I’ve got the CFA Level I exam in just under a month, and I won’t be posting until I’ve sat that.
PGC is a truly unique situation. It has evolved into an Australasian asset and wealth management business with three business units:
- Perpetual Group
- Torchlight Investment Group
- Property Group
The only way to value this stock is sum of the parts, based on asset value. Let’s start with Perpetual Group.
The Perpetual Group (Perpetual Asset Management, Perpetual Trustee, Perpetual Portfolio Management) is currently being sold. PAM and PPM have already been sold for NZ$9.8 million.
According to a Grant Samuel valuation report from November 2011 (which almost certainly understated the value of PGC, given that it assiged $0 to PPM) the remaining piece, Perpetual Trustee, is worth approximately $11 to $12 million. So all up $20 million for the Perpetual Group looks about reasonable.
Interestingly, PGC’s most recent interim report has the Perpetual Group and van Eyk listed on its book as discontinued operations held for sale, with a book value of $9.2 million.
$9.2 million? Since that interim report, PGC has already sold PAM, PPM, and its van Eyk interest for $26 million (be sure to convert to NZD), and we haven’t yet found out how much it will get for Perpetual Trustee. I think it’s fair to say that PGC’s book value generally understates its true value. I’ll come back to why that might be the case at the end.
That leaves the Property Group and the Torchlight Investment Group. The Property Group has a book value of $10 million. It’s hard to get a sense of whether this is a realistic proxy for market value – let’s halve it and take $5 million
The real difficulty is figuring out Torchlight.
Torchlight is a bundle of companies and general and limited partnership interests that PGC owns. It’s an incredibly complicated structure and untangling it into some sort of value assessment is very difficult.
Torchlight just sold its interest in van Eyk Research for NZ $16.2 million.
So if you take the enterprise value ($72 million = $54 million equity + $18 million debt), and subtract the cash from recent sales, a likely $10m for Perpetual Trustee (perhaps conservative), the $5m in book value for the Property Group (perhaps not so conservative), you’re left with the remaining equity representing Torchlight’s remaining interests being $31 million.
For that $31 million, you get Torchlight’s 42 million shares in EPIC, which is a privately held investment company that owns Moto, a motorway services company in the UK. Each share has a current NAV of $0.55, according to EPIC’s website. It’s very highly leveraged though, and there are legal disputes. But management are suggesting a listing on UK’s AIM exchange might provide a better gauge of the true value. Check out this April 2013 management letter to get a sense of EPIC’s situation.
Let’s just value the EPIC holding at half the reported NAV, so let’s say $0.275. That makes the stake worth roughly $11.5 million.
You also get Torchlight Fund No.1. Now, part of the whole reason that this thing trades at a discount is simply because of how little information there is on what’s actually in Torchlight. We know it was set up in July 2010 to make “counter cyclical investments at a time of low liquidity in the banking and investment sectors”. Clearly if you do that well you can make some money, but if you do it badly you’ll lose plenty too.
It’s worth pointing out that Torchlight Investment Group (TIG) is the general partner of Torchlight and receives monthly management fees and performance fees (if applicable).
So you get to buy the manager with all its fees, and some partnership interests as well, all at a hefty discount.
Aside from its interests in EPIC (which I have consolidated above with PGC’s own direct interests in EPIC in the discussion above), Torchlight has a book value of $30 million. As for what it owns, well, that’s kind of hard to tell…
The Grant Samuel report listed book values of Torchlight Fund No. 1 of the following:
|Mortgages and investments in land||88.5|
|Shares in EPIC||4.9|
|Convertible notes in EPIC||13.4|
|Shares in Australian listed companies||25.4|
|Sundry creditors and debtors||0.9|
I’ve struck out the EPIC interests, because the convertible notes converted to equity, and I’ve counted the aggregate interest above. What we have left is $109.2, of which PGC only owns a share (there are other limited partners).
The Grant Samuel report took the NTA at that time and came up with $14.1 million, and valued the management contract of the general partner at $8 million. This compares with the most recent interim report of PGC, which gives the book value of the Torchlight interest at $30.5 million.
I’ll use the most recent book value of $30.5 million, which, as far as I can tell, does not value the management contract (valued by Grant Samuel at $8m). I think this book value is almost certainly incredibly conservative. The Grant Samuel valuation report gives a hint as to why that might be the case.
The independent valuation report was produced because George Kerr (the managing director, and substantial shareholder) in conjunction with Baker Street Capital, put in a super lowball offer for the company at $0.33. The independent valuation report put the value at between $0.49 and $0.57, and noted as regards the writedowns:
At 30 June 2011 the directors of PGC, in conjunction with the auditors, undertook an extensive review of the value of all assets, which resulted in a write down of asset values by $87.5 million resulting in an NTA per share of 59.6 cents. George Kerr is a director of PGC and would have participated in the re-appraisal of these asset values.
Get the hint? George Kerr wrote the assets down to make his lowball offer look less embarrassing. In the end he and Baker Street Capital upped their offer to 37 cents, and ended up getting 77% of the company.
Before I address the whole management issue, I should deal with the liabilities.
I have taken total liabilities form the interim report, and subtracted the liabilities held for sale (some of which have been sold and so will no longer be on the books), and the liabilities for MARAC finance receivables (non-recourse to the property arm, which I have given a $5m book value)
So here we go:
|PAM and PPM sale cash||9.8|
|Van Eyk Research sale cash||16.2|
|Perpetual Trust (yet to be sold)||10|
|Property Group (half book value)||5|
|EPIC (half most recent NAV)||11.5|
That total is effectively the equity interest after some heavy discounting. Current market value of equity is $54 m. Although the discount doesn’t seem enormous (buying $1 for $0.83), I have been incredibly conservative in the above table. It really is a worst case scenario in terms of asset value.
I’ve bolded the Torchlight interest, because I think it could easily be worth $60m. If it were, we would be buying $1 for $0.57. If Torchlight were worth $60m, and the EPIC NAV were accurate, we would be buying $1 for $0.50.
There’s even a possible partial catalyst. Here’s a sentence from PGC’s 30 June 2012 annual report:
As the majority of future PGC investment will now only be investing offshore or via the funds it manages, we intend to return to shareholders the proceeds of the sale of Perpetual in the form of a capital return.
That would be great, but there have been subsequent Perpetual sale announcements, and any reference to a capital return has disappeared.
And herein lies the rub. This is an incredibly complicated and opaque stock. We just don’t know the value in the Torchlight group, and my valuation is not a worst case scenario if management steals the company.
How could management steal the company?
It could do a bunch of things. The first is that George Kerr could, in conjunction with Baker Street Capital (who together own 77% of the company through an entity called Australasian Equity Partners) issue a heavily dilutive equitive offering that not all shareholders could subscribe for.
That wouldn’t apply to me – I would buy a small enough stake that I could likely subscribe for further shares.
But they could make it harder. George Kerr has already talked about shifting the company off the NZ stock exchange.
He could list it in another country, quickly raise dilutive equity and make small shareholders struggle to organise subscribing for further shares in a different country, with a different currency, where small shareholders have no relationship with brokers or banks.
Would he do these things? Well, a group of shareholders have a blog dedicated to alleged nefarious deeds of management. You can see hit here.
Furthermore, here’s a list of questionable activities he has been involved in:
- PGC is forced to unwind related party lending when George Kerr requested $7.5 million from a conservative cash fund run by Perpetual, to invest in its Torchlight (basically distressed debt hedge fund).
- PGC is forced to back away from proposed investment in litigation funding, because that litigation funding is targeted at finance companies who lost millions of dollars of New Zealanders savings, when Perpetual itself was a trustee for many of the failed finance companies.
- Extracting outrageous fees from poor suffering EPIC shareholders to finish the management contract with EPIC (note that PGC (and therefore PGC shareholders) got the benefit of this, but it still stinks. Read this and note the title - George Kerr and the final assault on PGC).
So I’m going to wait on the sidelines. I did a lot of work on this stock and really wanted it to work, but it’s still not cheap enough if you take a huge management discount, which does seem necessary.
I may buy the stock if either of the following happen:
- Management indicate they are returning the proceeds from the Perpetual sale to shareholders.
- The share price drops even further. I am a strong believer that there are no bad stocks, only bad prices.
It should go without saying, but if a reader is interested in this stock, he or she should really do their own research. This was incredibly complicated, and I have simplified certain aspects and ignored others. I could have easily made an important mistake – if you’re interested in doing further work you should verify all my claims above before diving deeper.
Disclosure: no position
I’m conscious that I haven’t posted in a while.
I’m working on a complicated New Zealand stock and have yet to make up my mind as to whether I should buy it or not. The stock is Pyne Gould Corporation (PGC) if anyone else wants to take a look. Hopefully I’ll finish this weekend.
Basically, there is huge value, but I don’t trust the management at all.
In the meantime, I bought some Apple shares.
I sold the rest of my Fairfax Media shares at AUD$0.665 today.
After Fairfax sold TradeMe the price started to run up, and my whole thesis (that the market was valuing the Fairfax Media stub at an absurdly low valuation) played out pretty quickly.
I still don’t think newspapers are necessarily dead, and think that Fairfax has a good shot of moving advertising online and maintaining subscription revenues. But the margin of safety had shrunk significantly, in the best way possible – the share price went up!
All in all, average cost was $0.38, average sale price adjusting for dividends was $0.565, for a 49% return. It was my largest position and it paid off well.
I now have the largest cash position I’ve had since I got seriously interested in investing. I might write a bit about the lack of currently cheap stocks in New Zealand in a separate blog post.
Disclosure: No position in Fairfax Media.
One of my favourite companies is Nicholas Financial – a subprime auto lender. See previous posts by clicking here.
This reuters article suggests we’re seeing a bubble in subprime auto lending, with some pretty outrageous loans being requested and given.
If the stories are representative, then I think NICK being sold would be a great outcome – sensible underwriters can’t compete for loan growth with people who are throwing money out the door.
I haven’t given a Kirkcaldies & Stains update lately, and given that it has been my worst performing New Zealand stock, I thought I should take another look. You can see previous posts by clicking this link.
To briefly recap: Kirkcaldies is a department store that also owns a valuable building that is undergoing earthquake strengthening and being refitted for its newly re-signed tenant, Contact Energy.
I’m interested in the stock because the building’s independent valuation is greater than the enterprise value of the whole company.
The stock currently sits at $2.60. The building is carried on Kirkcaldies accounts at $23 million, and Kirkcaldies’ market cap is $23 million (but it does have about $17 m of debt, and $6 m in payables).
But the building’s most recent valuation was $46.5 million.
That valuation was carried out before the contract renewal with Contact Energy was signed.
This new contract also requires $6 m refurbishment of two floors of the building. I assume that the new contract with Contact maintains the building’s current value at $46.5 million, but we don’t know enough about the terms of the new agreement – it could have increased or decreased the value of the building depending on the relationship between the rent, the refurb cost, and the capitalised value of the refurb in the building.
Here’s what the Chairman of the Board said about the building and a potential catalyst on 13 February:
In October last year we received an unsolicited conditional offer for the HCC building. This ran on for several weeks while the prospective purchaser undertook their due diligence investigation. Unfortunately this did not lead to an unconditional contract for shareholder consideration and the offer lapsed. The building is currently not listed for sale and in the next few months we will continue to concentrate on the Contact Energy re-development program. Later in the year when the Harbour City Centre is fully let we will revisit our options.
Restructuring our two businesses
On the 21st of December 2012 the company announced it had appointed external parties to provide advice to the company on the corporate restructuring options to facilitate the separation of Kirkcaldie and Stains Properties Limited which owns the HCC, from its parent company Kirkcaldie & Stains Limited. If the restructuring proposal proceeds it is likely to involve shareholders receiving shares in Kirkcaldie & Stains Properties Limited and therefore holding shares in both companies. The restructuring will be subject to shareholder approval and the company will appoint an advisory firm to assist shareholders in their decision making process. While these plans are at a very preliminary stage and the Directors are seeking advice on the options, we envisage being able to update shareholders on these plans before the end of April.
Reading the emphasised lines above, I suggest the following chain of events is likely:
- Within a month or two, Kirkcaldies reveals its plans to split into two companies, one concentrated on retail (bad business), the other having ownership of the valuable building. There may be some arrangement whereby the bad business owns some shares in the valuable building to prop up its balance sheet.
- Later in the year when earthquake strengthening and refit is complete, the Board decide to list the valuable building for sale, when its rental yield is clear to the market
- The building is sold at its valuation, within 6 months.
- There is some value left in the remaining (bad) business – perhaps only liquidation value.
That’s my ideal scenario, and reading the comments from the Chairman above, I believe it’s quite likely. From there, it’s all about numbers. Here’s a spreadsheet where you can play around with various numbers to see likely per share value. I get to about $3.20 relatively easily when valuing the bad business on liquidation value. If the 150 year old department store has some goodwill attached, then add in a value there and see the value increase.
The second worksheet of that spreadsheet is a calculator that takes today’s share price ($2.60) and assumes value received for the building in 12 months, and liquidation value for the business in 18 months, and calculates an internal rate of return (IRR). (Note that there’s a good chance that when separated, the retail business might trade above liquidation value).
I get an IRR of 21%, which I’m comfortable with given that I feel that I’ve made conservative assumptions to get to that valuation.
Disclosure: Long more Kirkcaldies