What is Net Asset Value - and what does it tell you about stocks?

by , 13 March 2019
What is Net Asset Value - and what does it tell you about stocks?
When you're looking for stocks to invest in you'll typically either use fundamental investing strategies (looking at financial and other real world data) or technical analysis (looking at charts and price movement to predict future moves).

At the end of the day - financial performance drives stocks in the long-run. And as an investor in businesses I gravitate towards what these businesses and their finances can tell me as an investor.

One of the financial figures you'll be faced with often when investing is Net asset value (NAV).

So what is this figure - and what does it tell you about stocks?
 
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Net asset value tells you something about
the value of a stock
 
NAV is the value of everything a company owns, minus all the money it owes to banks and other creditors.
 
Think of it as similar to your net worth.
 
If you own a R2 million house and a R500,000 car – whilst owing the bank R1.7 million you have a net worth of R800,000. That is – if you sold everything and repaid your debt you’d be left with R800,000.
 
In the case of stocks it works similarly:
 
If a company owns properties, equipment and inventory worth R100 million, and it owes the bank and its creditors R40 million it has a net asset value of R60 million.
 
If this same company had 40 million shares in issue – its net asset value per share would be R1.50.
  
Net asset value needs to be compared to the share price to mean anything
 
So if you know the NAV of a share you can compare it to its share price.
 
If the NAV sits at R1.50 whilst the share price is 80c – it means the share is trading at a big discount to NAV.
 
If the NAV sits at R1.50 and the share price sits at R2 – it means the share is trading at a premium to NAV.
 
So what does this mean? 
 
A discount to NAV could mean one of two things:
  
o The share is mispriced – the market is discounting it too much or is over pessimistic
o The share could be a value trap – it looks cheap, but bad news on the horizon could see its value drop further
 
A premium to NAV typically means one of two things:
  
o The industry the company is in has very high barriers to entry (regulated such as telecoms or utilities) and it demands a higher price to its assets because of this
o Investors are optimistically pricing the growth of the company – this premium might remain for years on end. But in the long run this over-optimism is usually reversed and the stock prices fall or stagnate for some time afterwards.
 
When you look at investment holdings companies on the JSE – there’s another way to determine the NAV called the ‘Sum of the parts’.
 
All this refers to is the value of each investment held by the investment holdings company – minus the liabilities (or debt).
  
What the ‘Sum of the parts’ value means for you
  
According to Investopedia, the Sum of the parts (SOTP) valuation is:
 
“The sum-of-parts valuation is a process of valuing a company by determining what its aggregate divisions would be worth if it was spun off or acquired by another company. The valuation provides a range of values for a company's equity by aggregating the standalone value of each of its business units and arriving at a single total enterprise value (TEV). The equity value is then derived by adjusting the company's net debt and other non-operating assets and expenses.”
 
In short – it is a way to put a value on a company based on the value of each of its separate businesses if they were sold or liquidated.
 
We typically use this method to find a value for investment holdings companies.
 
That’s because these companies aren’t really ‘in business’ but rather invest in other companies that are. They make their money from dividends, and from capital growth (or selling) the businesses they invest in.
 
And, following the 2017 recession, as well as the stock market turmoil of the past couple of weeks, there are a number of investment holdings companies selling at their largest discounts to date – or close to them anyways.
 
Some of these companies are going for so cheap, you simply cannot ignore them.
 
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Four companies selling at irresistible discounts right now!
  
Bargain #1 – Zeder Investments
 
Zeder is an agricultural investment company. It owns a large stake in Pioneer Foods and its other investments include Capespan, Zaad, Kaap Agri, Agrivision Arfica and Quantum Foods.
 
The total value of this business according to the SOTP method is R5.68, with the current share price at R4.10. That means a discount of 27.8%.
 
You can easily track Zeder’s SOTP value by going to its website. The values are automatically populated from the share prices of companies it owns (if they are listed), as well as from the audited values from Zeder’s financial statements.
 
Bargain #2 – PSG Group
 
PSG Group is a diversified investment company. It owns stakes in Capitex, Curro, PSG Konsult, Zeder, PSG Alpha (PSG’s venture capital/private equity arm), and a couple of other smaller investments.
 
What’s significant here is that in PSG’s valuation – the company takes the market value of Zeder for instance. That market value, as explained above, is at a 27.8% discount to the asset value. So, with PSG selling at a discount you are in fact buying the company at a discount, on a discount!
 
PSG’s SOTP value is R300.04, with its share price at R243.46. That means the discount you get the share at is at least 18.85%.
 
As with Zeder you can easily track PSG’s SOTP from its website. You’ll see from the chart on this website that PSG hasn’t traded at such a big discount since 2012! In fact, in the past it has even had its share price trade higher than (at a premium to) its SOTP value.
 
Bargain #3 – Hoskens Consolidated Investments
 
Hoskens is also a diversified investment company. It has investments in gaming hotels (through Tsogo Sun), Media (a 62% investment in eMedia Holdings (the owner of eNCA, eTV and OpenView HD), and then a number of other investments in the mining, technology and property industry. 
 
Currently HCI trades at a price of R116/share. The value of its investments sits at R184.76 – at its latest financials (released 21 November 2018). That means the company trades at a discount of 37%.
 
What’s more, HCI is a decent dividend payer, and has paid dividends uninterrupted since 2010!
 
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Bargain #4 – African Rainbow Capital
 
African Rainbow Capital is a majority black owned investment Holdings Company with exciting investments such as RAIN telecoms, TYME Digital Bank and agri companies like Subtropico and Acorn Agri.
 
At its latest results release the company’s NAV sat at R9.23 per share. Its share price now lingers at R4.67. That means a discount of 49.4%.
 
This means the market is VERY pessimistic when pricing shares of the company. In my view – it is priced so that it would take a huge amount of bad news to further reduce the share price. But any good news or growth from here could mean BIG upside potential for shareholders…
 
Simply put – you can choose to invest in a company that’s priced at a premium. One that looks like the perfect ‘growth’ share. But any disappointing numbers will see its share price crash.
 
On the other hand – investing in a stock that trades at a big discount means much more limited downside. And any good news on growth could send its share price soaring!
 
Here’s to unleashing real value,
Francois Joubert,
Editor, Red Hot Penny Shares


What is Net Asset Value - and what does it tell you about stocks?
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