Just-Eat offered to pay £445m (A$867m) for Australian take-away delivery company Menulog. That’s a whopping 371 times earnings (before interest, taxes, depreciation and amortisation). Using last year’s results as a starting point, what does Menulog need to deliver to make that price reasonable?
Our initial calculations of what Menulog needs to deliver were challenged by some Lex readers… and while Lex is never wrong, we are willing to become more right, if given the opportunity. So the analysis below has been changed since it was initially published (the changes are detailed at the bottom for anyone interested).
So maybe things are starting to get a little overexcited in Hong Kong. We notice two recently listed micro cap companies that have had stratospheric rises.
Firstly Yan Tat Group, a printed circuit board manufacturer with revenues of $86m. In 4 days the market capitalisation had gone from just over $300m to a high on Friday morning of $3.2bn. At that high, the share price was up over 3 times versus Thursday’s close. At pixel time, however, the share price was down over one third from Thursday’s close and falling. That is an intraday swing in market capitalisation of $2.5bn.
Missing from the press release on the Kraft Heinz deal is just how much explicit value Kraft shareholders are getting. It’s an odd structure where Kraft gets 49 per cent of the new company PLUS a one-time dividend of $16.50.
Kraft shares have traded up to more than $80.
Lex has a tricky realtionship with go-go e-retail businesses. Their valuations – that is, the relationship of their stock prices to their profits – imply long-term growth rates inconsistent with the normal competitive pressures in retail. So mostly we make surly comments about them. There is, however, another side of the story. Online retail leadership does seem to persist. So in a recent note about Ocado, the UK grocer, we departed a little from our previous dour tone, and tried to articulate the bull case. Here is our summary:
[sceptics about Ocado's valuation] have failed to accept the core principles of online retail investors. Namely that much more of the market will convert to online; that the leader online, because of economies of scale, will never be overtaken by the also-rans; that margins online will expand beyond those of the traditional competitors; and that the bricks-and-mortar leaders will never become digitally competent. Accept this catechism, and all else follows. It is easy to doubt the four together, but in Ocado’s case, no one of them is obviously wrong, either.
There is a technical problem with the “data warehouse” at FT HQ (we are told) and that makes sending out our subscriber email impossible this week. So we’ve posted it here. Onwards!
Last week Lex kicked around the possibility that BT would spin off or otherwise separate its network division, Openreach. BT’s competitors, such as TalkTalk and Sky, depend on Openreach’s wires. They suggest that BT is (to exaggerate their view slightly) under-investing in the Openreach network and using the monopoly profits from it to subsidize its other businesses. It’s not very clear to Lex that a spin-off would lead to better service. But whether it would or not, Claire Enders of Enders Analysis has pointed out another little problem with the spin-off idea: that BT’s mountainous pension liabilities make it effectively impossible. She writes:
In any spinoff of Openreach, the government would have to consider whether to keep the pension fund obligations with BT, spin them off with Openreach, or split them between the two. The pension fund trustees might have to approve the plan, or at least set conditions for it. Crucially, the Crown Guarantee would also have to be considered.
European equities had a ripping start to the year. Is it all down to QE and the weakening euro? Or are there fundamental reasons to keep buying Europe? Join Lex live at noon (UK time) to discuss.
HSBC is struggling to make the big, global banking model work. Earlier this week it cut its return on equity targets. Does TSB, a niche UK retail bank, have a better business model? Or is it impossible for banks of any size to make decent returns? Join us at midday UK time for a Lex live discussion
Amazon’s free cash flow looks great – from a distance. On close inspection, the ecommerce company’s use of capital lease obligations obscures the vast scale of its capital expenditure, This in turn makes free cash flow look much rosier than it would if the true costs of running the business (such as principal repayments on capital lease obligations) were to be included.
For starters: Amazon’s use of capital lease obligations has been increasing a lot:
At Lex, we always have a soft spot for those readers who agree with our views. Thursday’s Lex regarding Dan Loeb’s Third Point and Japan’s Fanuc attracted these comments from Jean Medecin, member of the Investment Committee at Carmignac Gestion, an investor in Fanuc. Carmignac have €50bln AuM.
As long term investors of Fanuc we have always focused on assessing the company fundamentals rather than chasing the shadows of corporate actions. So far we can only rejoice at Fanuc’s performance.
Tuesday night’s result on television broadcast rights for the English Premier League caught everyone off-side. Both sides appear to have overpaid at £5.1bn (£3bn prior), which strongly suggests that the value of sports content, or at least for European football, has not yet peaked.
Sky will pay £4.2bn for the rights to televise 126 games per season from 2016/17, 83 per cent above what it paid previously. Sky not only protected its valued Sunday slots but also took care to gain as many first picks on Saturday as well. BT paid up, lifting their own payments by 30 per cent, though arguably for less. It receives less Bank Holiday slots, which Bernstein notes historically receive higher viewing numbers. Moreover, it will have fewer ‘first picks’ on which games to televise than before (12 vs 18). Their chances of showing the most popular games falls, and they have paid more. Hmmm, no flag?
Sky announced half year results today. Going on the offense in Germany and Italy increased its revenues and adjusted operating profits (17 and 16 per cent respectively). But it is a new game going forward. It is all about new content and how Sky defends its English Premiership League rights in the weeks ahead. Join Lex live at midday (UK time) to discuss.
Apple recorded $18bn in net profit on $75bn of sales in the three months to 31 December 2014.
Where does the company go after posting the most profitable quarter in corporate history?
Join Lex live at midday (UK time) today to discuss
Where do miners sit after the commodity crash?
BHP is a miner with a very serious hobby in oil and gas, but it makes its living from iron ore and copper. That hobby has started to look too much of a luxury since the oil price collapsed last year. On Wednesday it announced cuts to its US shale oil effort, only a few years after entering the space. It wants to reduce exposure to the the areas it cannot control.
But what of iron ore, BHP’s key product accounting for easily half of operating profits? The company doesn’t want to harm its most profitable product. But there are signs that the iron ore market could suffer more this year. Bad news for BHP and its rivals.
Join Lex live at midday UK time to discuss.
No one rings a bell on the day that a given market hits the bottom. That is the reason for owning assets that everyone hates: because you want to be hanging around on the day that everyone stops hating them quite so much, and it is impossible to predict when that day is going to be.
This sums up the argument Lex made last week about copper miners. Everything, from the strengthening dollar to the weakening global economy to short sellers, is lined up against them. So maybe a contrarian bet is in order; if so, pick a low-cost producer so you don’t have to worry about solvency at the same time as you worry about the stock price. In that note, we characterized KAZ Minerals of Kazakhstan as a high cost producer. The company begs to differ, and they sent us the following counter-argument:
UK house prices rose 7 per cent last year, according to Nationwide. Shares in housebuilders Persimmon and Barratt are up by over 10 per cent. Nice profits all round, then. Time to get out while the going is good, or double down in the hope that not even higher interest rates will damage the long term growth story? Join us at midday UK time for a live discussion.
Lex is anonymous, but the cover over our identities is threadbare. We’re right there on our biographies page, on this blog, and elsewhere. Why maintain the pretence? After all, it has a cost. It makes recruiting writers harder when “build your personal brand” is the dispiriting advice offered to journalists worried about the instability of news organizations.
But a little anonymity helps Lex maintain an identity (something not to be confused with anything so vulgar as a brand). The identity is partly stylistic: the column aims for analytic heft, brevity, and wit, with occasional success. It also involves perspective. Lex is on the side of the patient investor first, as opposed to, say, traders, managers, employees, the common good, or capitalism at large.
Deflation has arrived – eurozone consumer prices fell 0.2% in December. Many expect Mario Draghi to expand QE in spite of German protests. A Grexit is not out of the question. Are we headed for another eurozone crisis? Join Lex live at noon (UK time) to discuss.
On Monday, we brought you the story of Linn Energy, the oil and gas producer that slashed its capital budget along with its dividend partially in response to the tumble in oil prices. As we said, Linn is one of the rare “upstream” companies structured as an MLP.
Just how rare?
Chinese local brands are having a tough time. Bad timing for Daimler joint venture partner BAIC (which also has a joint venture with Hyundai Motor of Korea as well as its own in house developed brands) which will list on Friday. Just two days after Chinese automaker Geely announced a profit warning, sending its stock tumbling nearly one fifth, electric car maker BYD is the latest to take a dive. BYD, in which highly regarded investor Warren Buffett has a 10 per cent stake, fell by nearly one half in afternoon trading in Hong Kong. Volumes by the 4pm close were nearly 40 times the prior day’s fifteen day moving average. There has been no news or announcement explaining the fall.
BYD has had a troubled few years, delivering losses in seven out of the past ten quarters. Estimates for 2015 are for the company to deliver earnings per share of Rmb0.76 – just shy of the Rmb0.81 eps made in 2007, and well below the Rmb1.77 achieved in the 2009 peak. Up until today’s fall, it was trading at around 40 times next year’s earnings estimates based on the hoped-for recovery.