Airea is trading below liquidation value
CORRECTION: There is an error in this article. Airea is trading at a 4% premium to estimated liquidation value!
Carpet manufacturer at 19% discount
Inventing it, Ben Graham reasoned that some current assets, the only assets Graham considered sufficiently liquid and easy to value, would fetch less than the values recorded on the balance sheet in a closing down sale. Using book values as a proxy for liquidation value would overvalue the company somewhat.
On the other hand he ignored fixed assets, property, plant and equipment, which would probably have some value, however uncertain, if the company was no longer a going concern. The over-valuation of current assets would cancel out the undervaluation of fixed assets and, as a crude measure, net current asset value would do.
A potentially more accurate, but still approximate estimation of liquidation value can be achieved by reducing the value of current assets and accounting for the value of fixed assets using the pretty arbitrary multipliers in the worksheet below (% of BV column):
Since Airea has yet to publish it’s annual report and doesn’t break down property, plant and equipment in its preliminary announcement, I’ve assumed a similar split as last year between property, which is valued at 50% of book value in this calculation, and plant and equipment, which is valued at 10% of book value.
The share price is 35% below net current asset value, an approximation of an approximation of liquidation value, and 19% below liquidating value, an approximation!
That’s unusual for a profitable company.
- Airea is committed to nearly £5m of rent payable under non-cancellable operating leases on property and vehicles. Arguably I should have added the leases as an asset and a liability in the worksheet (which, arguably, companies should include on their balance sheets). If Airea had to sell the leases, there’s no guarantee it would get full price, so I’d have to apply a multiplier to them as with the other assets, bringing down the value of its assets in a liquidation. On the other hand, I’ve ignored a deferred tax asset of nearly £1m, which, assuming the company remains profitable should increase the company’s profit in future, and its valuation now.
- Airea shares are illiquid, the mid price is 11.5p, but an investor buying in today’s market would probably pay closer to 12.5p. That reduces the discount to liquidation value to 12%.
- This model ignores some costs that would almost certainly have to be paid in an actual liquidation, redundancies for example, so I’d hesitate to rely on it were a company actually liquidating.
Using liquidation values requires less guesswork than forecasting future profits, but beneath the surface there’s still a fair bit of fudging going on.
Nevertheless, Airea has passed this test. Providing Airea remains a going concern, I can say with some confidence it’s in bargain territory.
About the author
Richard is companies editor of Interactive Investor and a columnist at Money Observer magazine. A keen private investor through his Self Invested Personal Pension, he manages two virtual portfolios. The Share Sleuth portfolio is a hand-picked collection of mostly small-cap value shares, while the Nifty Thrifty is a mechanical portfolio designed to pick large, successful companies at cheap prices.
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|Last Update: 13:55:28 (19/05/16)|