Net Tangible Assets

[Sgt Pepper]

How important is NTA when assessing a share?

[Ferg]

It's one of many factors I look at and one of the lesser important ones. BUT it will depend on what you are investing in and why you are looking at it.

For me the NTA per share sets a floor price - any SP below that is often a good buy BUT that is on the assumption the business is profitable. A profitable business will continue to grow equity (assuming dividends < comprehensive profit) and on the assumption that is not achieved by issuing new shares ==> then the NTA per share will increase. However a business that makes losses and/or adds more shares at a faster rate than the growth in equity means the NTA per share will reduce.

Whilst something may appear cheap relative to NTA, this might be because the market has already priced in further erosion of equity or dilution of NTA per share or maybe the return on assets achieved by Directors & Management is worse than say a term deposit (in other words the risk does not warrant the return).

NTA is very useful when looking at managed funds, unit trusts or property trusts. IMO one shouldn't pay too large a premium over the NTA for these sorts of entities.

On the other hand a share price over NTA is being valued on some other basis - either something like a multiple of future earnings or discounted future cash flows or maybe even using hopium.

But coming back to my original sentence, it is one of many factors I look at. However, it usually carries little weight unless it should be used for the type of entity being invested in as noted above, or if there is some other issue where it can be used as a trump card to say "no" (e.g. negative NTA in a new IPO). Sometimes it is simply a "nice to know" and forms little part of my investment decision process.

[Dassets]

Without endorsing NTA one way or the other I would point out to dilute for non-listed options etc esp if in the money

[Doug]

For me the NTA per share sets a floor price

Huh? I would have said the ideal company has NO tangible assets (and no debt). IMO unless a company is in the business of acquiring tangible assets NTA is irrelevant and EPS is everything.

[Snoopy]

Huh? I would have said the ideal company has NO tangible assets (and no debt). IMO unless a company is in the business of acquiring tangible assets NTA is irrelevant and EPS is everything.


In one sense I agree with Doug here. If go you back into any business history, how did cash (a tangible asset) become an intangible asset down the track? At the time the 'intangible asset' was purchased, it must have been churning out a lot of cash. Otherwise our company who 'bought it', would not have paid the money they did to own it. Of course, just because a business unit was good at the time of purchase, is no guarantee that it will continue to be good. The intangible asset, valued at the time of the business unit purchase at a 'fixed intangible value', may no longer be worth the value it is held at on the books of the acquisitor. But OTOH if that business unit continues to perform and our parent company spends all of its cash on purchasing business units that create intangible assets on the balance sheet of the parent, then this would indicate that out parent business is acquiring external business with very high rates of return on the assets involved. From a parent acquisitor shareholder perspective, this is a good thing.

The other way of looking at this is when the tangible asset on the books has collateral value to other people (like banks financing expansion plans). If a company owns land, for example, then it can effectively strengthen its balance sheet by stealth. As on the book tangible assets increase in value, more money can be borrowed against them. This, as I understand it, was how the retailer Smiths City Group used to operate. They used their equity in their valuable central city Columbo St site, to finance the design build and selloff to property investors, their growing nationwide network of shops. It was when, at the suggestion of some clever accountant, they 'optimised their capital efficiency' by selling off their crown jewel of net tangible asset - the Columbo St land and building. Following that, they had to finance their expansion from business profits. Then when the retail business took a downturn, the group collapsed. In this sense, having good 'net tangible assets' on the books can be an insurance policy against tough business times.

SNOOPY

[shareman]

NTA isnt everything but it is a useful guide about a companies value

[LaserEyeKiwi]

NTA at least sets some sort of value on a ballpark amount which would be possible in a hypothetical liquidation of a company. Of course the reality would be how easy those particular assets would be too liquidate, but that can generally be evaluated easily. Cash & cash equivalents obviously are near instant at full face value. Land and buildings may take longer to sell, but valuation is fairly easy to estimate. More specialized assets (machinery etc) tougher to estimate.

Most companies should be valued on long term earnings potential at an appropriate valuation multiple, but it happens fairly often that you see a company with a very odd discount to NTA and on almost every one of those occasions the value is subsequently realized (either the stock price rises naturally, or a corporate action is taken to take advantage of the valuation mismatch)

[iceman]

Interesting discussion and good posts. But like some have said already NTA is only a part of the puzzle. You can have assets on the balance sheet that may not be fairly valued and producing a lot of cash and other assets that are valued highly but produce little or no cash.
I look at SAN for example that incredibly (in my view) has been selling valuable assets in the last 2-3 years and this week indicated they're considering selling more, to improve cashflow. That's a perfect reason for me to stay away from them and companies that sell good assets to make the short term cash gains. But it improves their NTA !

[Sgt Pepper]

One reason that prompted my question was Millennium Copthorne Hotels (MCK) which has (or had) share price of $2.35 but an NTA of around $4.60

[Sideshow Bob]

One reason that prompted my question was Millennium Copthorne Hotels (MCK) which has (or had) share price of $2.35 but an NTA of around $4.60

There are a few companies where they seem like a bargain, such as CDL and major shareholder MCK, where NTA is well north of the share price. With these companies, they have a major strategic long-term shareholder that can't really taken out by a takeover. And seemingly no plan to realise that tangible asset or have it necessarily reflected in the share price. Or are they just held back by their profitability - EPS?

Can also question the actual value of those assets, and on what basis they are valued. For example, USX:SFF assets are well in excess of share price (maybe $3+ from memory vs $1.31). But what is a freezing works actually worth if tried to sell it?

Didn't Buffet try to always buy $1 worth of assets, for well less than this (and with a margin of safety).

[percy]

One reason that prompted my question was Millennium Copthorne Hotels (MCK) which has (or had) share price of $2.35 but an NTA of around $4.60

MCK has 105,478,743 shares on issue at a share price $2.22 gives a market cap of $234,162,809.
For the year ended 31.12.2021 they had a NPAT of $40 mil. eps 37.92..PE of 5.85..........or 17% of their market cap.
If the company was valued at NTA [$4.86] it would be $512,626,670 ..eps 37.92..PE of 12.82.....or 7.8%.of their market cap.
So the question is are their assets earning enough for the market to pay a higher share price.?
5 years ago MCK's share price was $3.03..Yesterday it was $2.22.That tells us the market is not prepared to pay NTA..

Another company trading on a huge discount to NTA is SFF on Unlisted.
Last sale price was $1.40 while the last NTA I have is in 2020 when the NTA was $3.05.

ps.The last NTA shown on SCY before they were sold and shareholders received nothing was 70 cents,or thereabouts.

[shareman]

"Another company trading on a huge discount to NTA is SFF on Unlisted.
Last sale price was $1.40 while the last NTA I have is in 2020 when the NTA was $3.05."

I suspect if SFF tried to liquidate their assets they would get nothing like their NTA as theyre valued on a going concern basis

[percy]

"Another company trading on a huge discount to NTA is SFF on Unlisted.
Last sale price was $1.40 while the last NTA I have is in 2020 when the NTA was $3.05."

I suspect if SFF tried to liquidate their assets they would get nothing like their NTA as theyre valued on a going concern basis

I think that statement would be true for any company trading at less than half their NTA.
However SFF did sell their closed Fairton works. for well over NTA,which proves their are exceptions.

[shareman]

NTA is part of a broader picture but anyone would know that in the last few decades meat companies have consistently struggled to earn their cost of capital, SFF being a classic case for this industry. And SFF were the ones who tried to consolidate it to make it more profitable, many others have gone bust

[Aaron]

Interesting discussion and good posts. But like some have said already NTA is only a part of the puzzle. You can have assets on the balance sheet that may not be fairly valued and producing a lot of cash and other assets that are valued highly but produce little or no cash.
I look at SAN for example that incredibly (in my view) has been selling valuable assets in the last 2-3 years and this week indicated they're considering selling more, to improve cashflow. That's a perfect reason for me to stay away from them and companies that sell good assets to make the short term cash gains. But it improves their NTA !

The thing about Sanford is that a big chunk of their assets are intangible and to me are an important part of the value of the firm. Why they would sell any off is beyond me.
The NTA discussion re listed companies to me is secondary to your desired yield and a sustainable dividend at an acceptable yield. NTA will keep increasing while interest rates are falling and they will fall when/if interest rates rise. Admittedly that does include growth through development.
I am with Ferg one of many things to look at and in some cases not important such as the fangs.

[LaserEyeKiwi]

MCK has 105,478,743 shares on issue at a share price $2.22 gives a market cap of $234,162,809.
For the year ended 31.12.2021 they had a NPAT of $40 mil. eps 37.92..PE of 5.85..........or 17% of their market cap.
If the company was valued at NTA [$4.86] it would be $512,626,670 ..eps 37.92..PE of 12.82.....or 7.8%.of their market cap.
So the question is are their assets earning enough for the market to pay a higher share price.?
5 years ago MCK's share price was $3.03..Yesterday it was $2.22.That tells us the market is not prepared to pay NTA..

Another company trading on a huge discount to NTA is SFF on Unlisted.
Last sale price was $1.40 while the last NTA I have is in 2020 when the NTA was $3.05.

ps.The last NTA shown on SCY before they were sold and shareholders received nothing was 70 cents,or thereabouts.

If you visit the MCK thread you will see I have laid out the issue there in detail.

MCK owns two thirds of CDL. That two thirds stake at fridays market close is worth $230m.

MCK has a total market cap of $350m (you have to combine share counts of MCK & MCKPA)

This means the market is valuing MCKs non-CDL net assets at just $120m dollars.

Those non-CDL assets include
- 14 owned hotels and the land they sit on (many in highly valuable property areas like central Auckland, Queenstown, Wellington etc)
- Management rights & Franchise fees from 5 other hotels
- $32.5m in Sydney real estate that they are selling down
- $47m Net cash balance

Or another way to look at it: if you subtract the $80m value of net cash and Sydney real estate, the market values 14 owned hotels in prime locations (and fees from 5 other hotels) at just $40 million!!! Just one of the Auckland hotels (M social) is worth far more than that alone! (Even on a far below market value “cost basis”, MCK values its hotel assets at $254 million)

Now on the books, MCK has not accounted for their CDL Stake at market value, despite the market value been readily apparent in the form of a listed market security. Also, MCK just this week decided to no longer account for its Hotels at Market value, but instead on a cost basis (which means they are carried at valued from when they were purchased decades ago, less depreciation).

13532

[startingout]

Thanks Lasereyekiwi
Great detailed analysis
However how will this actual intrensic value of all these non CDL assets reflect in the share price of MCK or benefit the shareholders? Just want to learn how you think it will play out at the end?

I am a newbie investor and trying to see if itz going to be worthwhile investing in MCK for the long term.

[percy]

If you visit the MCK thread you will see I have laid out the issue there in detail.

MCK owns two thirds of CDL. That two thirds stake at fridays market close is worth $230m.

MCK has a total market cap of $350m (you have to combine share counts of MCK & MCKPA)

This means the market is valuing MCKs non-CDL net assets at just $120m dollars.

Those non-CDL assets include
- 14 owned hotels and the land they sit on (many in highly valuable property areas like central Auckland, Queenstown, Wellington etc)
- Management rights & Franchise fees from 5 other hotels
- $32.5m in Sydney real estate that they are selling down
- $47m Net cash balance

Or another way to look at it: if you subtract the $80m value of net cash and Sydney real estate, the market values 14 owned hotels in prime locations (and fees from 5 other hotels) at just $40 million!!! Just one of the Auckland hotels (M social) is worth far more than that alone! (Even on a far below market value “cost basis”, MCK values its hotel assets at $254 million)

Now on the books, MCK has not accounted for their CDL Stake at market value, despite the market value been readily apparent in the form of a listed market security. Also, MCK just this week decided to no longer account for its Hotels at Market value, but instead on a cost basis (which means they are carried at valued from when they were purchased decades ago, less depreciation).

13532

Yes I am well aware of your posts.
I have owned both MCK and CDI,however currently I hold neither.
May have also owned Kingsgate.?

[Mr Slothbear]

If you visit the MCK thread you will see I have laid out the issue there in detail.

MCK owns two thirds of CDL. That two thirds stake at fridays market close is worth $230m.

MCK has a total market cap of $350m (you have to combine share counts of MCK & MCKPA)

This means the market is valuing MCKs non-CDL net assets at just $120m dollars.

Those non-CDL assets include
- 14 owned hotels and the land they sit on (many in highly valuable property areas like central Auckland, Queenstown, Wellington etc)
- Management rights & Franchise fees from 5 other hotels
- $32.5m in Sydney real estate that they are selling down
- $47m Net cash balance

Or another way to look at it: if you subtract the $80m value of net cash and Sydney real estate, the market values 14 owned hotels in prime locations (and fees from 5 other hotels) at just $40 million!!! Just one of the Auckland hotels (M social) is worth far more than that alone! (Even on a far below market value “cost basis”, MCK values its hotel assets at $254 million)

Now on the books, MCK has not accounted for their CDL Stake at market value, despite the market value been readily apparent in the form of a listed market security. Also, MCK just this week decided to no longer account for its Hotels at Market value, but instead on a cost basis (which means they are carried at valued from when they were purchased decades ago, less depreciation).

13532


great post LEK and I always appreciate your eye for value and willingness to share.

I think MCK would benefit from a NZ version of Bill Ackman, that is someone with resources to take a noticeable stake of greater than 5% and start sending letters to management and throwing their weight around with the management and at annual meetings to either effect change in management to improve ROA or more likely to liquidate underperforming assets and return funds to shareholders.

there is significant value to unlock though i’m not a holder.

there may be a change with the new MD that recently took over from long serving one but only time will tell.


edit I will add for myself I look at NTA as one of a few key elements when evaluating a company, however I also factor in the chance/likelihood of these getting returned to shareholders in one way or another.

[LaserEyeKiwi]

great post LEK and I always appreciate your eye for value and willingness to share.

I think MCK would benefit from a NZ version of Bill Ackman, that is someone with resources to take a noticeable stake of greater than 5% and start sending letters to management and throwing their weight around with the management and at annual meetings to either effect change in management to improve ROA or more likely to liquidate underperforming assets and return funds to shareholders.

there is significant value to unlock though i’m not a holder.

there may be a change with the new MD that recently took over from long serving one but only time will tell.


edit I will add for myself I look at NTA as one of a few key elements when evaluating a company, however I also factor in the chance/likelihood of these getting returned to shareholders in one way or another.

Unfortunately with such a large majority shareholder, there is probably nothing even a well resourced activist investor can do to encourage any particular corporate action from MCK management. Not that management have really done anything wrong at all.

I see comments from many in the past saying such a big majority shareholder is reason for a big discount to NTA, but that simply isn’t the case. The perfect counter-example to that theory is CDL! It trades above its NTA - and has the exact same controlling shareholder that MCK has!

[LaserEyeKiwi]

I would also point out the fallacy that “the market is always right” as a reason for companies that are trading significantly below their NTA. In fact the market is often wrong. I have made plenty from loading up on companies that have had a mismatch in value that are eventually corrected.

Yahoo was a good one for me. They reached a point where its majority shareholding in Alibaba was worth significantly more than the rest of Yahoos business. Critics argued that Yahoo would never let its shareholders be able to realize the value of the Alibaba stake, because it would have to pay a huge capital gains tax on any spinoff or sell down of the Alibaba stake. Instead management just separated off the much smaller yahoo operations, and the Alibaba stake immediately gained its full value. Ha ha ha - it was such a good play and those with a short position were toast, and many “experts” who said it could never be done had to eat their words and look stupid.

more recently I flound some warrants in a Nasdaq listed company that were actually trading below face value - in that the price of the warrants was less than the difference between their strike price and the then current stock price. It also meant there was no premium at all for the time value of the warrant which still had years before expiration. I forwarded the details of it to quite a few US investor friends (just to check I hadn’t made an obvious error) - none of them could find any reason for the valuation mismatch. So I jumped in and quickly made a huge gain based on nothing but a market valuation error. Interestingly enough, none of my friends joined me in taking a position - it just goes to show that many people cant see obvious opportunities when it is sitting right in front of their faces.

[percy]

I see FRE's NTA is a negative 80cents per share,and their share price is $12.30.
MCK's NTA is $4.86cps and their sp is $2.22.
Two very different companies.
Will be interesting seeing which company out performs the other in the next year or two.
disc.Trust I am a trustee of holds FRE shares.

[LaserEyeKiwi]

I see FRE's NTA is a negative 80cents per share,and their share price is $12.30.
MCK's NTA is $4.86cps and their sp is $2.22.
Two very different companies.
Will be interesting seeing which company out performs the other in the next year or two.
disc.Trust I am a trustee of a trust that holds FRE shares.

FRE valuation is driven by its earnings & earnings growth right? Good example of where an NTA doesn’t have any relevance to share price (its major assets are intangible rather than tangible). One good say the same thing about the largest companies in the world: Apple, Microsoft, Google - all with minuscule NTA values. It is only when you reach Berkshire Hathaway on the mega cap list that you see NTA plays a part in its valuation.

[thebusinessman]

So I jumped in and quickly made a huge gain based on nothing but a market valuation error. Interestingly enough, none of my friends joined me in taking a position - it just goes to show that many people cant see obvious opportunities when it is sitting right in front of their faces.

Must be why we call you the LaserEyeKiwi...

[startingout]

If you visit the MCK thread you will see I have laid out the issue there in detail.

MCK owns two thirds of CDL. That two thirds stake at fridays market close is worth $230m.

MCK has a total market cap of $350m (you have to combine share counts of MCK & MCKPA)

This means the market is valuing MCKs non-CDL net assets at just $120m dollars.

Those non-CDL assets include
- 14 owned hotels and the land they sit on (many in highly valuable property areas like central Auckland, Queenstown, Wellington etc)
- Management rights & Franchise fees from 5 other hotels
- $32.5m in Sydney real estate that they are selling down
- $47m Net cash balance

Or another way to look at it: if you subtract the $80m value of net cash and Sydney real estate, the market values 14 owned hotels in prime locations (and fees from 5 other hotels) at just $40 million!!! Just one of the Auckland hotels (M social) is worth far more than that alone! (Even on a far below market value “cost basis”, MCK values its hotel assets at $254 million)

Now on the books, MCK has not accounted for their CDL Stake at market value, despite the market value been readily apparent in the form of a listed market security. Also, MCK just this week decided to no longer account for its Hotels at Market value, but instead on a cost basis (which means they are carried at valued from when they were purchased decades ago, less depreciation).

13532

Thanks Lasereyekiwi
Great detailed analysis
However how will this actual intrensic value of all these non CDL assets reflect in the share price of MCK or benefit the shareholders? Just want to learn how you think it will play out at the end?

I am a newbie investor and trying to see if itz going to be worthwhile investing in MCK for the long term.

[LaserEyeKiwi]

Thanks Lasereyekiwi
Great detailed analysis
However how will this actual intrensic value of all these non CDL assets reflect in the share price of MCK or benefit the shareholders? Just want to learn how you think it will play out at the end?

I am a newbie investor and trying to see if itz going to be worthwhile investing in MCK for the long term.

head over to the “MCK - Millennium & Copthorne” thread for a more detailed discussion. https://www.sharetrader.co.nz/showthread.php?8467-MCK-Millennium-amp-Copthorne-Hotels/page13

But briefly: Yes the value will be realized one way or another, with most likely scenario being profits generated from the assets which is then either distributed as dividends and/or growing the net cash on hand even further (the market has much less difficulty accurately valuing cash assets).

In the last 5 years 2017-2021, MCK has had a combined net income of $232 million dollars. During the 4 year period from 2017-2020, when it was still using fair value valuation for its hotels (but only cost value for its CDL assets), it lifted its net asset value by $155 million (from $601 million to $756 million).