Grafton Evaluation - Anthony Jan 2006

Hi Folks,

I copied the format used in Mike and Lynaire's "Simple Investment Principles to Grow Net Wealth (document number 21)" and changed the figures to be for Grafton. Here is what I got....

1. Assess the intrinsic value of a business

First, calculate the historical growth rate in earnings.

"Since going public in 1987, Grafton has increased its adjusted earnings per share at an average annual rate of 28%" (Source: Grafton Annual Report 2004)

2003 to 2004 the increase was 25%
2004 to 2005 predicted increase >20% (Source: interim report 05)

2. Put a value on the likely future stream of earnings

Even though the housing boom may be coming towards an end, Grafton is well positioned to take advantage of the SSIA spending over the next few years on RMI (repairs, maintenance and improvements) Once domestic house building reduces, there is still a lot of public infrastructure to be built, schools, hospitals, train stations etc that will continue the demand for Grafton products.
In the UK, there is a belief that house prices may rise, which would be beneficial to Grafton.

Over the next 5 years, one could safely assume 18% growth (taking 10% off last years figures to be safe)

3. Calculate estimated share price

Share Price = Multiple x EPS

Average multiple of top 10 Irish companies = 15 (Grafton current PE = 18.34)

2004 EPS = 54.2c

Growing this at 18% for 5 years gives ;

2009 EPS = 124c

So Share Price     = Multiple x EPS

                             =  15 x 124c            = €18.60

4. Calculate Return on Investment

Assumptions

• Buy shares and hold for 5 years
• Buy in Feb 2006 at €9.80 + 2% transaction cost       = €9.99
• Sell in Feb 2011 at €18.60 - 0.5% transaction cost   = €17.67
• Receive dividend of €0.71 over 5 years gets you to  = €18.38
• Assuming a dividend yield of 1.4%
  

Rate of Return (before tax) = 14.6%

To achieve a Rate of Return of 12% with the assumptions above, we could afford to pay €11 per share.

Today's share price = €9.65