Podcast: NAV, value or trap?

Simon BrownJSE Direct, Latest

Simon Shares

  • MTN (JSE code: MTN). Woe is MTN, another $2billion for tax evasion. Is it a shake down? Maybe, maybe not. Truthfully we have no idea and it does cover the same period (2007-2015) of their previous Nigerian fine. I long ago sold my MTN shares and no interest in buying more.
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  • Nice break out last week on the Top40, and then the retest and now we’re back inside the range of 49-52k trading at 51,000 with ZAR at 15.46. Sure some if this is general EM issues but GDP data from Tuesday showing us in a recession is weighting heavy on markets. Where to next? Well let’s see if 49k holds.
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NAV, value or trap?

A listener asked about net asset value (NAV).

Often when watching I hear a lot of market analyst talk about discounts to Assets, sometimes they say its bad sometimes they say its good. What does it actually mean when they say a share is trading at a discount to its assets or NAV, how is it calculated and is it good or bad?

NAV is the break up value of a company. If all assets were turned into cash and all liabilities paid off, what’s left? Divided by the number of shares is NAV per share and sometimes called book value. We then relate the NAV or book to the share price and get a ratio between price and NAV often called the price to book (P/B) ratio.

Also note the difference between tangible NAV which excludes intangible assets such as brand value and good will. I prefer tangible NAV.

As a rule a share trades at a premium to NAV as you’re not buying the break up value of a company but the future earnings and cash flow. Different industries will have different premium, banks typically max out at around 2x while retailers at times 3-4x and miners anywhere from below 1 to 10x.

A valuation strategy is to consider stocks cheap when their NAV premium is lower than typical for that particular stock and lower than industry peers. Sasfin (JSE code: SFN) is a case in point. NAV is around 4400c and the longer term average is some 1.5x, so seems like a steal. Except the stock has now fallen to around 3400c!

Another strategy is to buy below NAV, essentially you’re getting future earnings and cash flow for free. But is this value or value trap? Argent (JSE code: ART) has traded at around 50% below NAV forever and a day while The Don Group (now delisted) was at a chunky discount to NAV but that NAV kept melting away and the stock price kept on falling.

So a useful indicator but as always needs to be more than just one piece of data when buying a stock.

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