The O'Brien Column: BIL offers some extraordinary explanations for its 'rationale'

Friday 2nd March 2001

Brierley Investments has made the unusual suggestion that a company's share price should reflect the value of its total gross assets.

A reader who sent The National Business Review copies of documents related to BIL's special meeting in Hong Kong on March 5 was more forthright: "I have read some financial garbage in 31 years of investing in the sharemarket, but the 'rationale' expounded on pages 8-9 of this document takes the cake."

The "rationale" was the company's explanation for consolidating every two shares of 10USc each into one share of 20USc after the current share capital was redenominated into US dollars from New Zealand dollars.

BIL's reasoning seemed to set standard investment analysis and share price evaluation on its head.

It was in two parts. The first said: "The company's share price is, in the opinion of the directors, indicative of a company with total assets having a much lower value than is in fact the case with the company. The company's share price on the SGX-ST [Singapore Stock Exchange] as at the latest practicable date was 25Sc. Based on the audited financial statements of the group as at June 30, 2000, the group had total assets worth $S4015.9 million [$US2316 million], based on an exchange rate of $US1 = $S1.734)."

BIL provided information on 123 companies listed in Singapore, giving the value of their total assets (ranging from $S31.54 million to $S1.27 billion) and the closing price, as at the "latest practicable date," the latter ranging from 24.5Sc to 26Sc.

BIL's share price was 25Sc at the same date.

Another table gave similar information for seven companies with total assets of $S3.32 -$S3.99 billion. Their share prices went from 87Sc - $S6.05.

Then came the addition to longstanding investment analysis techniques: "It can be noted from the above that the company's share price is not commensurate with the share price of companies with a comparable asset base, but rather with the share price of companies with a markedly lower asset base.

"The proposed consolidation of two shares into one is expected to bring the company's share price to a level which is more aligned to the group's asset base. Shareholders should note, however, that there can be no assurance that this can be achieved as a result of the consolidation, nor that such result can be sustained in the longer term."

An argument that consolidation would raise the share price to a level more aligned to the asset base was irrelevant to any standard assessment of an appropriate price for BIL shares.

All things being equal, the share price should double, but net tangible asset backing per share would also double and the relationship between price and NTA would remain the same.

Nothing would happen to historical or forecast price/earnings ratios (assuming the company can produce earnings on which to base a p/e; it lost $US162 million in the year ended June 30, although an interim report for the six months ended December is imminent).

The return on shareholders' equity would be the same, as would the relationship between earnings before interest and tax to total assets and every other ratio in investment analysts' armouries.

An international broking firm uses 14 different ratios in its regular assessments of the Australian sharemarket, for example, but nowhere does it mention the relationship between share price and total gross assets.

BIL had another argument based on a view that its share price was "disproportionate to the current market capitalisation."

It was difficult to see how that could be relevant to any case for consolidating the shares, apart from some possible attempt to "gain face" among the Asian investment community, assuming the latter values such esoteric criteria when assessing companies, but we might as well set out the argument.

"The company's market capitalisation as at the latest practicable date was $684.093 million. The following table illustrates the most recent closing price as at the latest practicable date of certain companies listed on the main board of the SGX-ST with market capitalisation ranging from between [sic] $S578 million to $S796 million."

Share prices of 15 companies in the table went from $S3.48 to 96Sc.

BIL said it could be noted the company's share price was in the lower end of the share price band of companies with a comparable market capitalisation.

The NBR reader added the comment that BIL's price of 25Sc was "off the bottom," the bottom being 96Sc.

"With the proposal to consolidate two shares into one the company hopes to bring its share price out of the lower end of the share price band of companies with a comparable market capitalisation."

To which we may reply, so what? BIL seems to be saying a company's share price, and therefore some strange relationship between price and capitalisation and/or total gross assets, should be based on the organisation's size. Anyone who accepts that argument has to throw out net asset value, price/earnings ratios, yields, various ratios associated with cash flows, asset quality and managerial and directorial ability.

BIL's preliminary report for the year ended June 30 said significant progress had been made against goals set in November 1999, one of which was the establishment of a new culture focused on shareholder value and financial discipline.

Chief executive Greg Terry said the company had a "new team in place operating with a completely new culture." Its investment analysis culture certainly seems to be new.

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