THERE has been a most sobering re-appraisal of value on the JSE in recent months, with the market gloomily discounting share prices to levels that in the early parts of 2008 would have been considered outrageously cheap.
These days cheap just gets cheaper, even if investors are tilting at value propositions locked up in conglomerates or investment trusts.
But somewhere along the line there will be a temptation that cannot be resisted, a situation so enticing that it would require incredible discipline to let alone.
While there are a few situations on the JSE I would (politely) term interesting, the most compelling situation under my gaze at the moment is unlisted liquor group KWV Limited.
The last time I wrote on KWV (in Finweek, during late September 2008), reference was made to a strategic review being undertaken at its Paarl headquarters to determine the best way of taking the unlisted group forward for the benefit of shareholders and stakeholders.
In that article KWV CEO Thys Loubser indicated that the review recommendations ? which should be disclosed in the early part of 2009 - could entail listings or unbundlings.
Considering the fact that investment sentiment has just about dried up on the JSE, it would seem that any efforts at listing KWV should be undertaken over the longer term.
Unbundling option
So that leaves us with the unbundling scenario. For those who don't know, the bulk of KWV's value and earnings come courtesy of its 18% stake in rival liquor group Distell (held via the listed KWV Investments structure).
With KWV's own operations recently turning profitable, there have been suggestions that the group can now afford to let go of its stake in Distell.
But the Distell stake might not fetch the optimal price in current market conditions, and KWV may then be content to hang onto it. After all, what could be more comforting in tough trading times than collecting generous dividends from your biggest rival?
Of course, someone might make a bid for the Distell stake that KWV simply can't refuse. After all Distell has two major shareholders ? Remgro and SABMiller - which along with KWV controls almost all the issued Distell shares. If anything, KWV could be a kingmaker.
The really interesting aspect of KWV's Distell investment is the valuation. KWV ? according to research undertaken by Independent Securities - holds a net asset value (NAV) of about 389c/share. This calculation is based on KWV Limited's 60% holding in KWV Investments.
Currently KWV Limited is trading at 340c/share on the OTC (over-the-counter) market, which means the shares are discounting the KWV Investments stake by sbout 12%.
But if we take the actual "see through" value of KWV's effective holding in Distell (some 200 million shares at the last traded price of 5 800c), the inferred value of this stake is just over R2bn. That is equivalent to 459c/share, meaning the KWV Limited OTC price is offering a discount of closer to 25% on the Distell stake.
Freebie fest
So here's the deal. By buying KWV, you are effectively getting Distell at three-quarters of the price the shares trade on the JSE.
But that's not all, folks. This valuation accords no value (nada, zero, zilch) to KWV's own liquor manufacturing and marketing operations. In other words buying KWV at the current level not only garners you a cheap entry into Distell, but also gives the Paarl-based brandy and wine operations for free.
In the year to end-June KWV's own operations generated about R75m in profits. It seems safe to assume that if we strip out the Distell profit contribution, KWV operations would have generated (after tax and finance charges) about R35m at bottom line, equivalent to about 9c/share.
Working on a modest historical earnings multiple of eight times, we could reasonably place a value of about R280m on KWV operations. That value naturally looks past the potential worth locked up in some of the best agricultural land in the western Cape and valuable stockholdings.
Conservatively, I would value KWV Limited at about 500c/share, taking into account recent developments in the global economy.
With such an attractive discount at play I reckon it's worth forgoing your expensive tipple for a few months (what's really so bad about box wine anyway?) just to stock up on some KWV.
And rest assured, when KWV does eventually list on the JSE you'll be able to afford to top up with some of company's finest brands.
Fin24.com