Does a very low price to book value indicate a lame horse that's just about to recover and sprint ahead, or one that's ready for the glue factory?
After taking a look at some valuation methods based on a company's book value (that is, the written-down valuation of a company's net assets), I thought today I'd use those methods to have a look for some possible bargains. So I did some searching on companies with low Price to Book Value (PBV) and Price to Tangible Book Value (PTBV) ratios, and I found a couple of interesting (not to mention eyebrow-raising) ones.
Premium corpse?
The company with the lowest PTBV ratio I can find is Premium Bars And Restaurants (LSE: PBR), with a staggeringly low value of 0.03, which means its tangible book value stands at more than 30 times its current share price.
What does the company do? According to its website, Premium has "a diverse portfolio of over 50 bars, restaurants and clubs in the UK, as well as two hotels, The Waterside on Newcastle's quayside and The Rex in Whitley Bay".
Based on estimated earnings for the year ending June 2009, the company's prospective P/E stands at a lowly 1.3, and over the past few years it has reported positive cash flow. The current share price of 1.75p values the whole company at just £700,000 (How much does just one hotel cost?). What can be wrong with such a cheap-looking share?
Plenty, is the answer, as the company is essentially insolvent. Prior to a recent nosedive in its share price (this time last year the shares were trading at over £1, but fell to around 6p by December), the company announced that it was unable to renew its banking facilities, and has since been unable to issue audited accounts for 2008. As a result of that, trading in the shares has been suspended.
Basically, the company is in deep debt and is unable to keep up its interest payments. It is currently only staying afloat on short-term loans, conditional on selling off some or all of its assets -- the banks have recognised that the value in the company is its assets, and that a sale is the only way they'll get their money back.
Of course, with no audited accounts since 2007 and no way to properly examine the claimed book value of the company's assets, it would be a foolhardy investor who assumed that PTBV value of 0.03 is realistic. However, this looks to me like one for asset-stripping specialists to take an interest in, and I wouldn't be surprised if a lot of the investors who bought in at penny prices had exactly that in mind. I'm certainly no expert on companies like this, but I think there would have to be something seriously amiss for shareholders not to get back significantly more than the 1.75p the shares were suspended at if everything was sold off. And there must be a good prospect of a considerably higher share price if the company manages to dispose of enough to get itself solvent again.
Cheap Land?
Real estate companies often see their share prices geared up from property prices -- leaping higher than houses when things are looking good, and falling harder in a downturn. British Land (LSE: BLND) is no exception to that. In 2007 its share price rocketed ahead of property prices, peaking at over £16 per share, while today it has slumped to 397p (though that's up from its recent low of 301p).
The company has had a dreadful year ending March 2009, with provisional results showing a whopping loss of £6 per share. But it did maintain its dividend, and things are expected to get better, with analysts estimating earnings per share of about 27p for the next two years (and similar dividends). That suggests a prospective P/E of 14, which doesn't seem like much of a bargain, and land-based investments are really not the flavour of the moment. But the company's Price to Book Value is so low, at 0.35, that much of the pessimism surrounding the property market must surely already be factored into the share price.
While I can't see much happening to the share price while we are deep in recession, I do think that tangible book value does help to mitigate the downside, and the company's handsome prospective dividend yield of 6.7% is a nice little earner if it can be maintained. Again, I'm no expert in this company and I wouldn't invest on this cursory glance, but I wouldn't be surprised if a few canny investors have some shares tucked away for the long term.
Are you a follower of this style of investing? If so, I'd love to hear any thoughts you might have. So please feel free to add any comments below, even if it's just to tell me I'm nuts for even looking at these companies.
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