Question of the Week

A place for hybrids and forward multiples

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Question: Thanks for your comments in the Switzer program on Sky on Monday evening regarding the Medibank IPO. You mentioned the term “forward multiple” a couple of times in arriving at your estimate that the $2 top range price is a bit on the high side. Can you elaborate please?

Answer (By Paul Rickard): It is the price/earnings multiple. I use the word ‘forward’, because it applies to FY15.

Take Medicare as an example:
Share price: $2.00
Number of shares: 2,754 million
Forecast net profit after tax (NPAT) for FY 15: $258.2 million
Earnings per share (258.2/2,754) = 9.38c

Multiple (PE ratio) = 200/9.38 = 21.3

At $1.55: 155/9.38 = 16.5.

Question 2: Your latest article indicates you are a bit of a fan of the hybrid securities market. However, any hint of ASX-listed credit is absent from your income model portfolio. I appreciate everyone’s circumstances differ but do you see a place for hybrids in an SMSF in pension mode for over 60’s and if so, at what levels?

Answer 2 (By Paul Rickard): The ‘income’ and ‘growth’ portfolios we publish are quite deliberately equities only. Further, I consider hybrid securities to be part of my ‘fixed income/bond’ weighting.

Because they are a crossover security, some commentators make the case that hybrid securities should be considered part of your equities weighting. I don’t subscribe to this argument, because while they potentially have equity downside risk, they don’t have equity upside gain potential. Furthermore, most of these securities will have reasonably stable capital prices – the downside risk is possible, but in most cases, unlikely.

And yes – I do see a place for hybrids within an asset allocation – as part of a weighting to bonds/fixed interest – however it would be relatively small.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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