22/08/2012 - 10:43

Making sense of differing dollar values

22/08/2012 - 10:43

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The stock market is throwing up some interesting valuations of late, with excessive discounts on some top companies.

The stock market is throwing up some interesting valuations of late, with excessive discounts on some top companies.

THE stock market, we are told, is never wrong when it comes to valuing shares; a claim that sits somewhat oddly with companies valued on the market at less than their cash backing.

White Energy, an east coast coal miner, is the best example of the ‘less than cash’ phenomenon, with $139 million in its bank account and a stock market value of $101 million.

Even after deducting $25 million for convertible notes White has on issue, the company is left with cash of $114 million – which theoretically could leave a fleet-footed raider with a quick and easy $13 million, getting the company’s coal assets for free.

It is, of course, never that easy, but the fact that some companies have dropped so low on the depressed Australian stock market that they are trading close to their cash backing is an important indication that we’ve neared the bottom in the current stock market cycle.

Kambalda-based nickel miner Mincor is currently valued on the market at $127 million, with 60 per cent of that covered by its $76 million cash in the bank, meaning everything else from profitable nickel mines to exploration projects is valued at $51 million.

Other examples of the market applying an excessive discount on well-run stocks include the pricing of three of Australia’s biggest companies at what looks to be less than their break-up value, or the value of underlying property.

David Jones, subject of a bizarre takeover bid earlier this year, is one of the best-known names in retailing and remains a profitable business, despite the industry-wide downturn in retail.

On the market, David Jones has fallen from $5.79 three years ago to recent trades at $2.55, a price that values the entire business at $1.4 billion – an amount more than covered by the property value of the company’s central city and regional stores.

A ‘sum-of-the-parts’ break-up scenario can also be painted for another retailer, Harvey Norman. Its shares have plunged from $7.15 five years ago to recent trades at $2.01, valuing the entire business at $2.1 billion, a price likely to be well below what Harvey Norman’s property portfolio would fetch.

Newspaper publisher, Fairfax Media, is another stock that has started to attract the attention of investment banks and private equity groups interested in an acquisition and break-up, dumping property and premium publishing assets such as The Australian Financial Review newspaper for a sum likely to be well above the $1.3 billion put on the stock by the market.

For investors, the trick is knowing whether calculations that appear to show a break-up value more than the current whole are accurate, and that assets being touted as easy to sell could actually be sold.

Central city and industrial properties controlled by David Jones, Fairfax or Harvey Norman might actually be a lot harder to sell than imagined because of the tight rein banks have on property lending.

Mining companies are different because their assets can be more easily liquidated.

Whichever way the situation is analysed, however, there is an interesting situation emerging on the market at a time when investment banks are desperate for deals.

It is the banks that have orchestrated most recent mining mergers, another area where there is a wide gap between market value and deal value.

St Barbara’s takeover of Allied Gold was priced at 70 per cent above the ruling market. Silver Lake’s takeover of Integra is at 40 per cent above the market, and Nathan Tinkler’s move on Whitehaven is being priced at 37 per cent above the market.

The common thread linking retail, media, coal, and gold companies is the gap between what the ‘all-knowing’ market says an asset is worth, and what a keen bidder is prepared to pay.

Investors with an appetite for somewhat risky punts could have a bit of fun acquiring some of the more obvious break-up propositions and then waiting for the deal. Spread the net wide enough, and it could work as a strategy.

Good gas signs

APART from members of the flat earth society and the ‘stop-the-world-I-want-to-get-off’ Greens, there are not too many people who would not welcome Australia’s entry into the shale-gas industry; the real question, however, is who will be first to cook with shale gas?

Until last week the smart money was on Adelaide, thanks to shale-gas discoveries in the Cooper Basin of South Australia.

Beach Energy has already booked a contingent reserve of gas in long-neglected beds of shale rock, but it is yet to reveal firm plans to produce commercial quantities of gas from shale.

Slow progress in the Cooper could therefore leave Perth as the first city to receive deliveries of shale gas, which, in all aspects, is identical to conventional natural gas, mainly made up of methane and with smaller amounts of ethane, propane and butane.

The reason Perth has moved up the list of likely shale gas recipients is that partners in the Arrowsmith No.2 shale-gas test well located near Dongara are receiving encouraging results from the long and complex process of fracturing and flowing deeply buried shales and other ‘tight’ rocks.

First target in the well, the Irwin River Coal Measures (IRCM), has been fractured and flowed gas to the surface. Tests are now under way on the Carynginia and Kockatea shales and the High Cliff Sandstone.

Early reports indicate the IRCM tests yielded better-than-expected gas flows.

More work is required, but the early signs of Perth having a new source of gas on its doorstep are encouraging.

Cold comfort

FAMILY squabbles and raising capital for her big new Roy Hill iron ore mine are adding complications to the life of Australia’s richest person, Gina Rinehart.

However one emerging trend that will make her smile (if a $20 billion fortune doesn’t do it already) is the ‘go slow’ sign being hung on African mining projects by international companies such as Barrick Gold and Rio Tinto.

Mrs Rinehart has been annoyed by Rio Tinto diverting money and management time to its iron ore project in Guinea, a mine she regards as competition to Roy Hill, while Rio Tinto’s wider African adventures are viewed as un-Australian.

Cold comfort as it might be, given that the iron ore price slide is cutting into the margins at the proposed Roy Hill development, but it seems Mrs Rinehart was right in chastising Rio Tinto’s rush into high-risk African projects. 

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“One of the great pains to human nature is the pain of a new idea.” 

Walter Bagehot


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