OK, we’ve talked about what a great business Mader is, but what is it worth? What can you afford to pay for Mader and still make a reasonable return? The market price is no guide, as you can clearly see over the past few years. When Mader was trading on a PE of 9 in 2021 it was too cheap. Now Mader is trading on a PE of 32 times earnings (guidance $million / 200 million shares x 32 = $5.90), is that a reasonable price to pay? The market thinks so, but the market is not always right. It was wrong when Mader was on a PE of 9, so it could be wrong now.

Let’s assume Mader consistently returns 30% on share holder equity for 10 years. If the share price equaled shareholder equity value and all earnings were reinvested into growth your return would be 30% per year.

That’s not the case. You are currently paying $6 for 50 cps of equity in the business (PB 12). So, in effect your return is 30% per year on 50 cps, and 74% of earnings are reinvested at the 30% rate. The remaining 26% of earnings are paid out as dividends returning you c. 1% fully franked.

One way of working out the intrinsic value of Mader shares is to consider future returns based on current shareholder equity, future ROE, the percentage reinvested, your dividends and your franking credits. You also need to consider what total return you would be happy with investing in Mader, accounting for the risks. The higher the cost price the lower your returns will be.

Currently a government backed term deposit is returning 5%, so you would require a decent premium over this to compensate for additional risks in owning a cyclical mining services business, perhaps a premium of 3% to 5% for Mader.

McNiven’s StockVal Formula considers all these things and works out a valuation based on your required return. Alternately, you can use the formula to arrive at an estimated return based on the current share price. I do this in Excel.

At the current share price of $6, forward ROE of 30%, equity of 50 cps, 74% of earnings reinvested, and including 100% franking credits, I get a return of 7.9% per year. If you are happy with a premium of 3% over a term deposit for the additional risk, and you can’t find a higher return elsewhere, than you could pay $6 today.

Personally, I would prefer a higher premium to take on the additional risk, say 5%. Using McNiven’s StockVal formula and a required return of 10%, the valuation is $4.00. I’m not saying this is the value, but you get the idea.

I can see why the market is paying $6 per share for Mader. So, that’s the valuation I’ll give it.

Disc: Not held