David Jones Takeover and Valuation Summary


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Clients of invast.com.au have asked them for their thoughts on the David Jones takeover offer. Invast figured it was a fair price, fully valued and highly likely to proceed. Get to know their own valuation of David Jones in this report.

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David Jones Takeover and Valuation Summary

  1. 1. Invast Insights Week Commencing April 28, 2014
  2. 2. www.invast.com.au | 1800 468 278 This week we look at the following topics: 1.0 Trade review on the Dow Jones & monthly outlook 2.0 David Jones takeover & valuation summary 3.0 Technical outlook on Japanese Yen crosses 4.0 Upcoming client only webinars 5.0 Invast’s NEW daily Forex podcast channel
  3. 3. www.invast.com.au | 1800 468 278
  4. 4. www.invast.com.au | 1800 468 278 1.0 Dow Jones monthly outlook The following note was published by Chief Market Analyst Peter Esho to clients on 7 April. Here it is with more detail. It’s always difficult to pick the top of the market. Many analyst, advisers or fund managers point to periods of time where they have been right in picking an upward or downward point but many of these guys won’t show you instances where they have made a call and got it wrong. Hindsight is always correct! When I look at markets, I take on board all the fundamental and technical informa - tion but the most importance part of the trade is having my own conviction. I follow my instincts. Taking action is the most important part of becoming a successful trader.
  5. 5. www.invast.com.au | 1800 468 278 Sometimes doing nothing is the best decision, but not in this instance. I think global stock markets will continue to rise over the next few years but I feel that the US market is running out of puff and might be due for a small correction as part of an ongoing upward trend. The worst case scenario is that I’m wrong, the best case is we back this conviction that I have and capture some trading profits. Let’s explore the way I would trade this. 1. My first assumption is that I can be incorrect, there is a good chance that I don’t get my conviction right. I don’t pretend to be perfect. It’s not about ‘being right’, it’s about making money. If I get things wrong, I need to be brave and disciplined enough to take a loss. I then set my stop loss level – the maximum amount of money I am willing to lose if my conviction is incorrect and the market moves against me. This level will dictate what my reward target is. Without risk, we cannot forecast reward. If you don’t factor in the chance that you are incorrect you will eventually find it difficult to trade
  6. 6. www.invast.com.au | 1800 468 278 successfully like the pros. 2. The US market and particularly the Dow Jones Industrial Average hit an all- time high recently. Sure the economy is recovering, but things are far from perfect. The US Federal Reserve has been pumping the financial system with cash and this has fuelled investment across all risk assets, particularly US dollar dominated ones like stocks. I learnt a very important lesson from one of my mentors many years ago – an investor who has successfully been trading the markets for more than 40 years – his advice was not to fight the Fed when they pump money. 3. But what about following the Fed when they withdraw the money? I wasn’t experienced enough to ask him that those many years ago. Perhaps I will the next time I bump into him. Following the Fed the other way seems to make sense to me. I think eventually the US Federal Reserve will have to start warming the market to higher interest rates. It will need to do this without sacrificing the fragile recovery in the economy but based on recent data,
  7. 7. www.invast.com.au | 1800 468 278 things are not as desperate as they were a few years ago. Every central bank needs to ensure credibility and the US Federal Reserve needs to start warming the market to the prospect that rates will need to start rising. It has already done this but will continue to do so, the market will listen. The market will start to look forward by around 12-18 months and so the very first sniff that the Fed is more hawkish than expected will see higher rate assumptions and pressure on stocks – which have run very hard. 4. The reason why I think the Dow Jones Industrial Average is a good Sell at the moment is that we had a reasonably unchanged FOMC meeting last week and we are also about to enter into another round of quarterly reporting season. I went through the Dow Jones names each individually, adjusted their market cap weighting, looked at their price to earnings ratios and market expectations around their earnings. I then multiplied index weighting by earnings growth to find the most statistically significant companies to report for the Dow Jones to maintain its current high levels. I highlighted these, most of them will start reporting in a couple of weeks. There could be disappointment out there in the market.
  8. 8. www.invast.com.au | 1800 468 278 5. It’s also worth noting that the riskier elements of the market have already started falling. For example, the Nasdaq Biotechnology sub index was down around 4% on Friday as many names struggled to hold onto their recent gains. The index has now completely given away its 2014 gains, admittedly after running very hard last year. Very few traders successfully pick the top or bottom of markets. I’m not trying to be a hero who wants to pick the market top. I just feel that the Dow Jones can fall by around 8-10% over the next few months while the overall market remains in a decade long overall upward trend. It’s nice to be able to capture this pullback. I’m willing to accept a 2% move against my position if I’m wrong, back to record high levels on the market. My risk reward on this trade will be around 1:5 which is very reasonable. If the market falls by more than 10%, I’ll continue to ride my position and adjust my stop loss on a trailing basis. My target for the Dow Jones on this trade is around 14,985 based on the technical analysis below. Our technical analysis shows resistance at around 16,650 but I’ll round this up by another 100 points to set my stop loss level which is 2% away from the current spot price as I write.
  9. 9. www.invast.com.au | 1800 468 278
  10. 10. www.invast.com.au | 1800 468 278 Figure 1, US30 Daily, Source: Invast MT4
  11. 11. www.invast.com.au | 1800 468 278 In conclusion I reiterate the fact that I’m not trying to call the top of the market here, I just like trading risk reward probabilities going into reporting season. Over the medium term I am more bullish than bearish, I continue to look for buying opportunities but I just feel the risk reward payoff on the Dow Jones at the moment favours a Sell trade with a time horizon of around four to six weeks. The market should find some solid support at around 15,700 or so which is where the 200 moving average is currently sitting. We hope this is the most insightful piece of research you read this week. These are our initial impressions only, please make sure you read all disclaimers at the bottom of this document carefully. If you would like to discuss further, please feel free to contact me on the details below. 2.0 David Jones valuation summary Many clients have asked what we think of the David Jones takeover offer – is it a fair price, is it fully valued and if we think it is likely to proceed successfully. We completed a valuation review once the news came out, as per the screen shot and notes below.
  12. 12. www.invast.com.au | 1800 468 278
  13. 13. www.invast.com.au | 1800 468 278 Normally we wouldn’t publish our valuation thoughts in this way but the image above shows our working – just like in high school or university where each line is required in order to get full marks for answering the question. We want you to learn our way of thinking. It’s not all about fancy charts and computer models, sometimes business valuations are as simple as this image below.We attach our notes and why each calculation is performed. The whole point here is that the David Jones offer is reasonable, basically in line with the type of ballpark premium you would expect from a foreign company to get the deal over the line. If we assume the 18.8x times multiple is correct, that would represent roughly a 30% premium to a 14.5x price to earnings ratio which is really where David Jones should be trading. This explains why the Board has endorsed the offer and entered into an arrangement to get things rolling. We think the South African listed Woolworths group who pitched the deal knows very well the property valuation upside to David Jones’ portfolio and has figured if it can successfully
  14. 14. www.invast.com.au | 1800 468 278 divest these assets there would be some nice surplus cash available to recycle back into the business. It took us five minutes to come to this view, based on the calculations above. Our aim is to get you thinking the same way. We will continue to provide similar type of analysis – outside of the ‘usual’ analysts notes some of you might have been accustomed to by now. 3.0 Technical outlook on Yen crosses In the last report we talked about potential exhaustion of the upside momentum on the AUD/JPY, with resistance between 96.50 and 97.50. The pair did hit 96.50 and immediately found itself rejected by the level. While our longer term view for the pair is still to the upside, as with any rally a correction in the market is inevitable. This week we are anticipating this correction to occur. Short term outlook - The rejection at 96.50 is within 10pips of the Daily 161.8% Fibonacci Extension and being a psychological level, we had anticipa -
  15. 15. www.invast.com.au | 1800 468 278 ted some loss of momentum due to profit taking to occur around this level. We also noted AUD/JPY reliance on AUD/USD strength for guidance and the lack of momentum in AUD/JPY in the past week is directly tied to the sideways movement in AUD/USD between 0.9200 and 0.9300. A technical correction could be triggered by a daily close below 95.25, where the current 23.6% Fibonacci retracement is located. Support to the downside is located at 94.50 where the 38.2% Fibonacci retracement is located, followed by 93.85, where the 50% Fibonacci retracement and the Ichimoku kijun-sen overlaps. Stochastic oscillator is also coming off the 80 level, a sign that the pair is becoming overbought and due for a technical correction. Overall in the medium-short term, the trend remains to the upside. This is evident from price above the Ichimoku cloud and the chikou-span indicating a bullish sentiment in the market compared to 26 days ago.
  16. 16. www.invast.com.au | 1800 468 278 Figure 2, AUD/JPY Daily, Source: Invast MT4
  17. 17. www.invast.com.au | 1800 468 278 Long term outlook - Changes in the short term outlook are very important for our longer term outlook, more so than ever. First of all, the 50% retracement level of the drop in 2013 at 96.00 remains a key resistance that has not seen a weekly close above it. The second concern is the formation of the candle, if AUD/JPY remains within the range of 95.00 and 96.00 this week; a bearish Harami pattern could develop on the weekly chart. While the pair is now trading above the Ichimoku cloud on the weekly chart, Ichimoku cloud is relatively thin until the first week of May 2014. A move below the Ichimoku cloud support (currently located between 92.70 and 93.80) could see the pair reverse all its gains. We are holding off judgement of the longer term view for the AUD/JPY and change our view from bullish to a slightly more neutral stance. We need a convincing close above 96.00 on the weekly chart for our bullish view to be reinstated.
  18. 18. www.invast.com.au | 1800 468 278 Figure 3, AUD/JPY Weekly, Source: Invast MT4
  19. 19. www.invast.com.au | 1800 468 278 Strategy for the week - Because of our neutral stance on the longer term view, we want to focus on the short term strategy. Since we expect a technical correction to occur, we prefer to go long on bounces from support around the Daily Kijun-sen and 50% Fibonacci retracement (refer to figure 4 on the next page), with stop loss just slightly below the 61.8% Fibonacci retracement at 93.00. Target will be an extension of the correction and we are looking for a potential push towards 97.00. Please refer to Figure 4 below for all the key levels on the strategy for the week.
  20. 20. www.invast.com.au | 1800 468 278 Figure 4, AUD/JPY Daily, Source: Invast MT4
  21. 21. www.invast.com.au | 1800 468 278 Invast’s new daily Forex podcast If you are interested in listening to our daily Forex strategy video’s but prefer to do it via a Podcast, then be sure to subscribe to our new iTunes podcast channel. Podcasts are a great way to get all the key information and strategy calls whilst you are travelling to and from work or at any time you are out and about. How to access our new iTunes podcast channel: 1. Open up your podcast app on your iPhone. 2. Click on the search button and type in either of the following: a. Invast b. The Forex indicator 3. View the image below for details on how to do this or go to www.invast.com.au/itunes
  22. 22. www.invast.com.au | 1800 468 278
  23. 23. www.invast.com.au | 1800 468 278 7.0 Disclaimer Please note that you are receiving this report complimentary from Invast Financial Services Pty Ltd (AFSL 438 283). Invast staff members may from time to time purchase securities which are included in this or future reports. The authors of this report may or may not be holding a position in the securities mentioned. Please note that the information contained in this report and Invast's website is of a general nature only, and does not take into account your personal circumstances, financial situation or needs. You are strongly recommended to seek professional advice before opening an account with us. General Disclaimer: This newsletter contains confidential information and is intended only for the person who downloaded it. You should not disseminate, distribute or copy this newsletter. Invast does not accept liability for any errors or omissions in the contents of this newsletter which arise as a result of downloading this newsletter. This newsletter is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell any financial product. Invast Financial Services Pty Ltd is regulated by ASIC (AFSL 438 283 | ABN 48 162 400 035).
  24. 24. www.invast.com.au | 1800 468 278 Risk Warning: It's important for you to read and consider the relevant Product Disclosure Statement, and any other relevant Invast Financial Services Pty Ltd documents before you decide whether or not to acquire any financial products listed in this email. Our Financial Services Guide contains details of our fees and charges. All these documents are available here on our website, or you can call us on +612 8036 7555. CFDs and Foreign Exchange are leveraged products and carry a high level of risk and you can lose more than your initial deposit so you should ensure CFD and Foreign Exchange trading meets your personal circumstances. General Advice Warning: Being general advice, this newsletter does not take account of your objectives, financial situation or needs. Before acting on this general advice you should therefore consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. *Distributed with the permission of Invast.com.au