginal to strong.

Cameron Reilly [54:23]: You going to give that a one or a two?

Tony Kynaston [54:25]: A two. If it was consistent. I’ll give it a one, but it’s going up. So I’m giving it a two.

Cameron Reilly [54:30]: Is my forecast intrinsic value more than two times the current share price? No,

Tony Kynaston [54:38]: No. Correct. We say the forecast was nine, and currently is in the sixes.

Cameron Reilly [54:44]: Yeah, six to seven. It’s not one of the top 10 ASX stocks. So we’re going to just nullify that 1. 0 out of 0.

Tony Kynaston [54:53]: Yep, that’s right.

Cameron Reilly [54:53]: Is the price per share, divided by the cost per share, less to or equal. Less than or equal to six. I’ve got 7.12.

Tony Kynaston [55:04]: Yep, so do I. So it’s a 0.

Cameron Reilly [55:07]: It’s a zero. Now are the CEO and owner founders? No, but the chairman is the son of the founder, I gave it a one.

Tony Kynaston [55:16]: I give it a two.

Cameron Reilly [55:17]: A two?

Tony Kynaston [55:18]: Yeah, so it’s an owner founder. Like the family, the chairman’s fine. If someone’s on the board and they have a large shareholding and been around for a long time that’s a two.

Cameron Reilly [55:31]: Last one, intrinsic value going up in the future, share analysis.

Tony Kynaston [55:36]: We don’t have an IV share analysis. So it’s a 0 from 0.

Cameron Reilly [55:40]: So we’re nullifying that one. Okay, so I’ve got four that we nulled. Which means instead of 19. I’m calculating my score on 15. For some of the scores, I’ve got a seven. Yep. And I’m going to divide that by 15. I get 47% anyways by score.

Tony Kynaston [56:09]: Okay. My hedge is slightly higher. I had 71%. I’ve got a score for the quota, the PE. Yeah, And I think you have more items on your checklist than I do.

Cameron Reilly [56:25]: Yeah, okay, but I think we worked out that it shouldn’t get out that stuff. But I think you gave that one, a two. And I gave it a zero. So you have 47%, we want it to be higher than 75%. So it’s not and then if I take the checklist score, divide it by, price to cash flow. I’m getting point 07, which is not greater than 0.1. So it’s not hitting my checklist. Did it come out okay in yours in the end?

Tony Kynaston [56:59]: Yeah, it comes out at point one on mine. But I didn’t have if I back out that future EPS. Which I didn’t have when I did my checklist originally last week. I also got point O seven. And the reason why I wanted to do this one was because. If we have gotten on to the share price, earlier. We would have gotten up to point one. So the things which have knocked us down. Are you know about comparing the share price to the IVs for example. So the share price has gotten away from us quickly. Given that it has and its point O seven. It’s still worth being on our watch list, and if the share price retreats. I want to look at it again.

Cameron Reilly [57:37]: Right, okay. All right, so we should put that in as on the watch list. Yeah, waiting for the share price to fall.

Tony Kynaston [57:48]: Or alternatively, when we get the next other numbers, we can have a look at it again.

Cameron Reilly [57:53]: Our next results. Okay, I’ll add that to my little dummy portfolio. Sort of a watchlist section so we can just quickly have a look at where the prices are. Okay. Well, thanks, thanks mate, good one.

Tony Kynaston [58:06]: Yeah, no good, thank you. Thanks for that and let me know what you’re doing next week.

Cameron Reilly [58:10]: Yeah, just for our subscribers to know, next week, I’m supposed to, I might be on jury duty for the next couple of weeks.

Tony Kynaston [58:19]: Can you imagine being on like a history teacher who’s upon a murderer rap. You’ll be the point of order, your honor.

Cameron Reilly [58:28]: Yeah, yeah, look, you just said that Alexander the Great died in 325 BCE. It was actually 323 BCE. And we know that because in Arian… Anyway, so we will still do a show, it may be a day or two later than normal depending on whether or not I get impaneled. So it’s full disclosure, but we will be back next week. Trust us on that. And thanks for subscribing and thanks for listening. Thanks for your input, Tony.

Tony Kynaston [58:59]: Thank you Cam and good luck with your jury duty.

Cameron Reilly [59:00]: Yeah, thanks. And just to wrap up, just to remind you, don’t take anything you hear on this podcast as financial advice. If you need financial advice if you’re thinking about investing, please go see a licensed financial advisor. Neither Tony nor I are financial advisors. The show’s really just about financial literacy and education, learning how a millionaire successful investor. Like Tony thinks about the process of investing what he looks for, this is education, not advice. Even with the dummy portfolio, you know, we’re keeping track of that just so we can see how following the methodology works.

But you should be taking that as a list of stocks to invest in. You know you should be doing your own research and your work or getting some advice. Please do that. If you want to listen to any other podcasts, go check out podcast network.com. If you want to contact Tony and myself, you can find our contact details on the website QAVpodcast.com.au. Would love to hear from you. Love to hear what you think about the show. Love to get suggestions from you, on how we can make it more useful, more engaging. And be nice to each other, we’ll talk to you next time.

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