Imperial is priced for modest growth

Jean’s and my portfolio has a weighty interest in Imperial Holdings. We bought our first tranche way back in 2000, mainly an investment in the late Bill Lynch’s management. When Lynch died, we were tempted to sell and wait for a while how management continued to perform before we bought again. But we suffered from long-term investment inertia and held on while new CEO Hubert Brody’s team restructured the company. While this was being done, the company’s performance slowed before moving back into gear.

The internal rate of return (the annual compound return cash-out to cash-in) on our investment is a shade under 20%. The internal rate of return on Imperial as a counter in our High Yield portfolio is 60% as the timing in its purchase was more opportune.

In mid-September last year (a few months after the High Yield Portfolio acquired its stake) I wrote that the share price of Imperial Holdings, then at R96, was undervalued. You wouldn’t have been able to read this because the newspaper that offered the story decided, for space reasons, not to publish it. I wasn’t trying to push the share price up. I rather hoped that some readers would agree with my view and share in this value.

In June 2011, when market sentiment was warm, Imperial’s share had traded at over R125 following a positive trading update for its latest financial year ended June 30 2011. As expected, when the results were published late in August, headline earnings per share were reported in the upper range of expectation - a year-on-year improvement of 38% to 1 370c from 992c.

I wrote: ‘The share price is something of a conundrum. Why could, even given the weak overall market sentiment, the share price be valued at 24% less than it had been valued back in June? The company had, after all, delivered what had been expected. The somewhat feeble market comment excuse was that the weight of Imperial’s earnings growth had been derived from vehicle sales. In the 2012 financial year, revenue growth from this business operation is probable to be much lower. The Eurozone is under serious debt pressure. The forward view on earnings growth for the group is not optimistic.

‘However, consider this: The share price now has fallen to R96, R2,60 of this fall because a dividend was paid in September. The market rating at this share price is historically a price-earnings ratio of 7, the earnings yield is 14,2% and the dividend yield is 5%. The directors reckon the volatile economic environment will challenge earnings growth in 2012. However, even if Imperial only maintains earnings in 2012, the share seems to me to be undervalued.’

The share price has since then more than doubled to R205 (at Friday’s market close), and I feel it appropriate make another stab at its value.

Headline earnings per share in the financial year 2012 were up 14% to 1 566c. The historical market ratings are a price-earnings ratio of 13, an earnings yield of 7,6% and a dividend yield (gross, i.e. before withholding tax) of 3,3%.

On these ratings, the market probably expects a modest improvement in bottom-line earnings per share in the 2013 financial year and the share is priced for just this. In contrast to last year, in spite of all the current global economic cracks, the market likes Imperial now.

Ben Temkin

(Click on the chart to see it more clearly)

Gaining 86% in the past 12 months (111% from its October low) plus the four-year record of increased dividends, Imperial might be considered a longer-term investment. This is indicated by its price movements, since its low, remaining almost entirely in the upper section of blue speed resistance lines. Presently there is no indication that this steeply upward trend will not continue for the foreseeable future. However, with the addition of the red moving average convergence/divergence indicator - which has just pushed upwards its dotted signal line - a new short-term buying opportunity. has been indicated.

Jean Temkin

Expect the unexpected

Charts are warning that something may be afoot in the share market. The sudden leap in volatility early in the month and the widening of the JSE-Overall’s Bollinger Band in the first half of August are warning of a possible change.

Volatility, when markets or share prices bob up and down in an erratic fashion, indicate uncertainty. During such uncertainty, there is disagreement regarding what a price or index level should be causing an ever-widening gap between buying and selling levels. Disagreement and mind-changing among the buyers and sellers increases market anxiety. I have used a red Chaikin’s indicator to plot a 10-day volatility moving average and rate of change.

Traditionally in August, the silly season in the US and Europe when investors, fund managers and the like head off on holiday, share market volatility is low. But as the chart shows last year was a dramatic exception and this years’ spurt at the start of the month had chart-watchers wondering. Theories regarding volatility often disagree. One theory, that high volatility is seen at the bottom of a major cycle was proved correct last year, but it remains to be seen if this theory, that volatility falls at the top of a major cycle, proves to be correct.

The second indicator, the Bollinger Band also illustrates volatility. The green enveloping lines are plotted at standard deviation levels above and below the blue 20-day moving average. In periods of high volatility the band widens and when volatility is low, it tightens. This time last year the extreme volatility widened the band considerably, but between February and May it was tight.

Currently, the band had widened, almost like an open mouth with the tongue-like moving average and candlestick index plotting moving swiftly upwards. However, in the last few days it has pulled slightly downwards. As the JSE-Overall index had become overbought, this slight easing is not significant. However, my gut feel is that at best we will see another sideways market for a period, but more likely a swift decline in the index level.

Jean Temkin

(Click on the chart to see it more clearly)



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Ben & Jean share their thoughts on the Investment World & its opportunites, plus anything else that they think will be interesting