upside_umop
12-08-2010, 10:32 PM
I've always liked the security of NTA, and find you can easily sleep at night with a lot of them. PPP was my first NTA play, where I went all in and it worked out quite well during the GFC. Now it appears more are popping up...PPP included :)
Anyway, I thought it would be a good idea to develop a thread towards stocks with high Net Tangible Assets relative to Market Cap.
In accounting for assets, IAS 36 has some specific requirements for the valuation of such assets on the balance sheet. IAS 36 has the test that:
The Carrying Amount is compared versus the Recoverable Amount. The Recoverable Amount is defined as the higher of:
-Fair Value less costs to sell
-Value in use (Cash Generating Unit).
Fair Value less costs to sell is quite obvious. Fair Value would be defined where there is an active market with the market price being 'Fair value.' If the market is not active, the fair value may be determined by observing events of recent sales transactions. Costs to sell would be legal, taxes, costs of removing assets etc etc.
Value in Use otherwise known as a Cash Generating Unit (CGU) is the old Net Present Value (NPV) of the future cashflows. There are five elements to be reflected in the calculation of the CGU:
-An estimate of future cashflows the entity expects to derive from the asset.
-Expectations about possible variations in the amount or timing of those future cashflows.
-The time value of money, represented by the current risk-free interest rate
-The price for bearing the uncertainty inherent in the asset (risk)
-Other factors, such as illiquity that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset.
Now you say, 'it would be easy to manipulate such elements.' Yes and no.
-Fair Value less costs to sell...think listed investment companies that own stocks etc. Its relatively easy to determine the market price for them. Just make sure you keep up day to day what the price of each of it's investments are..
-CGU. It could be quite easy to manipulate them. When the financial statements get audited, it is the auditors that will give the final 'sign off' whether or not the asset is good for the number it has on the books....but can the auditor really know accurately, or at least semi accurately, and better than the market (otherwise they shouldn't exist), the elements above? I would say probably not. Therefore, NTA plays that rely on these calculations would be inherently more risky than say a Fair Value calculation. Again, there will be easier companies to value i.e. an oil company has a relatively predictable forward curve of production, price (futures..), OPEX and therefore cashflows. Retailers don't. I'm not saying retailers aren't good, just not my idea of an NTA play.
Then there is more. Sure, you have this company that has factors above its market cap in NTA. But what about the burn rate of cash? In most cases, this is what the market values in and the unpredictability in management surrounding those assets.
Say you have got a small oil company, $10m in cash with a management team that is burning $1m a quarter with some slightly cashflow positive assets of $250,000 a quarter. Worth buying? From an NTA play, (prospects aside), probably not. They are burning $3m cash a year...3 years without anything and the company will be knocking for more money. On the other hand, lets look at a play I had a while ago. PPP at the end of 2008. They had $150m cash on hand, were making $300,000 per day from oil operations, had no debt and minimal management costs a portion of their overall position. Their market cap was ~$120m. It was a good play, not multi bagger stuff instantly, but was safe with a good buying strategy.
I guess I've given the run down and what kind of NTA's I like. The point of the thread would be to encourage discussion on potential plays with respect to above comments. Of course, if you don't believe on my points then fire away and correct me if I'm wrong!
To get the ball rolling, I'll chuck down a quickly looked up stock that I thought had a pretty significant discount.
OCP. When I first saw it, it said 'NTA of $3.64 per May 31' then took a huge dive to ~$1.50. On further investigation one of it's listed investments, ISF, declined 75%! This wiped out about $1.50 in NTA. Still, it has around 2.10 in NTA with a good portion of this in cash but it shows you have to look a wee bit into it to see what the story is and not to take ASB's word! OCP was not as good as first looked.
PPP again is a bit of cashbox. $110 million in cash and receivables and $100m market cap. Its still profitable but there is now quite a lot of doubt where the future will lie for this oiler given Tui appraisals have turned up dry. Directors recently bought 6 million shares on market and NZOG own 15% stake, which was bought up around December 08.
Has anyone else out there done any research/investigating for some NTA plays? Liz, I know you were into looking for Current NTA plays where companies had more current assets on hand than market cap. Any success?
Anyway, I thought it would be a good idea to develop a thread towards stocks with high Net Tangible Assets relative to Market Cap.
In accounting for assets, IAS 36 has some specific requirements for the valuation of such assets on the balance sheet. IAS 36 has the test that:
The Carrying Amount is compared versus the Recoverable Amount. The Recoverable Amount is defined as the higher of:
-Fair Value less costs to sell
-Value in use (Cash Generating Unit).
Fair Value less costs to sell is quite obvious. Fair Value would be defined where there is an active market with the market price being 'Fair value.' If the market is not active, the fair value may be determined by observing events of recent sales transactions. Costs to sell would be legal, taxes, costs of removing assets etc etc.
Value in Use otherwise known as a Cash Generating Unit (CGU) is the old Net Present Value (NPV) of the future cashflows. There are five elements to be reflected in the calculation of the CGU:
-An estimate of future cashflows the entity expects to derive from the asset.
-Expectations about possible variations in the amount or timing of those future cashflows.
-The time value of money, represented by the current risk-free interest rate
-The price for bearing the uncertainty inherent in the asset (risk)
-Other factors, such as illiquity that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset.
Now you say, 'it would be easy to manipulate such elements.' Yes and no.
-Fair Value less costs to sell...think listed investment companies that own stocks etc. Its relatively easy to determine the market price for them. Just make sure you keep up day to day what the price of each of it's investments are..
-CGU. It could be quite easy to manipulate them. When the financial statements get audited, it is the auditors that will give the final 'sign off' whether or not the asset is good for the number it has on the books....but can the auditor really know accurately, or at least semi accurately, and better than the market (otherwise they shouldn't exist), the elements above? I would say probably not. Therefore, NTA plays that rely on these calculations would be inherently more risky than say a Fair Value calculation. Again, there will be easier companies to value i.e. an oil company has a relatively predictable forward curve of production, price (futures..), OPEX and therefore cashflows. Retailers don't. I'm not saying retailers aren't good, just not my idea of an NTA play.
Then there is more. Sure, you have this company that has factors above its market cap in NTA. But what about the burn rate of cash? In most cases, this is what the market values in and the unpredictability in management surrounding those assets.
Say you have got a small oil company, $10m in cash with a management team that is burning $1m a quarter with some slightly cashflow positive assets of $250,000 a quarter. Worth buying? From an NTA play, (prospects aside), probably not. They are burning $3m cash a year...3 years without anything and the company will be knocking for more money. On the other hand, lets look at a play I had a while ago. PPP at the end of 2008. They had $150m cash on hand, were making $300,000 per day from oil operations, had no debt and minimal management costs a portion of their overall position. Their market cap was ~$120m. It was a good play, not multi bagger stuff instantly, but was safe with a good buying strategy.
I guess I've given the run down and what kind of NTA's I like. The point of the thread would be to encourage discussion on potential plays with respect to above comments. Of course, if you don't believe on my points then fire away and correct me if I'm wrong!
To get the ball rolling, I'll chuck down a quickly looked up stock that I thought had a pretty significant discount.
OCP. When I first saw it, it said 'NTA of $3.64 per May 31' then took a huge dive to ~$1.50. On further investigation one of it's listed investments, ISF, declined 75%! This wiped out about $1.50 in NTA. Still, it has around 2.10 in NTA with a good portion of this in cash but it shows you have to look a wee bit into it to see what the story is and not to take ASB's word! OCP was not as good as first looked.
PPP again is a bit of cashbox. $110 million in cash and receivables and $100m market cap. Its still profitable but there is now quite a lot of doubt where the future will lie for this oiler given Tui appraisals have turned up dry. Directors recently bought 6 million shares on market and NZOG own 15% stake, which was bought up around December 08.
Has anyone else out there done any research/investigating for some NTA plays? Liz, I know you were into looking for Current NTA plays where companies had more current assets on hand than market cap. Any success?