Arthur Barnett takeover offer shows the importance of nta

By Peter V O'Brien

Friday 16th August 2002

The takeover offer from Arthur Barnett's major shareholders for the Dunedin-based retailer put attention again on the appropriate relationship between earnings a share, net asset backing, share market price and the price offered in a bid.

Figures for nta, relative to share price, were considered in The National Business Review on February 15, when it was noted 30 companies' market prices were less than their asset backing and nine stocks sold at less than half nta.

There were 32 companies in that situation last week, with eight at less than half asset backing.

The overall mix differed from February's, with eight of the current list selling above asset backing six months ago and three of those discounted in February now ahead of nta.

Arthur Barnett was on both lists. The share price was 86c in February when nta, after adjustment for intangibles, was $1.80.

A solid price rise just before announcement of a proposed offer saw the stock close last week at 97c when nta was $1.77, based on the latest accounts.

[The actual offer of $1.40 was revealed late on Wednesday - after this article was prepared. See page 36].

Release of a half-year report in March accounted for the change in asset backing.

Arthur Barnett's notice to the Stock Exchange said the offer price would be significantly higher than the then current market price.

Arthur Barnett's current net asset backing is probably different from that at the half-year balance date of February 1, given an extra six months trading and likely adjustments to various items in the balance sheet.

The February 1 figure of $1.77 for nta, was a good starting point to consider the earnings/nta/price relationship.

The company earned $629,000 in the six months ended February 1, compared with $591,000 in the corresponding period of the previous year. That came after a profit of $746,000, before unusual items, for the year ended August 1, 2001.

Comment accompanying the interim report said both Arthur Barnett stores improved their performance, benefiting from greater discretionary spending mainly as a result of increased earnings in the rural sector.

A subsidiary company owns the Meridian Centre shopping mall in Dunedin, which was said to be performing well, maintaining steady growth in both turnover and foot traffic.

Arthur Barnett has yet to report on the year just ended. Assuming an operating profit increase of 15% over the past year (similar to the gain between 2000 and 2001), net profit would be $858,000 and earnings a share 5.92c, rising to 6.9c at profit of $1 million.

The current share price of 97c would be a price/earnings multiple of 14, if earnings a share were 6.9c.

That has to be set against nta of 1.77 plus a probable addition since February 1.

Arthur Barnett's assets are used to generate business in its retail stores, although the Meridian Centre provides additional income from rentals. That rules out any big gains from a break-up.

Potential earnings have to be considered when settling on a "fair" offer price. An offeror also has to put any benefits accruing to private, non-listed ownership into the mix to reach an appropriate price.

Shareholders are unlikely to get net asset backing, because $1.77 would give a price/earnings multiple of 25.6 if the company earned $1 million, falling to 17.1 in the unlikely event of potential medium-term profit hitting $1.5 million (10.35c a share).

The Warehouse basked in an historical price/earning ratio of 33 last week but that would be lower on a prospective basis.

Briscoe Group was on an historic p/e of 24.3 and the next-highest retailer was jeweller Michael Hill on 15.3.

There were considerable differences between Australasian retailers The Warehouse and Michael Hill, national chain Briscoe and regional department store Arthur Barnett.

The company's nta will be considered when setting an offer price, suggesting it would be unwise for investors to ignore that financial indicator when making any equity investment.

That view has particular relevance to stocks selling at a considerable discount to nta, provided there is scope for better utilisation of the assets or a chance to rationalise them.

Problems arise with specialised assets, which can be used for only one purpose, subject to hiving off parts of the enterprise.

Tranz Rail was an example last week. The shares were $2.02 and nta was $4.10 (latest accounts).

Tranz Rail's main assets were rolling stock (locomotives, carriages and wagons), permanent ways (the rail networks) and land and buildings. Assets directly associated with rail transport of people and goods can be used only for those purposes, although sections can be sold as individual items (passenger services, for example).

Tranz Rail's reorganisation involved asset sales, some of which could be at more than book value.

That could apply to other companies whose shares sell substantially below nta. The point should always be part of investors' assessments.

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