Forum Archive Index - September 1999

["Brent Wheeler" <brentw@bwcl.co.nz>]

There have been a lot of "Cash Shells featuring in recent discussions on
Sharechat.  At the risk of teaching people how to suck eggs it may be worth
re-considering a couple of principles involved in valuing such shares.
First the market is most unlikely to value the shares by "dividing the cash
by shares on issue."  The basis for valuation is instead, "what will be done
with the cash and will it be done well.  An extreme example is Strathmore.
The good Mr Watson bought at $0.17, even the wider market was buying at
$0.32.  Current price is around $1.40 for "no apparent reason "since nothing
appears to have changed - to the point of the dreaded "please explain" from
the regulators.  The "apparent reason" was/is a change in expected future
earnings, be that through investments, ownership changes or whatever.

Even in a takeover the bidder must bid what they believe (expect) thay can
do with the cash.  A very conservative valuation approach might say "we can
reasonably expect the cash to be able to earn the average premium for
equities above govt stocks - which in NZ post investor tax is around 8 - 9%.
If this approach was adopted "fair value" might be expected to be be 1.08 or
1.09 times cash divided by shares.  There are other ways.

The point is that share prices are set by investor expectations - not by
dividing balance sheet numbers into shares outstanding.  Share pricing is
always and everywhere a forward looking game.

I realise most "share chatters" like to talk about individual stocks and
their prospects - and I enjoy that, but I think the odd excursion into the
processes which should drive our thinking is worthwhile now and again.

Thoughts?

Brent

Dr Brent Wheeler
Director
Brent Wheeler & Co. Limited
AUCKLAND


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