The bear market has left many companies trading at a discount to the assets in their balance sheets. Shares have not been this cheap for a long time.
In the current environment there are plenty of bombed out shares but how can you spot a bargain that won't lose your investment? One yardstick is to measure a company's net asset value against its market valuation.
The total value of a company's assets less the total value of its liabilities is its net asset value (NAV). For property companies in particular this is a good starter for valuation purposes, although it has to be said that falling property prices mean you need to view their own valuations with healthy scepticism.
Certainly, with companies in other sectors, if you use this method of valuation you need to take great care of how you treat intangible assets, as when things go awry, the book value placed on them is impossible to realise.
For companies other than property companies, a more sophisticated valuation method is to measure net current asset value (NCAV) against market valuation.
How to calculate 'net current asset value'
NCAV compared to market value is calculated by taking a company's current assets and subtracting the total liabilities, and then comparing the valuation to its market value.
It is a valuation method made famous by Professor Ben Graham to determine if a company is trading at a fair market price. Graham argued that is a company is trading below 67% of its net current asset value per share it is probably worth investing in (subject to the usual caveats).
The perfect scenario is to buy assets that have a realisable cash value at a discount, and pick up rest of the business for nothing.
Three contenders
In practice it is rare to find bargains like this. French Connection is one such bargain viewed in terms of its share price discount to NCAV. MWB is at an even greater discount to NAV. Trafficmaster, heavily discounted to NAV is at a slight premium to NCAV but still attractive as it is actually profitable.
1. Trafficmaster (LSE: TFC)
Trafficmaster supplies satellite navigation and commercial vehicle tracking systems. Its shares have bombed in the past year and now stand at 19.75p.
For the year ending 31 December 2008 it reported a pre-tax profit of £4.8 million, which was 2% down on the previous year, with turnover up 15% at £55.8 million.
Its market value at £27 million is approximately half its net asset value of £54.8 million, as reported in the accounts for the year ending 31 December 2008.
The more conservative net current asset value of £21.5 million equates to a value of 15.7p a share, which means its share price is only at a slight premium to the minimum value placed on its assets.
I think this derating is overdone and, depending on your view of its future prospects, it is worth considering as a long term buy. Certainly it is one to look into.
2. MWB Group (LSE: MWB)
The share price of MWB, a property-related business group, has also been savaged in the past year, dropping 77% to 22p, giving it a market cap of approximately £16 million.
The group owns a 68% share of AIM-listed serviced office group MWB Business Exchange, which recently announced full year pre-tax profits of £14m for the year ending 31 December 2008, up 5% on the previous year. It also owns a 68% share of department store Liberty and a portfolio of hotels.
NAV at 30 June 2008 was £215m stripping out intangibles, which equates to approximately 297p a share
Figures for the year ending 31 December 2008 are expected in the next couple of weeks, and MWB is expected to improve upon the pre-tax loss of £13.8 million delivered in 2007.
In an announcement made on 11 February 2009 it said: "EBITDA of MWB and its subsidiaries for the year ended 31 December 2008 is expected to be substantially higher than the EBITDA of £26.8m for the year ended 31 December 2007 but may be approximately 10% lower than the external market expectation updated in August 2008."
I'd obviously wait until the year-end results are published and pay particular attention to its cash flow and debt situation. Still, it looks as though it could be a very attractive buy for the long term.
3. French Connection (LSE: FCCN)
Fashion retailer French Connection recently announced a full-year loss of £17.4m but its shares stand at 62% of its net current asset value per share. The loss included an impairment writedown of £11.9 million relating to the US business acquired in 2001. If you were to strip this out the loss was £5.5 million.
With its shares at 51.75p it has a market cap of approximately £50 million. From it latest set of accounts to 31 January 2009 its NCAV is £79.9m equating to 83p a share.
As any economic recovery is still some way off, this is one for the long term.
More on this topic: Three Asset-Rich Tiddlers | Value shares discussion board
