Wednesday, 17 December 2008

REF Profit Downgrade

Reverse Corp (REF) today announced that it expected 1H09 NPAT to be in the range of $7.5 - $8.5m or 8 - 9 cents per share. That compares to NPAT of $10.2m in 1H08. Whilst the AUD/GBP exchange rate for the current half has been worse than 1H08, these forecasts clearly demonstrate that REF is experiencing a slowdown in call volumes.

The company also reiterated that they intend to keep their dividend policy of paying out up to 100% of profits in dividends. If we take the mid point of the company's guidance range and assume the company can match it's first half performance in the second half, we come to NPAT for the full year of $16m. That represents a decline of about 20% from last year.

Last month when I bought some more REF shares I said that even if REF cut their dividend by a third to 16 cps for the full year, it would still represent a very attractive yield. Given the new guidance, a full year dividend of 16c per share seems likely as that represents a payout ratio of 92%, well within REF's stated policy and guidance.

An 8c dividend for the first half is in the bag given the guidance, the question is whether earnings deteriorate futher in 2H09.

Punching in a $16m NPAT for FY09, I value the stock at $1.56 per share, that is assuming a dividend payout ratio of 100% going forward and a reduction in ROE from just over 200% to about 180%.

The good news is that the market had already priced in a pretty bad outlook for REF. The realization that buying shares of REF today will earn you a dividend yield in the range of 15% is still an attractive proposition. The longer term issue for REF is can they successfully grow the business through geographic expansion and higher penetration rates in existing markets. To date, the company has had mixed success with it's growth plans.


Dean said...

So how did you arrive at your $1.56 ?
Im a bit of a mug punter when it comes to the share market. However bonds are another matter, im in on a conference call right now with Deutsche who are explaining why they didnt call their sub issue. ( sub spreads on bank paper have pushed out massively as a result, many people are nervous other banks will follow the DB lead ) First time ive heard insto investors swear at an issuer on a conference call - cant remember an investor backlash like this. A lot of people are pulling all call funds out of DB now and any further debt issues will be nigh on impossible to get away unless ridiculously wide. Some are calling this to spell the end of DB in Australia, given their presence here was debatable anyway.

The Fundamental Analyst said...

Hey Deano,

The calculation for REF is a fairly simple one because I have assumed all profits will be paid out as fully franked dividends. Thus you can think of the company in the same terms as a bond throwing off coupon.

The caluclation is then Return On Equity / Required Return (or discount rate x Equity per share. So 180% / 15% x $0.13