Spirit, a group of pub chains recently demerged from Punch, posted a profit in today’s full-year results, it’s first as a newly independent company. But heavy write downs have changed the value equation.
Spirit has hitherto looked cheap compared to the book value of its assets, so as a profitable company it could be a bargain if it's still selling at a discount. Disregarding intangibles, goodwill and deferred tax assets, this is the situation:
Spirit has changed its accounting to value property, plant and operating leases at market value rather than historic cost, a revaluation which reduced the book value of property, plant, and equipment by £350m and operating leases by £10m.
The 'value' has flown. At historical cost, the company would be selling at a 30% discount to tangible book value, now the share price values it at almost a 100% premium. When book value can disappear at an accountant's keystroke, it justifies the hard-nosed position of hard-core value investors who insist on a steep discount.
Movements in property values should not have a bearing on Spirit's earning power, but valuing Spirit by its potential profit is speculative because it has no history in its current form.
Management strikes a confident tone, sales are growing at its managed pubs, and Spirit is planning to dispose of underperforming leased pubs. It's proposed a dividend, but I think it would take too much effort, and it may not even be possible, to gain enough confidence in Spirit to add it to Thrifty 30 portfolio.
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: 16:35:07 (19/06/13)|