Valuation
To value Massy Holdings Limited, we utilized a free cash flow to equity valuation method. The core result from our valuation was a price target of J$2,850.16 (TT$123.00), assuming an average revenue growth rate over the 5-yr forecasted period of 6.94%, cost of equity of 11.71%, and a long-term growth rate of 4.74%. Cost of equity was determined using an average of the CAPM method and a transposed calculation of equity cost, based on the Group’s stated WACC of 9.60%. Our long-term growth rate reflects an average of the Group’s retention ratio x ROE over the last 5 financial years. Notably, we believe this is a conservative estimate, considering the current higher level of ROE results in a growth rate of 6.06% in FY2021
The share price determined equates to a P/E of 15.00x relative to net profit attributable to shareholders and 18.51x relative to net profit from continuing operations attributable to shareholders. Forward P/E relative to net profit from continuing operations attributable to shareholders under these assumptions equates to approximately 17.44x. At present, the stock trades at a P/E ratio of 12.77x.
Utilizing varying estimates of the Company’s cost of equity and long-term growth rate within a reasonable range (reasonable is determined to be at least 10.50% given the Company’s stated WACC of 9.60%) suggest that the value of the stock could range from J$2,612.09 (TT$112.73) at the low end to J$3,508.56 (TT$151.42) at the high end. Note that this is based on the present financial position of the Company that informs our estimate of growth and therefore, is subject to change once new information is released.
As at February 25, 2022, the stock traded at a share price of J$1,967.25 (TT$ 106.00) which implies an upside of 44.9% in J$ and 16.0% in TT$, relative to the core price target of J$2,850.16 (TT$123.00). Based on our estimate for FY2022 dividend payout of J$66.04 ($2.85), coupled with the current price of J$1967.25 (TT$ 106.00), the Company’s expected dividend yield, assuming purchase at this price, would be 3.4% in J$ and 2.7% in TT$, thereby reflecting a total return of 48.3% in J$ and 18.7% in TT$. Given the return potential and our positive outlook for the Group, we recommend that investors OVERWEIGHT Massy’s stock.
It’s important to note that we opted to use a cash flow methodology as we do not believe any listed company on the JSE is sufficiently comparable to Massy given the Group’s distinct portfolios in areas such as industrial gas distribution and motor vehicle rental and sales in areas such as Colombia, for instance. Even if we were to use a comparable, its closest potential peers are conglomerates. A major difference between Massy and conglomerates lies in Massy’s outright reconstruction of its business to an Investment Holding Company, a change that seeks to eliminate a major issue with conglomerates, i.e., businesses within the Group that are not adding value above WACC to the overall Group. As such, what is typically referred to as a conglomerate discount, in our view, is less likely to be applied to Massy under its new structure. Therefore, we believe Massy’s P/E multiple should be higher than listed conglomerates.
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