Buy the real-estate, get a £200m business for free
A stock that trades at 1.4x earnings, 32% of TBV and holds hidden assets worth 10x book value.
I found a stock with one of the most absurd valuations I've seen in a long time.
To illustrate:
It’s currently priced at just 32% of its tangible book value and 1.4x its FCF.
This is after I stripped out all assets that couldn’t be sold at an auction in the real-world and averaged the FCF over the last 5 years.
Apparently, according to Mr Market, this business is worth more dead than alive.
When a business is priced in this way, we have to answer only one simple question:
“Will this business generate more FCF over its remaining life than the current value of its market cap?”
If it does, the market has definitely mispriced it today (and we make good money).
If it doesn’t, the market was on to something (but we don’t lose very much).
I believe it’s mispriced and there is plenty of FCF left in the tank. I also believe the business is likely to continue on for decades to come.
I’ll explain why shortly.
But first, let’s take a quick look at why none of that matters.
The balance sheet reveals that the assets owned by this business far exceeds its liabilities.
The majority of this is made up of current assets (my favourite).
An examination of the annual reports reveal something even more enticing.
Hidden assets.
Specifically, three buildings and the land they sit on.
The first one is a factory used as a production facility, and the other two are commercial rental properties that generate cashflow.
This company regularly re-values these assets based on prevailing market rates.
However, the balance sheet only shows the original cost, minus the standard depreciation.
In other words, the balance sheet shows £5mn worth of buildings and land but the current valuation is actually £50mn+.
That’s 10x the book value, hidden away in the notes.
But it gets better…
The two rental properties alone generate 7.5% ROI, relative to the current market cap.
Yes, you could buy the entire business, shut everything down, give away all the other assets, and still generate a 7.5% annual return from renting out the two properties.
That’s some deep-value.
The margin of safety is humungous.
Even if we’re totally wrong about the business generating FCF long into the future, it doesn’t matter.
If the company liquidates, we are highly likely to make a profit from the process, because of how cheap the stock is today.
Again, I don’t believe liquidation is a likely outcome, but it's nice to have the downside protection.
Once the downside is taken care of, the upside usually takes care of itself, and I believe this stock is no exception.
I hold it in my portfolio and I purchased it very close to the current share price.
This opportunity is still available for anyone interested…