Qualiport

By Bruce Jackson (TMF Googly)

Kilburn, London -- Who put the rocket under the share price of EMAP? (EMA). On Thursday, the shares jumped 58p to 1418p, a new all time high. I couldn't find any news surrounding the surge, but I am not complaining. In typical fasion, the shares dropped back a bit today on a big up day for the market.

It is worth noting that EMAP is now challenging Rentokil Initial (RTO) as our biggest holding. We have invested an extra £300 odd into EMAP, courtesy of the rights issue, and this has helped bridge the gap between the total pound values of the respective holdings. Together, these two companies now represent roughly 37% of the entire portfolio.

This means that, to some extent, the gains or losses of the Qualiport will be dependent on the movements of those two shares. The 80/20 rule says that 80% of your gains will come from 20% of your shares. We're seeing that theory in action with the Qualiport. When the share price of Marks & Spencer (MKS) moves, because it only represents about 8.5% of the portfolio, it's not going to affect the total returns all that much. Even still, it would be nice to see some of the laggards putting in a spurt in an attempt to catch the runaway leaders. They should be envious, if nothing else!

Next Tuesday we see results from one of our poorer performers, Independent Insurance (IIG). A profit warning back in November, due to yet more flood damage claims -- which are completely out of the company's control -- saw the shares drop back sharply. IIG also announced that they were writing off £5m of costs incurred due to their failed foray into the financial services market. The decision not to pursue this option was given at the time as being largely due to the state of the stock market, which was just bouncing off its October 1998 lows. Now, with the market having recovered, this looks like it was a bit of short-termism from IIG. On the other hand, you could say it was better for IIG to concentrate on its core insurance activities rather than diversify into an area in which it has far less expertise.

The market is expecting IIG's earnings per share (EPS) to be slightly up on last year's normalised earnings, at around 14p. Insurance companies, however, should be assessed on their total net asset value, and the company said in November that they expect that to be roughly 12.5% ahead, barring no adverse movements in their investment portfolio. Well, as we all know, the stock market had a roaring end to 1998, so there is a chance that their net asset value increase could top 12.5%.

Key comparison numbers will be:

-- 1997 underwriting profit of £21.3m

1998 will undoubtedly see this decline, as IIG have already announced a total of £18.5m of weather related losses, and this will come straight off their underwriting profit.

-- 1997 net realised investment income & gains of £43.8m

1998 could easily better this, as at the half year stage the company had already racked up gains of £38.5m.

-- 1997 net asset value of £223.9m

Any increase in this is essentially a product of the underwriting profit and investment returns, plus the movement in any unrealised investments. As I said above, this is the key figure when assessing an insurance company's performance and valuation.

One final point before we leave IIG -- the Chairman Michael Bright usually buys yet more shares in the company on results day. He is almost guaranteed to do this again next week, because not to do it would send out the wrong signals. The share price had a nice little jump today. Perhaps we could see a decent set of results next week. Join the lively and informed discussion about IIG on its message board. We'll cover the results here next Wednesday.

Yesterday, Dell Computer Corporation (Nasdaq: DELL) announced a strategic alliance with IBM (NYSE: IBM), worth US$16 billion over 7 years. This will help facilitate our company's move into higher margin products. There is already more to Dell than personal computers, and this reaffirms that.

On Monday afternoon, our time, Dell's shares will open at half their weekend closing price. This is because they are splitting their shares 2 for 1. Over the past few years, Dell has consistently done this when the share price has reached US$100, as it did not so long ago. It does not affect the underlying valuation, because on Monday we will suddenly own 74 Dell shares.

Qualiwatch

We'll continue today with the valuation of Vodafone (VOD), the leading mobile telecommunications company in the world. Last Friday, we saw that the company could potentially come close to jumping our 15% compound growth hurdle. This was using what I call the "quick and dirty" 10 year earnings per share valuation tool. It helps me get a ballpark figure.

Last night's Daily Fool touched on return on equity (ROE). Warren Buffett considers increasing corporate ROEs as one of the factors instrumental in driving the share market forward in recent years. He's no mug at this investing game, so we ought to take notice of what he says.

I have calculated Vodafone's average ROE at 26.1%, after adding back £1.361b of purchased goodwill to the equity base. Dividends paid represent about 43% of net profits, meaning 57% of profits are retained in order to grow the business. As time goes on, it is expected that this retention ratio will increase, firstly because Vodafone is forecast to quickly grow profits, and secondly because the company has plenty of growth opportunities and needs the cash to invest in those.

I have whipped up a basic ROE valuation model based on the following assumptions:

March 99 equity base -- £1.851b
10 year ROE -- 28%
Retention ration -- 65%

Extrapolating that out over 10 years, we see profits in 2009 of £2.759b. Whack a price to earnings ratio (P/E) of 30 onto that, and you get a total value of £82.772b. Add on £5.445b worth of dividends over that 10-year period, and you get a total return of £88.217b. Compared with the current market capitalisation of about £35.7b, your 10 year compounded annual growth rate (CAGR) is 9.5%. This falls some way short of our 15% hurdle. Using these assumptions, the share price would have to fall all the way back to 700p for the 15% CAGR hurdle to be jumped. Personally, I can't see that ever happening, but stranger things have happened.

Next Wednesday, we will look at one final valuation model, which is a bit more aggressive than the ROE method above. At the moment, it looks like we aren't going to buying Vodafone anytime soon.

Have a great weekend, Fools. All comments and thoughts, as usual, to the Qualiport message board.

Company Change    Bid
DELL   -$2.00   $78.00
EMA      0.00    13.55
IIG     -0.02     2.11
MKS     -0.14     3.79
PIZ     -0.05     7.35
RTO     -0.04     3.95
ULVR    +0.01     5.95

Qualiport Stocks

Last Rec'd  Total #  Company     In At   Current  Change
 19/12/97    783     Rentokil     2.55     3.95    54.9%
 17/04/98    169     EMAP        11.34    13.55    19.5%
 04/11/98    245     Pizza Exp    7.93     7.35    (7.3%)
 27/01/99     37     Dell (US)  $89.25   $78.00   (12.6%)
 17/07/98    298     Unilever     6.72     5.95   (11.5%)
 27/10/98    755     Indep Ins    2.58     2.11   (18.2%)
 11/05/98    368     M & S        5.54     3.79   (31.5%)

Last Rec'd  Total #  Company     In At    Value     Change
 19/12/97    783     Rentokil   2046.53  3601.80  1046.32
 17/04/98    169     EMAP       2052.57  2737.10   395.78
 27/01/99     37     Dell (US)  2007.42  1749.09  (258.33)
 04/11/98    245     Pizza Exp  1966.34  1800.75  (165.59)
 17/07/98    298     Unilever   2052.54  1773.10  (279.44)
 27/10/98    755     Indep Ins  1972.64  1593.05  (379.59)
 11/05/98    368     M & S      2054.11  1394.72  (659.39)


Cash:                                    £1,711.43
Current Total :                         £15,852.09

Total Invested:                         £16,184.62
Profit/(Loss) :                           (£332.53)

Value Per Share

                    Day      Month      Year      
Qualiport          0.04%    -3.91%     -5.70%
FTSE 100          -0.21%     2.58%      2.82%
FTSE All Share    -0.13%     3.19%      4.04%

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For an explanation of Value Per Share accounting, please click here.