3 discounted property plays

There are many ways to value a company. One of the most common ways is to use the price-to-earnings (PE). Strictly speaking when an investor uses the PE method of valuation, the investor is applying a multiple to the earnings of a firm to determine its relative value to either the market, the stock’s long-term average multiple or a benchmark required return.

There are however many other ways to determine value and in different circumstances different techniques can be of greater or lesser use. One of these ways is to consider the “liquidation value” of a business. Using liquidation value to determine a realisable value of assets can sometimes be very straightforward.

For example consider a Listed Investment Company such as Argo Investments (ASX: ARG). The assets of Argo are made up almost entirely of shares in listed companies. These are easy to value as between 10 am and 4 pm Monday to Friday when there is a market bid price available. Deducting any liabilities and intangibles that Argo may have on its balance sheet produces a number known as the Net Tangible Assets (NTA). In Argo’s case this leads to a pretty accurate “snapshot” valuation of a minimum value that could be realised for Argo’s assets.

The official NTA value of a company is easily attainable. The hard part comes in determining if the reality of liquidating the assets would see the company’s version equal real-world realisable values.

As may be obvious by now, purchasing companies below their NTA – assuming at some point the share price increases to reflect NTA – has the potential to be profitable.

While property assets are not anywhere near as nimble and easy to offload as listed shares, they are unlikely to become obsolete or worthless either. With that in mind, investors prepared to do further research may like to take a closer look at these three companies that are all backed by property assets and trading well below their NTA backing.

1)     Devine (ASX: DVN) has recently announced an impairment charge against one of its properties of $10 million. This impairment should mean Devine’s NTA is closer to $1.94 than the published $2.01. With the share price trading at 79 cents per share (cps), the stock is trading at a 59% discount to its NTA.

2)     FKP Property (ASX: FKP) just last week announced a $187.9 million impairment of its balance sheet which certainly shows the market was right to price that stock below NTA. Including the latest impairments, NTA per share will likely drop to around $3.50, down from a previous $3.98. With FKP’s share price at $1.42 this implies a discount of 60% to NTA.

3)     Aspen Group (ASX: APZ) updated the market in July, announcing that an audit of carry value of assets would lead to a write-down of 1.3 cps at 30 June 2013. This should see the NTA decrease from the current published 26c to 24.7 cents. With its share price near a 52-week low of 16.5 cents, this implies the stock is trading at a discount to NTA of 33%.

Foolish takeaway

It should never be forgotten that there is (nearly always) a valid reason the market has knocked a share price down substantially below a company’s net tangible asset backing. While it’s important for investors to have the faith in their own analysis, this should also be balanced by acknowledging that the market often gets it right too.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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