Wide choice for investors who spot undervalued companies

By Peter V O'Brien

Friday 15th February 2002

Investors who like buying shares whose prices are discounted below their net asset backing had a choice of 30 companies this week.

The share price was less than half nta in nine cases and another 21 companies had a share price to nta ratio of between 0.6 and 1.0.

Figures for nta were taken from The National Business Review's share table but adjusted for later events such as share issues.

The price:nta ratios should be treated cautiously, because there would be cases where "real" asset backing was more than the figure calculated from dividing shareholders' equity by the number of shares on issue.

Adjusted asset backing on that basis could rise again for goodwill factors. It's a value excluded, by definition, from "net" asset backing.

Astute investors would also take account of the nature of assets when assessing the merits of buying discounted shares in the hope of corporate recovery, asset sales or a takeover.

Some assets have specialised uses and others could lose their "value" rapidly if a company was forced to a fire sale for any reason.

Companies involved in technology (or what passes for a technology sector in New Zealand) could have trouble realising the book value of assets if forced to do so.

Meat processors Affco Holdings and Richmond were examples of companies with some (not all) specialised assets.

Affco's share price was 33c and its nta was 41.7c a share, after adjusting for the recent 1:5 share issue at 25c each, involving the issue of 45 million new shares and adding $11.25 million to shareholders equity.

The price:nta ratio was 0.79.

Richmond sold at $2.30 and the latest nta was $3.13, giving a price:nta ratio of 0.73.

Someone could hanker for ownership of a meat-processing company through a takeover, assuming major shareholders were willing to sell.

The straight price:nta ratios could make both companies attractive, although Richmond would be well ahead of Affco on the latest trading and financial information.

Anyone looking at the groups from an asset-stripping viewpoint would have to discount some assets.

Meat processors own land and buildings, both of which are relatively easy to realise. They also have specialised equipment, a fair amount of which is, apart from its scrap- metal value, useless for any business apart from meat processing.

The 30 companies whose shares sold at less than net asset backing included the usual crop of property groups.

They made the list in October 2000 when The National Business Review last considered the price:nta ratio concept, but two companies were excluded this time.

AMP Office Trust and Colonial First State Property Trust both had a ratio of 1.1, just above the 1.0 cutoff point.

Kiwi Income Property Trust's ratio was 0.8, National Property's 0.9, Newmarket's 0.7, and Trans Tasman's 0.3.

Southern Capital has various property-investment activities but the company is also involved in other businesses.

A combination of property and non-property interests, plus the company's general outlook, resulted in a price:nta ratio of 1.9.

There is nothing unusual in property companies having low ratios. Their shares traditionally sell at, or close to, asset backing, but there can still be heavy discounts, as shown in the Trans Tasman case.

Companies in the sector pay a high proportion of their net profit as dividends and regularly revalue properties to market value, thus making the relationship between price and nta realistic.

It would be unusual for anyone who took over a property investment to make a capital killing, unless there were sudden rises in property market values, heavily discounted assets were bought or extraordinarily high gains could be made through cutting administrative outgoings.

Some companies with a ratio of less than 1.0 or 0.5 might be classified as dogs or no-hopers. Carter Holt Harvey hardly comes into either category.

The group's ratio was 0.7 this week.

Anyone thinking of taking over CHH, realising the asset values and making a massive capital gain would need considerable funds (about $1.75 billion at current prices, at least) and the agreement of majority shareholder International Paper.

Neither of those matters would deter a potential bidder who wanted Carter Holt Harvey but there is no way control of the group would change hands at about 70c under net asset backing, which was the difference between the ruling price:nta ratio of 0.7 and the 1.0 which could be described as "par."

An appropriate classification for BIL International (formerly Brierley Investments) can be left to readers. The company's shares sold at a solid discount to nta, the former being 42c and the latter $1.19, to give a price nta: ratio of 0.4, among the lowest on the New Zealand Stock Exchange list.

BIL's majority shareholders seem happy with the current situation and would not be selling at 42c. Pride alone would dismiss such action.

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