The S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) is home to 200 of Australia’s largest companies covering the full spectrum of industries from banking and finance to healthcare and mining. While most companies trade on many times their net tangible asset (NTA) backing – for example JB Hi-Fi Limited (ASX: JBH) trades on around nine times its NTA – there are a handful that are available for significantly less than their NTA.
When companies trade at less than their NTA, it is essentially the market stating two things. Firstly, that it doesn’t believe that the accounts accurately reflect market value. In other words, future write-downs to NTA are being forecast. Secondly, the market is often implying that it has concerns over a business’ viability or profitability.
Very often the market is “right”. For that reason, investors should carefully consider the market’s point-of-view before concluding they have it right and the market wrong. The following two stocks are all trading below their stated NTA values which in theory means they are trading below the replacement cost of their tangible assets.
Qantas Airways Limited (ASX: QAN) had a stated NTA of $2.25 on the 31 December 2013. With the shares currently trading at $1.18 this is a massive discount. The problem faced by investors is that management has announced a huge $2 billion cost reduction program which amongst other initiatives includes that “more than 50 aircraft will be deferred or sold.”
The dramatic structural changes occurring at Qantas could have significant ramifications for balance sheet values. As such investors may prefer to steer clear of Qantas, however if the NTA turns out to be accurate and regulatory and structural changes improve the airlines’ fortunes there could be significant upside.
OZ Minerals Limited (ASX: OZL) with its share price currently at $3.86 has reported NTA of $6.84 for the year ended 31 December 2013. This figure was down from $8.35 the year before which is a reminder that an NTA gap can be closed not only by a share price rising but also by the NTA falling. The reason OZ makes for an interesting investment proposition is the $364 million of cash on the miner’s balance sheet. The remaining hard commodity assets and equity investments add to the appeal.
Care must always be taken when investing based on a metric such as a discount to NTA and ideally a group of such stocks are purchased to spread the risk. Companies with hard or liquid asset backing such as property or cash generally offer investors more surety, while plant and equipment such as Qantas’ aircraft need to be viewed very conservatively as realising book value in a sale can be hard to achieve.
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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.