VALUE INVESTING
SVB Holdings

By Stephen Bland (TMFPyad)
May 12, 2000

Sorry guys, no whimsy this week, no tales of love, requited or otherwise, it's time to get heads round some numbers for a change. We've even got a totally unironic, matter-of-fact, in your face title, just the potential target company's name.

As so often, this company caught my eye in last week's Investors Chronicle and I thank them for permission to reproduce their data.

The company's year end is 31 December 1999 and those results were reported amongst the IC's weekly results feature. The most valuable part of the magazine, and an absolute goldmine over the years for me.

As I've written, it takes no time at all to whip through the little table of information at the bottom of each company's results, which usually occupy one column out of three on a page. Remember, I'm looking for the pyad criteria in the first instance. I have no interest at this stage in what the company does, not even what its name may be.

Focus on the table at the bottom of the three columns. Above the historical results. Shut your mind to all else, no phones, no people, no nothing. This is important. Start with the tightest filter, if that fails no point in looking further. Nearly every company will fail. That tightest filter by a long way is "A". Assets per share, or the reciprocal P/BV as it is more commonly known these days. No more than one or two seconds per company is all it takes. You can do the whole magazine in less than a minute.

I find that SVB Holdings (LSE: SVB) at 82p has net assets of 119p, or net tangible assets of 114p. P/BV therefore of well under one. I'm starting, marginally, to get interested.

Second tightest filter, debt, lack of same and plenty of net cash desirable. No comment by IC. Wot? Look into that later. Sometimes happens with financials as I glance up the page and note that this is one of those listed Lloyds companies that exist on the stock market. Mental note immediately flashes up from memory that these tend to hang around at very low valuations, almost certainly because of poor reputation of Lloyds. They have come up in trawls before for this reason. Possible attraction here is that a good quality value play in a bombed-out sector can benefit from the double action. First the sector may get a rerating and second, the share itself may be rerated on top of that. I don't need the sector rerating to make my money, but it sure can't hurt any. It increases the attraction of the share.

We're on to the weakest and most commonly found criteria now: price to earnings ratio (P/E) and yield. Well, the IC quotes a historical P/E of 4 which is extremely attractive, and a yield of 4%, which although it satisfies my requirement of 50% over the market, currently 2.2% on the FTSE All-Share index, obligingly also quoted by the IC at the back, is not that high. I don't even need to look up the P/E on that index because at 4, SVB is going to be way within my limit of a maximum of one-third under the market. For the record though the P/E on the FTSE All-Share is 26.3, which means I could go up to about 17.

In practice however this is astronomically high for me, normally I would have to take complete leave of my senses to consider a share on a P/E as high as 17. I'd rather play Russian Roulette with a bullet in every chamber than throw money away on shares that dear, even if they are that cheap as pyad shares. I might conceivably make an exception if the earnings per share (EPS) forecasts showed such growth that it, say, halved the P/E to 8, implying a 100% growth in EPS. But that apart, even double digits make me nervous, at a time when the market is at a P/E of 26. Of course if the market dropped to, say, 12, then my limit would be a more reasonable 8, but in practice that is more like the kind of P/E I end up buying anyway, even with high markets.

Okay, so apart from the lack of net cash or debt figures the company qualifies. So I move my eye back to the top of the column and read the IC comment. There appear to have been a lot of exceptional items in the 99 EPS figure of 19.5p, which gave rise to the stated P/E of 4. According to the magazine, taking these out gives pre-tax profits of £3.3m. I need that converted to EPS, so a quick bit of mental arithmetic tells me that this is around 3p, a bit less in fact, but I don't need any calculators yet, it's all going on in my mind at this stage. The P/E now looks a much sadder 30 or so. No interest at all to me of course but I read on anyway, maybe there's a huge boost in the forecast.

The "combined ratio" is below 100%, says the IC. This is the ratio of claims to premiums. An important statistic in this industry. In the case of Royal & Sun Alliance (LSE: RSA), for instance, the CR is over 100%. They pay out more in claims than they take in premiums. Quite common in the insurance game, where the money is actually made on investment income rather than on underwriting. But SVB has been turning a profit on underwriting if its CR is below 100%.

I read further, stuff about online brokerage business and froth like that. Not interested thanks, I'm a value player. Seems also that there was an acquisition which the IC mentions has gone well. Rare. Acquisitions normally don't go well.

Right, my appetite has been whetted. At this point I have not spent more than a couple of minutes on this company. Despite some adverse characteristics like the high normalised 99 P/E, the lack of cash or debt figures and the techie bull, I have a soft spot for financials in general. I power up CD-REFS and have a look at the page on SVB.

It confirms my view on Lloyds companies never doing much. The share price over the last few years has moved within a reasonably narrow range in each year. For example in 99 the high/low was 150/108. Why should it change now? Well, only if the sector is rerated. What are the chances of that? If you see that EPS, historically, is all over the place, then not much I guess.

I look down the page of REFS to try and locate cash or debt figures. Again there are none quoted, just like the IC; I don't like this situation too much but I'm assuming for the moment that there might not be any debt. With businesses like banks or insurance companies, cash doesn't mean much because that's what they hold anyway. So one looks at the debt figure but there's nothing here.

A glance at the relative strength figures shows a powerful relative weakness over the last year of 35%. I like that, always sweetens my view of an otherwise attractive company. I'm after that which the market does not want to know about. The more it has been shunned, blacklisted, cast out, the better.

Next, look at the EPS forecasts, absolutely critical and central to the game. Remember cheap value shares often stay cheap value shares, meaning that they are not cheap value shares. The consensus is 5.3p for 2000, giving me a forecast P/E of about 16. Gigantic, stupendous, a wrist slasher. Within my 2/3 of the market limit, but see above on double digit P/Es.

All right, while I'm here might as well look at the chairman's comments extracts. A number of buybacks have been made over the last few months and this fits in with statements by the company that "attainment of a premium rating for SVB shares is amongst your board's top priorities" etc.

Yeah sure mate, how about getting that premium rating by a large increase in EPS instead? That's what will rerate your shares, not buybacks. I'm being a bit cynical here – not like me. The truth is that I get quite a pleasant glow from all the chairman's comments extracts. It actually smells reasonably good.

But I turn it down. Main reason? The enormous P/E, even on forecast. I could have ascertained the debt situation. Got hold of their accounts if I wanted to really investigate it. But I give up at the P/E break point, even though I quite liked the share in some ways.

So I've looked here at an abortive one, the purpose being to illustrate the kind of process that goes through my mind when considering shares. The whole thing took probably no more than ten minutes. In fact it's taken me far longer to write about the process here than it took to actually carry it out.

Most shares do prove abortive ultimately, even those that at first sight appear attractive, because the holes in my sieve are microscopically small, deliberately so. I want only the very best shares to pass through, which happens rather rarely. Often the failure point may be some very minor thing that I don't like, in an otherwise highly attractive share; it doesn't take much for me to back off, I am extremely choosy. But I don't regret that, it has to be that way for me, because of the risks of staking a lot on just the one share.

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