Question 1: I have been holding Endeavour [EDV] from the date when they separated from Woolworths (WOW). I would like to know your thoughts for this company over the long term as the share price has been struggling of late and I am considering increasing my position.
Answer: Endeavour (EDV), which is the old Dan Murphys/BWS grog shop business and Australian Hotels, is trading near its 52-week low (closing today at $6.18, against a 52-week low of $6.11). Earlier in the year, it hit a high of $8.40. Perceived as being a defensive stock, it has come off due to slower than expected sales growth (in hotels), pressure on the gaming market, higher costs, in particular labour and higher debt servicing costs (i.e., interest). The sell-off is probably a little overdone, but then again, it is hardly a “must have stock”. For some investors, its poker machine licences don’t allow it to pass the ESG filter. The brokers are marginally positive on the stock. According to FN Arena, the consensus target price is $6.75, about 9.2% higher than the last ASX price. The range of broker targets is from $6.20 through to a high of $7.30. There are 2 ‘buy’ recommendations, 2 ‘neutral’ recommendations and 1 ‘sell’ recommendation.
On multiples, it is reasonably priced – forward multiple of 20x next year’s earnings, prospective dividend yield of 3.5%.
I am a little bit ambivalent on Endeavour. Interesting below $6, a sell over $7.50. A negative that overhangs the stock is that Woolworths still owns 9.1% of the company. They say they have no current intention of selling any more, but last December, they sold a parcel of 5%. History shows that once a company starts down this path, eventually they will sell the remainder of their holding.
Question 2: Although super is tax free for me to withdraw, if my adult children inherit it, they will have to pay tax and Medicare levy on the component in super that is not tax free. To avoid this, in the past I employed the recontribution strategy, but haven’t contributed to super for four years. I believe there are now restrictions based on age and the amount already held in super. I am 65 and retired. Is there a restriction based on how much I already hold in super?
Answer: Yes, you can only make a non-concessional contribution to super if your total superannuation balance is less than $1.7 million. The cap on contributions is $110,000.
To access the bring forward rule, which allows you to potentially contribute up to three years’ worth of non-concessional contributions in one go, your total superannuation balance limits this to: if between $1.59m and $1.7m, a maximum of $110,000; if between $1.48m and $1.59m, a maximum of $220,000 and if less than $1.48m, up to $330,000.
The good news is that with indexation, the limits are increasing on 1 July 2023. The new limits are total superannuation balance between $1.79m and $1.9m, $110,000; balance between $1.68m and $1.79m, $220,000; and balance under $1.68m, $330,000. Concessional contributions, which are the employer’s 10.5% plus any amount you salary sacrifice, are capped at $27,500.
Question 3: I have quite a few shares in copper and gold producer/explorer Aeris Resources (AIS). Could you please enlighten me with your thoughts of AIS as I am thinking of topping up?
Answer: I am not a mining engineer, so I leave the assessment of the economics/feasibility of potential mine development to the experts. The broker analysts, who are paid to know something about this, like the stock. Macquarie has an ‘outperform’ and a target of 70c, Bell Potter a ‘buy’ and a target of 89c, and Ord Minnett a ‘buy’ and target of 90c. Current ASX price is $0.465. If you believe Aeris can execute and confident that the copper price will hold up, then they are probably a ‘buy’ around these levels.
Question 4: On the FN Arena website, brokers give their estimated EPS (earnings per share) forecast and also a target price. Can you tell me how one broker can have a vastly higher EPS forecast yet a lower target price compared to another?
Answer: Firstly, the earnings estimates shown are typically only for this financial year and the next financial year. For a target price (valuation), most brokers use a discounted cash flow (DCF) analysis to calculate this. It will look at forecast earnings over a number of years, typically at least 5. The biggest factor in a DCF is often the terminal value, which is the sum of all future earnings past the 5 years. A second critical factor is the discount rate used to bring these “future dollars” back into “today’s dollars”. So, it is possible that Broker A might have a higher estimate of next year’s earnings compared to Broker B, but a lower target price, simply because he/she has a lower terminal value, or is using a higher discount rate.