Melbourne IT (MLB)

Stock Case Study: Melbourne IT (MLB)

Company profile Melbourne IT is a world leader in domain name registrations and related online business solutions. Established in 1996, and listed on the ASX in 1999.

Melbourne IT began registering .com.au domain names in 1996 and in April 1999 was accredited by ICANN to provide registrar services in the .com, .net and .org domain spaces. Today, Melbourne IT manages more than 6 million domain names and is a truly global domain name registrar which supplies more than 40 different domain name types to customers across the globe.

In addition to its strong organic growth, Melbourne IT has also expanded its business through strategic acquisitions. In 2003, it purchased New Zealand-based domain name registrar, Domainz, which offers corporate domain management, reseller and direct domain services into the fast growing New Zealand market.

In April 2004, Melbourne IT acquired Cogent IPC, a European-based digital brand protection company which specialises in providing services to high profile internet based brands such as those in the airline, automotive, clothing, banking & finance, electrical, IT, furniture and food and beverage industries.

In September 2006, Melbourne IT cemented its position in the online services market with the acquisition of WebCentral Group, incorporating Australia's largest web and application hosting company, WebCentral. This acquisition has given Melbourne IT a significant sales capability within the developing Software as a Service (SaaS) market which provides customers with access to software via the Internet as an alternative to purchasing, installing and maintaining software on local computers.

In January 2007, Melbourne IT enhanced its UK market presence with the acquisition of IDR Management Services, a pioneer in the UK corporate domain management space with an impressive client base of FTSE 100 companies and trademark attorney firms.

In May 2008, Melbourne IT acquired VeriSign Inc's global Digital Brand Management Services (DBMS) business, significantly boosting the company's scale and market share in the digital brand protection and performance market. The VeriSign DBMS business has been integrated with Melbourne IT's existing Corporate Brand Services division to form Melbourne IT DBS.

In the same month, Melbourne IT and Fairfax Digital launched a joint venture called Advantate, a company focused on providing the extensive SME market in Australia and New Zealand simple, cost-effective access to search engine marketing services. Advantate provides SMBs with a single point of access to search engine marketing services from a range of leading providers including Google, Yahoo Search Marketing, Ninemsn and Fairfax Digital networks. Source: http://corporate.melbourneit.com.au Copyright © Colin Nicholson 2010. Please seek my permission to transmit or copy any part of this file other than for your own personal use as permitted by law. This document does not purport to be advice of any kind to any reader. It is intended as a tool for teaching investment through practical examples and using as a basis my investment plan as set out in Building Wealth in the Stock Market. This document has been prepared without knowledge of or regard to the financial plans of any other person. Readers should consult licensed financial, legal and taxation advisers before acting on anything in this document. I am not a licensed adviser.

Earnings and dividend quality Melbourne IT’s earnings and dividend history was as shown in the chart below:

Melbourne IT cents per share 25 EPS DPS 20

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Calendar years ending

Since 2003 there has been a fitful increase in EPS and DPS.

Ratios and assessment I decided to buy Melbourne IT on 3 June 2010. At that time I made this assessment of their key ratios:

Date 2/06/2010 Stock Melbourne IT ASX Code MLB Pre-purchase Checklist Mkt Av Any Assessment Criteria Stock Plan Req Guidance V Plan Price Earnings Ratio 9.58 15.02 2011 up OK Dividend Yield 7.32 3.85 No OK Franking 100% Yes No OK Debt/Equity Ratio 65.9 <60% No Little high Mkt Capitalisation $163m >$100m NA OK 2% Liquidity (22-day Av) $496k Enough NA OK

As noted in the Assessment column, I was seeing Melbourne IT as meeting the requirements of a Value model chart (see below). The only small doubt was the slightly high debt to equity ratio, but I thought this was sustainable for this business

Copyright © Colin Nicholson 2010. Please seek my permission to transmit or copy any part of this file other than for your own personal use as permitted by law. This document does not purport to be advice of any kind to any reader. It is intended as a tool for teaching investment through practical examples and using as a basis my investment plan as set out in Building Wealth in the Stock Market. This document has been prepared without knowledge of or regard to the financial plans of any other person. Readers should consult licensed financial, legal and taxation advisers before acting on anything in this document. I am not a licensed adviser.

and it should be reducing over time. This was not a large company, so liquidity was an issue. I decided not to exceed 2% of capital in this stock.

Chart Analysis MLB - MELBOURNE IT LTD > +5.7% +0.11 to 2.05 M @ M 301299-300610 20.00 MOV AVS 12(0) mnth 1.7712

10.00 9.00 8.00 7.00 6.00 5.00 4.00 3.00

2.00

1.00 0.90 0.80 0.70 0.60 0.50 0.40 0.30

0.20 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

The monthly chart above shows a good example of a value model stock.

Model Value Stage B/out from Accum Already trending? Yes

MLB - MELBOURNE IT LTD > +5.7% +0.11 to 2.05 W @ W 290705-040610 5.00

4.00

3.00

2.00 1.80

1.60

1.40

1.20

1.00 2005 2006 2007 2008 2009 2010

On the weekly chart above we can see a wide accumulation pattern. This was forming the general shape of a descending triangle pattern, which is theoretically bearish. However it looks as though the breakout is upward. Melbourne IT is already trending on the way out of the accumulation pattern. Copyright © Colin Nicholson 2010. Please seek my permission to transmit or copy any part of this file other than for your own personal use as permitted by law. This document does not purport to be advice of any kind to any reader. It is intended as a tool for teaching investment through practical examples and using as a basis my investment plan as set out in Building Wealth in the Stock Market. This document has been prepared without knowledge of or regard to the financial plans of any other person. Readers should consult licensed financial, legal and taxation advisers before acting on anything in this document. I am not a licensed adviser.

Setting the sell stop level The low price in the recent correction was $1.65. I set my sell stop at $1.63, which is quite close. It is shown on the chart by a dashed horizontal line.

Determining position size With reference to the depth screen on my broker’s website, I found that I would probably have to pay up to $2.05, although I hoped with patience to do a bit better than that.

My position size calculations are shown below for the two portfolios.

Portfolio SMSF BON Although Melbourne IT was already trending, I Total Capital 1,843,303 2,338,191 was able to invest 2% of capital inside the 0.5% maximum risk rule. Buy Price 2.050 Sell-Stop 1.630 Risk 0.420 On 3 and 4 June 2010, I was able to buy 18,000 for the SMSF portfolio and 23,000 for % Capital to Risk 0.5 the BON portfolio at $2.00. Maximum Position 21944 27836 By 19 August 2010, Melbourne IT had % Capital to Invest 2 undergone a correction forming a higher Position it buys 17983 22812 trough and risen reasonably strongly above the previous peak: Position allowed 17983 22812

MLB - MELBOURNE IT LTD > -1.3% -0.025 to 1.885 W @ D 020107-190810 5.00

4.00

3.00

2.00

1.80

1.60

1.40 J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D 2007 2008 2009 2010

I decided to raise my stop loss in accordance with my investment plan, because the rally had continued the upward trend to above the previous peak in the trend. The low of the last trough was $1.94. I moved the stop loss up to $1.93. This was very close to the low of the trough. I might not act on a one cent violation, but I would want to look at it closely. Remember that my stop loss guideline is up to 2% below the trough low, which would have allowed me a stop loss as low as $1.90. This is a round number, so $1.89 may have been better, even though it is over 2%.

MLB - MELBOURNE IT LTD > -1.3% -0.025 to 1.885 W @ D 020107-190810 5.00

4.00

3.00

2.00 New stop loss 1.80

1.60

1.40 J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D 2007 2008 2009 2010

By Friday August 27 2010 Melbourne IT was in trouble. It had released a negative report and the price had fallen close to my stop loss. I needed to be watchful:

MLB - MELBOURNE IT LTD > -1.3% -0.025 to 1.885 W @ D 020107-270810 5.00

4.00

3.00

2.00 New stop loss 1.80

1.60

1.40 J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D 2007 2008 2009 2010 Copyright © Colin Nicholson 2010. Please seek my permission to transmit or copy any part of this file other than for your own personal use as permitted by law. This document does not purport to be advice of any kind to any reader. It is intended as a tool for teaching investment through practical examples and using as a basis my investment plan as set out in Building Wealth in the Stock Market. This document has been prepared without knowledge of or regard to the financial plans of any other person. Readers should consult licensed financial, legal and taxation advisers before acting on anything in this document. I am not a licensed adviser.

On Monday 30 August 2010 Melbourne IT fell through my stop loss:

MLB - MELBOURNE IT LTD > -1.3% -0.025 to 1.885 W @ D 011208-300810 2.60

2.00

1.80

1.60

1.40 D J F M A M J J A S O N D J F M A M J J A S O 2008 2009 2010

The low of Monday 30 August 2010 was $1.84. As my stop loss is driven by the low of the bar, all the previous discussion of how close the stop loss should be was now irrelevant. For those who are interested, the close on that day was $1.91, which was also below my stop loss level at $1.93.

I had not been watching the market through Monday 30 August 2010, so I only picked up the stop loss violation in the evening. I sold my holdings in Melbourne IT quite early on 31 August 2010 at an average price of $1.8701 for one portfolio and $1.875 for the other portfolio.

I moved Melbourne IT to my daily watch list so that I could monitor it in case the trend reasserted itself later, when I would consider buying it again.

The end result for the campaign in Melbourne IT was:

It should be noted that because the Total Purchase Cost 36039.60 46050.60 expected upward trend had continued Total Sale Proceeds 33628.11 43081.88 after purchase, I had been able to Dividends 0.00 0.00 raise my stop loss. This meant that Imputed Credits 0.00 0.00 although I risked close to 0.5% of Net Result -2411.49 -2968.72 capital when I bought Melbourne IT, % of capital -0.13 -0.13 The actual loss was only 0.13% of capital.