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The news that Liberty will be listing part of its property portfolio separately got me wondering about many of the other hidden values sitting on some listed companies’ balance sheets. In the case of Liberty, we always knew about its property holdings, which include assets such as Sandton City and a stake in Melrose Arch, as the company holds them on behalf of policyholders.
Metair Investments
Many other companies also have large property holdings.
For example, if we look at Metair Investments, which mainly manufactures and
distributes products for the automotive industry, its recent results show
property, plant and equipment of just under R3.3bn on its balance sheet, yet it
has a market cap of only
some R3.8bn.
On the surface this looks great, but we need to fully understand what the “property, plant and equipment” actually is. Certainly it’s not all property, so I look at the latest annual report for the period ending December 2015.
In this report it states that “all property, plant and equipment is stated at historical cost less depreciation” and it further states that “land is not depreciated”. Digging further into the notes, I find land and buildings making up some R1.4bn of the company’s figure for property, plant and equipment. The company also makes the point that some R266m of this property is encumbered as security for a bank overdraft and other borrowings.
But the point is that of the R3.8bn market cap, some R1.4bn is property on the balance sheet at cost, not at current values. So the actual values are potentially much higher, depending on when the land was bought. In truth, it also depends on where the land is located as not all property is equal. But at the end of the day, about a third of Metair’s market cap is underpinned by the property it owns.
City Lodge
Another stock to look at is hotel group City Lodge*. In its latest results the group says that property, plant and equipment totals some R1.8bn, compared with its overall market cap of around R7.3bn. In its annual report to June 2015, this R1.8bn number is pretty much just land and buildings (the buildings being hotels of course). There is a small amount of around R174m that is furniture and equipment. So we’re left with some R1.6bn of property and buildings, of which just under R300m is land on the balance sheet at cost, with the remaining amount the cost of the buildings.
In this example the value of the land is fairly low relative to the company’s market cap, albeit boosted by the buildings. But I would say it is safe to assume that the land values are likely much higher as the hotels are mostly in great locations, while the buildings likely have an even higher market value. If we double the land values and add 50% to buildings, we get some R2.5bn as the values of the hotels and land they sit on. Not shabby for a company worth about R7.2bn at the time of writing.
When I first did this calculation on City Lodge a few years back, the market cap was around R2.4bn (6?000c a share) and the values I worked out for buildings and land were some R1.4bn, as I recall. In other words, I bought a fantastic company with about 60% of the price being its buildings and land; a great deal. Now that City Lodge shares are closer to R165, the gap has widened markedly.
Be sure to take a careful look
Without doubt, there are other companies we can dig into. When checking a balance sheet, we often just run our eyes down the list, noting cash without looking at the details. As always, some extra digging can reveal some great gems.
Note that real estate investment trusts (REITs) operate differently as their properties are an investment vehicle and hence they are revalued regularly.
*The writer owns shares in City Lodge.
This article originally appeared in the 8 September edition of finweek. Buy and download the magazine here.
