Readers might have seen the informative article from Motley Fool Staff this morning about how this unpopular ratio can boost your returns. I thought some suggestions of companies trading at a discount to their Price to Book (P/B) ratio would be helpful:
Genworth Mortgage Insurance Australia (ASX: GMA)
A rare gem, at least at first glance, Genworth has a P/B ratio of 0.73, which means that the net assets on the company's books are worth some 20% more than the shares are. Better yet, said assets are mostly cash or investments – which eliminates the problem of realising the 'value' of something like second-hand machinery carried on the books at as-new prices. Effectively, you could buy the company for $1.5 billion and pick up $1.8 billion in cash – not bad eh?
The downside is that Genworth is highly leveraged to a housing downturn. The company itself states that the 'probable maximum loss' of its insurance portfolio is in the vicinity of $2.3 billion – which would obliterate that discount to book value. With such an asymmetric payoff – win small, lose big – and the difficulties in analysing the likelihood of that downside occurring, I reckon investors should watch Genworth from the sideline for now.
Vocus Group Ltd (ASX: VOC)
Vocus Group has a P/B ratio of 0.7, but a tangible P/B ratio of 66. That's because there aren't many tangible assets – things that can be touched, like cables or offices. Most of Vocus' assets are 'Goodwill' which cover intangible things like brand name, customer base, and so on.
Effectively, when shareholders buy Vocus shares today, they are getting around 6 cents in real assets and $4.30-ish in 'goodwill'. And that's OK, because Vocus has a great customer base, makes a lot of money from those assets, and has a strong competitive position due to its fibre networks.
Yet in some cases, huge amounts of goodwill can be a warning sign a business is under pressure – e.g. due to competition – as the company has very few assets to underpin the value of its shares if the business falls apart.
Astro Japan Property Group (ASX: AJA)
A rare example of a property investment trust trading at a discount to its book value, Astro Japan has a P/B value of 0.77. Property trusts always report their Net Tangible Assets (NTA), which can be an easy way for investors to check the tangible book value of a company. In this case, Astro Japan's Net Tangible Assets are valued at $7.68 per share. Many factors can change this value, including interest rates. There also theoretically might not be any buyers for those properties – regardless of what their value is.
Astro Japan is a good example of another big issue with buying companies at a discount to book value – waiting for the market to reprice them. Although shares have performed well since I identified them as an opportunity in 2014, I don't think they have ever traded at or above the value of their net tangible assets. Of course, there was no way to know that at the time.
