Thanks @Rick and @mikebrisy

ive just finished the book, and have started playing around with McNiven’s formula.

in general the book is a useful read and a homage to the greatest investing double act the world is likely to see (Buffett and Munger): quality, quality, quality.

But what I particularly like about it is how it puts hard numbers to all those variables that, as vaguely informed investors, we know to really want and to look for, but have a poorly formed structure of how to incorporate into some kind of valuation: (ROE,ROFE, IRR, equity per share [not earnings per share!] pay out ratio etc).

It also forces you to work out what return you are prepared to accept for the kind of company you are potentially investing in. To me this method is more intuitive: this is a high growth company that may not carry on getting a ROFE of 35% for the next 5 years so if I’m going to invest I want to get a 20% annual return vs. this is an established lower risk company that should be able to carry on with the same metrics without too much trouble so I am happy to accept a return of 9% (or whatever). Rather than applying a discount rate - but I accept this is horses for courses

I have used DCFs in the past but have found them too subjective: a percent here or there on TV or WACC can give wildly differing values. The same error can also apply to McNiven’s formula when estimating NROE and payout ratio. Somehow, I feel more comfortable with these variables. Time may make a fool of me on this: I do tend to get excited by new things!

Also, I don’t think it can easily be adapted for those companies that aren’t yet profitable. Please correct me if I’m wrong. So the unprofitable, nearly FCF +ve, “inflection point” companies that Small Cap investors often prize so highly are not served well by this valuation method. That said, (oh man, I used that phrase too! Next I’ll be saying “essentially“ - it’s the new epidemic: @Strawman and @Claude I’m looking at you) this doesn’t bother me too much as my Stock investing habits slowly migrate more towards quality and resilience.

Im going to reverse engineer a few of Ricks valuations and check my methodology but hope to print a few valuations using McNiven’s formula in the coming months.

All in all, one of the better investing methodology books I’ve read, but does require a couple of passes to get the major concepts clear, and a moderate level of understanding of investing terminology.

best wishes

C

@Chagsy I’m pleased you found McNiven’s book useful. What I like about the book and the formula is how it gets you thinking about what really matters when valuing a business.

I’ve tried using McNiven’s formula to value pre-profit businesses on the inflection point by estimating future ROE (based on expected future earnings) without much success. This learning experience has cost me some real dollars, so I tend to avoid using it for pre-profiit businesses.

When I first started using the spreadsheet I sorted the businesses according to the highest investor returns at the current share price, hunting for the best opportunities near the top of the list. Now I sort the businesses by highest future ROE and hunt for the best quality businesses with an acceptable return (some as low as 6% to 7% according to McNivens formula).

I look forward to seeing your valuations and assumptions using McNiven’s formula @Chagsy. Please message me if you would like a copy of my spreadsheet.

Cheers,

Rick

@Rick no pressure, but if ever you wanted to do a walkthrough of the process, let us know and we can line up a zoom meeting. I think a lot of members would find it valuable.

@Rick good work and interesting, i use basically the same inputs but move them around to derive an IRR output. I like the way you adjust for risk, many moons ago, i had a hard and high IRR cut-off, which i thought was being conservative. what it actually did was eliminate the quality businesses and skewed my portfolio towards cheap (and in time nasty stocks). the essential ingredients are future ROE, asset growth and adjusting for the risk of the organisation imo, well done on the work.

@Rick , @mikebrisy , @Chagsy , and of course @Strawman

Thanks for the insights on Mcnivens formula. I hadn't looked at it before so will dig in deeper.

In relation to sustaining the high ROE and the future in general for Nick Scali, my thoughts and recent learnings are as follows -

• I shopped both Nick Scali and Plush over the past month for a new couch. Takeaways were there are plenty of cross over options in both style and materials between both stores. So many fabrics, colours and configurations available in each style, that it would be rare they lose a sale to lack of choice! Same ordering and delivery process in both stores. Prices very competitive and the quality seems very good for the price. Some lower cost options in Plush though. And the service was excellent in both - helpful but not pushy. So from a consumer point of view was very happy and as an investor you can see the synergies that have been created with the Plush integration and the staff and process was sustainable.

• Huge whack of working capital in retail is tied up in inventories. But NCK has minimised this by the make to order model. Yes you have to wait 3 months for delivery so if you need it quick, they're out of play. But if you can wait, you get a better couch and exactly what you want. 30% deposit required up front and with a 65% gross margin it means not much cash required to pay factories before they get the full payment on delivery. Hence the warehousing space, excess inventory issues etc are all minimised and working capital is maximised.

• Here in Brisbane I had to drive 25 minutes to our closest store. Not a big deal but there are at least two more major shopping locations closer to us that in time they could open a store. So the target to open around 70 more stores nationally over the next 10 years seems reasonable to me and should be a big growth driver.

• Just this week major competitor Greenlit Brands, who own Freedom and Fantastic Furniture shared their financials in The Australian. (This is who they bought Plush off a few years ago.) On $1 billion of revenue for the year, they booked a $9 million loss. On half that revenue, NCK booked $100 million in EPS in the same period! If you look at net operating cash flow, Greenlit was about 10% of revenue for the year, where NCK was 25%. So clearly they have a moat with the unique business model.

• I attended the AGM in October and found Anthony Scali and the whole team, very approachable, down to earth, transparent and ultimately shareholder friendly. The culture seemed strong.

• In my humble opinion this is one of the highest quality, growth businesses on the ASX. It has maintained ROE of over 40%, gross margin of over 60%, net margins of over 15%, EPS growth of around 20% and with no dilution for at least a decade. And yet you are only paying 14 times PE today. On a look through earnings basis it has outperformed the other "quality growth" stocks on the ASX such as CSL, REA, CAR etc for a decade now but simply hasn't had the multiple expansion they have.

• And a possible future catalyst for some multiple expansion will be when they move into the ASX200 and have all the new passive money flooding in then. I hope that will happen in the next 12 to 24 months.

Happy holder IRL and on Strawman

Thanks @Chagsy@mikebrisy @Solvetheriddle and @Karmast for you kind comments and contributions.

@Strawman I’m happy to give it a shot talking about McNiven’s Formula on Zoom. Perhaps I can talk about why I use it, how I use it and some of the limitations I’ve found in using it?

Is it possible to share a few slides and my screen on an iPad? My laptop is ancient! It’s been a while since I presented using Zoom.

Great go for it @Rick

Of course @Rick -- whatever you think works best. Let me DM you to arrange details.

Looking forward to this!

@Chagsy did you read Market Wise? I can’t seem to find it for sale anywhere.

@jimmybuffalinoI don’t think you can still buy a copy of Market Wise. However, his later book, “Concise Guide to Value Investing” contains the same information but written in a more user friendly and concise version. It’s available on Amazon.

https://www.amazon.com.au/Concise-Guide-Value-Investing-McNiven

Brilliant, thanks!