The longer I invest, the more I become convinced that saying 'No' is the key to success for many of the best investors. While they might talk about buying deep value, robust growth, powerful tailwinds, and what have you, fundamentally what they are doing is saying 'No' to the other opportunities – and there are plenty of attractive ones – that cross their desk.
This requires a discerning eye and the ability to reject things that don't suit your purpose. With that in mind, here are two Australian shares I'm saying no to today:
Ardent Leisure Group (ASX: AAD)
Ardent Leisure reported core earnings of $13 million in its first half earlier this year. There is necessarily some uncertainty due to all the recent asset sales and one-off expenses, but if we assume an identical second half, Ardent is priced at 35 times its core earnings.
Yes, Ardent will be well funded following the recent sales, and the theme parks business will recover in time. However, management has reported both that competition remains high in the Main Event business and that the pace of the Main Event rollout will slow in order to deal with competition and refurbishments. There will be 38 Main Event centres at the end of Financial Year 2017 and a further 8 will be added in 2018.
I estimate that Ardent needs to open another ~20 Main Event centres to cover the Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) reduction post-marinas and health club sale, which is the equivalent of ~3 years growth at current rates. While the recent quarterly update clarified a lot of things, I still think Ardent shares price in too much future growth to make it a standout opportunity today.
DuluxGroup Limited (ASX: DLX)
Worth doing, worth Dulux? Maybe. I've written about DuluxGroup previously and the company has a number of attractive traits, including a sterling track record of performance. Shares are currently priced at around 19x earnings, which does not seem expensive to me and indeed is cheap historically. There are several potential profit drivers for the company including ageing Australian houses and a new manufacturing plant that could reduce costs and/or improve sales volumes.
However, management has suggested that underlying volume growth will be around 1% to 1.5% per annum. Factor in a couple of percent in possible cost savings and/or higher prices per annum and the resulting growth is modest. It's also important to remember that Dulux's strong results have been achieved in a booming Australian construction industry – even during the GFC. Thus investors have relatively modest growth, paired with a possible hefty downside if the housing industry keels over.
While I like the business and think it could be a respectable performer over the next decade it just hasn't managed to seal the deal for me – I'd need a cheaper price. There are a number of other companies that appear to be growing faster, with more attractive economics and similar price multiples that I would prefer to buy first.
