09-09-2015, 04:53 PM
testwrite Wrote:so it there value or not? it cannot be in both states
i think the option value answer is good, but impossible to predict future states, so hard to discount back to get option value
"negative US$284m, or about minus S$0.20 per share" is easier to think in term of fundamental analysis, but using 7x adjusted EBITDA, all banks will have negative value also, couldnt reconcile that also
The price of any asset is made up of two components: investment value, as defined by the underlying cashflows generated (which are either paid out or reinvested and paid out later), and speculative value, as defined by the possibility of resale at a profit.
At a low price, there is a large investment value component present, and the investor is paying little or nothing for the speculative value. However, an asset that has high investment value usually has good speculative prospects as well, a point noted by Benjamin Graham in The Intelligent Investor. So it is a case of "buy one get one free".
At a high price, the underlying investment value has not changed, instead the investor is paying a large premium for the speculative value. If the investor is wrong about the speculative prospects, he will suffer badly as he will be dependent on the underlying investment value, for which he has paid too much.
In the case of Del Monte Pacific, the EV/EBITDA analysis is predicated upon the underlying cashflows and hence refers to the investment value component. Based on 7x EV/normalized EBITDA, the appropriate investment value of the shares is negative.
However the speculative value of the shares is not zero for as long as the shares exist, which is why they have option value. The shares have no expiry date, hence they are effectively perpetual call options.
Since it is too early to tell whether the management is doing a good job, it is very difficult to put a number on the speculative value of the shares. As a speculation, they are definitely not worth zero, but beyond this, it is hard to say.
Personally I would place this in the "too hard" category and move on.
EV/EBITDA is normally used for conventional operating businesses e.g. manufacturing, logistics etc. It is a proxy to gauge how quickly an owner can take back his investment cost. It frowns on excessive debt because a downturn can result in serious cash flow problems leading to default and bankruptcy. Hence, the 5-7x rule of thumb.
Because of thin spreads and high regulatory costs, banks require very high levels of leverage to operate profitably, usually 10x or more. But the main risk to banks is not a downturn causing the bank to default on its debts (which are actually the deposits of its customers). The main risk is a downturn causing borrowers to default on their debts (which are actually the assets of the bank).
Investors in banks usually study the non-performing loan ratio, the bad debt provisioning and so on. If they are not sure they will usually demand a haircut on the value of the bank's equity, on the basis that the equity will sooner or later be impaired by the bad debts. So P/B is a more common metric when analyzing banks. P/E is also used when the investor is confident that the bank will survive its current troubles and return to its former profitability.
As usual, YMMV.