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Picking stocks by pegging value - part 2
Trevor Hoey, July 6 2007

Last week CompareShares.com.au brought you the first part in Trevor Hoey's "pegging value" series - to view the article go to Picking stocks by pegging value - part 1.

Following on from last week’s article on how to identify attractively priced growth stocks, we have six selections that fulfil some fairly demanding prerequisites using the proposed price earnings to growth (PEG) methodology.

As indicated last week, the object is to determine what is fair value based on prospective data, in effect earning per share forecast for fiscal years 2007, 2008 and 2009. There is no room in this analysis for yesterday’s heroes – we are looking for the stars of tomorrow, rather than reflecting on what was hot last year.

Running the ruler over companies in this fashion requires a show of faith in analysts that compile forecasts. But companies don’t always live up to forecasts, so to try and minimise the possibility of misguided forecasts undermining our analysis, we have only chosen stocks where there are forecasts provided by two or more analysts. Hence, earnings per share forecasts presented in the data tables are an average of those provided by analysts that cover the companies.

Price earnings ratios are calculated dividing the closing share price as at June 29, 2007 (the last trading day of fiscal year 2006-07) by the earnings per share forecasts for 2006-07. Earnings per share growth is calculated by adding the growth between 2006-07 and 2007-08 to the growth between 2007-08 and 2008-09. Because this covers two years growth the aggregate figure is divided by two, representing the average level of annualised growth.

As indicated last week, this data provides the basis for benchmarking stocks whereby a rating of one represents fair value, more than one represents a premium to fair value and less than one represents a discount to fair value. Our aim is to identify six companies that are expected to achieve annualised growth of more than 20 per cent, but are rated below one.

In compiling the following data we intentionally included a selection of companies that incorporated a diverse range of sectors and a broad spread of benchmark indicators. We have provided a short profile on each company, examining the factors that should assist in achieving strong growth.

Company Name	Share Price 29/06/07	P/E RatioRelative to FY07 forecasts	Average EPS growth FY08/FY09	PEG Ratio (PE/Annual Growth)
Perilya Limited	$4.37	10.6	57%	.19
Bravura Solutions	$1.66	32	75%	.43
RCR Tomlinson	$2.20	13.6	27%	.50
Peoplebank Australia	$1.16	11.4	23%	.50
VDM Group	$2.95	20	37%	.54
BlueFreeway	$2.40	33.3	46%	.72

Perilya Limited

Perilya is emerging as a leading Australian base metals mining and exploration company. The company owns and operates the Broken Hill zinc, lead and silver mine in New South Wales. Perilya’s short term growth will stem from increased production of high grade zinc at the company’s Beltana mine in South Australia. Perilya is also in a position to expand its zinc output as a result of exploration success at nearby areas.

From a PEG perspective, Perilya represents the best value growth stock, but it should be noted that resources companies traditionally trade at a discount to the broader market because of the earnings uncertainty that stems from their exposure to often volatile metal prices.

Bravura Solutions

Bravura Solutions has had a roller coaster ride since listing on the ASX in June 2006. Its share price darted from $1.20 to a high of about $3 in January 2007, but a sharp fall in February accompanied by some tax-loss selling as June 30 approached left it hovering around $1.70.

Bravura’s 2006-07 result is likely to set the tone for the next 12 months as investors attempt to weigh up why the share price of a company with one of the strongest two year growth forecasts is under so much pressure. Bravura provides professional services and wealth management applications to more than 150 financial institutions and its software is used to manage more than $800 billion in funds.

Bravura’s exposure to the high growth wealth management industry has broadened, as the company has quickly grown its European operations. Perhaps there are expectations of some growing pains in the 2006-07 result, but Bravura’s strong position in a niche market that has been boosted by recent acquisitions should see the company find support from long term investors.

RCR Tomlinson

With exposure to the booming resources sector and an increasingly larger proportion of earnings stemming from the design, manufacture and maintenance of equipment used in civil and commercial infrastructure, RCR is ideally situated to benefit from current and medium term economic trends.

In May RCR announced that it had received more than $30 million in new orders. The acquisition of Applied Laser Group that was completed in March 2007 provides RCR with a dominant position in a niche market. Five acquisitions in the last 12 months should play a large part in RCR achieving 2007-08 growth forecasts.

Peoplebank Australia

Strong performances by I/T & T services companies such as Oakton and SMS Management and Technology suggests that Peoplebank, a company that specialises in placing IT & T professionals in executive, contract and permanent roles should be benefiting from strong industry conditions.

Peoplebank has preferred supply relationships with many large companies in the I/T, finance, retail, manufacturing and government sectors. Peoplebank listed on the ASX in 2005, and after achieving significant organic growth the company is poised to complement this with revenues from bolt-on acquisitions.

While nominal growth is expected in 2006-07, the company is expected to enter its next growth phase in the coming two years. The May acquisition of Western Australian based Gryphon consultants should make an important contribution in 2007-08.

VDM Group

There has been a flood of new listings by companies that service the mining industry. Some are trading on P/E multiples that are surprisingly high, but VDM has kept a low profile and appears to represent good value in a hot sector. The other aspect that makes VDM attractive is its diversification. The company is a multi-disciplined engineering and construction business that is involved in mining and commercial infrastructure projects in Australia and overseas.

VDM has been successful in being awarded high profile contracts in the booming Middle East construction market. The May acquisition of three bolt-on businesses together with revenue from its overseas operations should underpin strong growth in 2007-08.

BlueFreeway

BlueFreeway provides a wide range of digital and interactive marketing services in Australia, China, Europe and the United States. This growth market attracts high P/E multiples, but as indicated by BlueFreeway’s PEG ratio, the potential earnings per share accretion justifies the value attributed to the business.

In May, Microsoft offered $US6 billion for aQuantive, America’s largest interactive agency and digital media company. This implied an enterprise value to earnings before interest and tax (EBIT) multiple of nearly 60. By comparison, BlueFreeway’s market capitalisation relative to its 2007-08 EBIT forecasts is 10.7.

Given that the digital and interactive marketing industry is so fragmented, BlueFreeway is well positioned as a first mover to do what Photon did when it led the way in consolidating the non-digital marketing and communications industry.

Disclaimer: The information in this article is general in nature and does not take into account any investor's particular objectives, financial situation or needs. In considering its appropriateness, investors should consult a financial adviser before making an investment decision.

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Trevor Hoey is one of Australia's leading finance journalists, having written for Shares, Personal Investor and BRW magazines. Trevor's broad contact base enables him to find out - and report on - the real story behind what's happening at Australian listed companies. Trevor writes for the Australian Financial Review and AFR Smart Investor magazine.