The O'Brien Column: Property companies among those in a rut

By Peter V O'Brien

Friday 6th October 2000

The list of companies with share prices under $1 and a price to net tangible asset backing ratio less than one this week was almost the same as a year ago, suggesting they are in a rut.

There were 29 companies in that situation on Monday, compared with 23 when The National Business Review made a similar survey on October 15, 1999.

Some of those groups were not listed last year, further confirming the lack of progress for the rest. The list contains seven property companies. There were eight properties on last year's list but Shortland Properties has been taken over and delisted.

It was noted last year that property companies' shares usually sell at, or close to, asset backing, but there will still be some heavy discounts, as there were a year ago.

A price to NTA ratio is the reciprocal of a discount, with, for example, a ratio of 0.50 being a discount of 50%.

The property companies' ratio were: AMP 0.55; Capital Properties 0.92; Colonial 0.95; Newmarket 0.67; Property Leaders ANZ 0.93; Trans Tasman 0.23; National Property 0.80.

Reports from property companies contain similar comments to those of 1999.

AMP NZ Office Trust's preliminary report for the year ended June 30 said the New Zealand economy grew strongly during the year, although there was weakening business and consumer sentiment and lower growth in the second half.

The trust said a growing economy would normally lead to increased demand for property but general investor sentiment was subdued, dominated by concern about the growing disparity between the prime and secondary office property. Tenant activity increased during the year, particularly demand for prime office accommodation.

While the overall market picture told one story there were marked variations between the performance of the different office sectors, reflecting a number of significant trends transforming the way office space was used, how much was used and what was used.

Tenant demand was increasingly favoring prime over secondary space, large over small floor plates and prime locations.

The trust said that reinforced its long held view that the prime office market would outperform the secondary market.

That comment could probably be applied validly to other types and property, whether industrial or commercial.

Identification of potential takeover targets is one reason for examining NTA to share price ratios.

The mere fact that the ratio is low in any particular case does not mean someone will bid for a company, now or in the foreseeable future.

Many of the companies among the 29 have one or more dominant shareholders who could have no intention of selling, the profitability of others might be insufficient and unable to be improved and some of the assets represented in the net asset backing could be very specialised and have a limited market if a company was broken up.

Property companies can be broken up easily but some others on the "under $1 and less than one" list might be unattractive to potential buyers or unlikely to obtain shareholder approval.

The dominant shareholders in Brierley Investments, for example, would hardly be prepared to sell out at, or near, current prices, given the amounts they paid for the investments.

That does not mean they would stick with the company if the share price improved to beyond the cost of investment.

Such a situation would automatically take BIL out of the "under $1 and less than one" list, because the price would be more than $1 as would the price:NTA ratio.

Evergreen Forests is another with a dominant shareholder who would seem unlikely to favour a takeover, unless it became strategic in a wider international context to quit a New Zealand company.

Fletcher Challenge Forests is a different situation. The shares are currently selling for less than half NTA.

The stock represents assets that will eventually be part of the FCL dismantling process. Assuming Fletcher Challenge Forests IS sold, it seems inconceivable (although anything can happen in this world) the directors would accept a price of less than 50% of NTA. There is obviously a question of profitability related to price in such cases but valuation of a forestry company is, or should be, based on a longer period than a year or two.

When those matters are considered it seems worthwhile for investors with a reasonably high-risk tolerance to look at Fletcher Challenge Forests.

There are other ways of dealing with the under $1 and less than one phenomenon. Utilico used one when it said shareholders would be asked to approve the return of $20 million in cash through the cancellation of two shares for every five held for a cash payment of $1, equivalent to 20c for each existing share.

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