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Seven shares trading at a big discount to NAV

Some London-listed shares going at big discounts

Important: What follows is not a recommendation to buy or sell shares in any companies or trusts. I am just a private investor, storing and sharing my notes. Read my disclaimer.

I have the impression the stock market has currently taken a dislike to private equity and unlisted holdings, as well as any ambiguity or a lack of transparency (although the latter is usually partly in the eye of the beholder).

It won’t be like this forever. A few years ago, the big growth and income investment trusts were trading at a sizeable discount, whereas now they’re all on a premium. Investors today want income. Fashions change.

I suspect that someday, all other things being equal, the following companies will be more favoured and the discounts will be smaller – hopefully because the Net Asset Value (NAV) at least held up, and the share price rose.

But nobody can be sure – the discount could narrow instead because the NAV falls – and I certainly have no timetable in mind in most cases. As ever do your own research and make your own mind up if you’re interested in pursuing these discount to asset plays.

Daejan

Ticker: DJAN

Many commercial property companies are now trading close to NAV again, but not Daejan. It’s a property company run and partly owned by the founding Freshwater family. It owns commercial and residential property in the UK and the US, and it tends to issue very scanty releases. I get the impression most of its portfolio is not prime, though I think it has some prime assets, including in London. A good run had taken the share price to well over £32 by the start of April, but it’s now back at £27. At the interim stage last September the company said it had assets of £51.53 per share. Assuming no change since then, that’s a 47.6% discount to book. The shares tend to trade at a big discount, mind, but they did climb to a premium in the last property boom.

Electra Private Equity

Ticker: ELTA

Private equity trusts were hit hard in the downturn, as some private equity companies collapsed or were heavily diluted by the sheer weight of their debt. Electra Private Equity has come through fairly well, and recovered from a sell-off that took its discount to NAV to over 60% in 2009. As I write the discount is estimated at 31%, according to Trustnet, and it was recently even bigger1. Private equity should trade at a discount due to the uncertainty about valuations, but a smaller discount of 15% to 20% is feasible in better times. Electra says it’s cautiously picking up good deals, including the assets of deleveraging banks. You’ll definitely want to dig into its reports; the very recent presentation to analysts [PDF] is a good start. Note that while Electra itself doesn’t have much debt, most of its portfolio companies do.

Caledonia Investments

Ticker: CLDN

I have written about Caledonia before. Ten months on, the discount has widened from 20% to over 30% according to Trustnet. If the share price was to rise to the current NAV, an investor would see a nearly-45% gain. If it rose because the NAV was rising too, the gain would be even greater. Unfortunately, according to its latest annual results Caledonia’s NAV declined 7% in the past financial year on a total return basis, compared to a 1.4% rise in its benchmark. I still have money in Caledonia, but so far the market has been right. With even blue blood RIT Capital Partners recently flirting with a discount again, less illustrious Caledonia is probably one to tuck away and forget about for five years.

Gresham House Investment Trust

Ticker: GHE

I said above that there’s not usually a timetable with an asset play, but that’s not quite the case with Gresham House. Its managers have decided they can’t make its brand of property investing work in shareholders’ favour in the current climate, so rather refreshingly they’ve decided to liquidate the portfolio and return all cash to shareholders. Recent full-year results put basic net assets at 427p per share, compared to a mid-price of £2.82 as I write. There’s a horribly wide spread, which could see you pay £2.95. On that basis there’s a 30% discount to NAV, or a gain of 44.5% in maybe one to three years. Management will still be drawing expenses, however, which could reduce the NAV; set against that a recent disposal went above book value.

Hansa Trust

Ticker: HAN / HANA

This is a similar deal to Caledonia – a big and old family-founded investment trust that is trading on a steep discount despite a very good long term record. Hansa was at least beating its benchmark over the latest six month period it officially reported to investors, though admittedly that takes us all the way back to September 2011. Its portfolio is more straightforward than Caledonia’s, except that roughly 40% is in one listed company, Ocean Wilsons (Ticker: OCN), a Brazilian tug operator that has its own emerging market portfolio. According to Trustnet, Hansa’s non-voting shares are on a 25% discount.

Jellybook

Ticker: JELY

Jellybook Limited is a cash shell that raised money last year to buy into a social network company. It has yet to make its investment, and as of 31 December 2011 it was sitting on £10.5 million in cash, against a market cap of £7.45 million as I write. That means there’s a near-30% discount on cash here – and cash is cash. Of course the manager plans to pump the money into a currently unknown company that I think is unlikely to be bought cheap, though with Facebook shares declining perhaps the shine has come off the sector. In any event, in the dotcom days (when the manager was also active) a shell like this might have traded at a premium. Despite the discount on cash it’s probably the highest risk of all these shares, as we have no idea where the money will go.

Ventus 2

Ticker: Ven2

Another very high risk share, this backer of wind turbine projects is suffering from multiple simultaneous reasons for its discount: It’s a little understood VCT, it’s horribly illiquid, a couple of its investments have been written down to near-zero, management has changed – oh, and the wind didn’t blow so much in the UK in the past couple of years, making potential investors lairy of the historical data. Other less cultured blogs would use a colourful term for multiple adults enjoying sexual relations at once to describe this confluence of negative influences, but I’ll just call it the group hug from hell. The bottom line is that the shares are trading at a 37% discount to a marked-down NAV. The potential catalyst for change is that new management says it’s cleaned the stables, and now hopes to deliver a dividend of 3.5p a year for the next three years, rising to 4p to 6p within five years. A disastrous foray into non-wind energy means its original investors will probably never see the 6p to 8p annual payout first targeted, and the high TER means there’s little chance of NAV growth, but a nimble nibble might secure a long-term tax-free income of around 10%. Ventus 1 shares once traded (ludicrously) at a premium to NAV, but I’d personally only invest from here in the hope of perpetual junk bond-like income.

Note: As I write I own shares in Caledonia Investments and Ventus 2, and may or may not buy or sell shares in all these companies. I take no responsibility for any decisions you make as a result of this post – read my disclaimer and do your own research. Remember most people will do better investing passively.

  1. Note that Trustnet uses an estimated NAV figure. For greater confidence when buying into a discounted trust, you need to wait until the company issues an up-to-date NAV, and then time your purchase accordingly. []

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{ 7 comments… add one }
  • 1 Neverland June 11, 2012, 3:19 pm

    Well heres my stream of conciousness thoughts:

    Caledonia

    The trouble with Caledonia is that, apart from a brief flirtation with meritocracy (sp?) when Tim Ingram was in charge, you have to be a Cayzer to run it and that gene pool isn’t that wide. I have hemmed and hawed about Calendonia myself at this discount level but things would have to get worse for longer for the family to bring in professional management again…

    Electra

    I used to have shares in this pre-crash. When the time came to go back in I bought Dunedin Enterprise Trust instead because it was at a higher discount a little more conservatively run. DNE is still at a higher discount to NAV, however they just did a tasty tender offer buying back shares at a 10% discount to NAV and have undertaken to return half of the proceeds of any future investment sales to their shareholders as dividends. So in terms of purely getting you money back sooner at no NAV discount I would prefer DNE

    Daejan and Gresham House

    It all looks fine on paper but all the assets here are property where the valuations are highly subjective. Trying to sell into a weak market, like Gresham is, can cause you to have to take low ball offers. At Daejean you are basically hoping the Freshwaters (I think thats the families name) will buy you out with debt to take the company private. Why would they? They have permanent outside funding with optional interest payments in the form of dividends. They tell outside shareholders very little and they are not answerable to them either. A win-win if I was a family member…

    Jellybook

    You are having a laugh surely? 🙂 I would suggest anyone who is a fan of corporate train wrecks should have a look at the RNS announcement history of its less than illustrious predecessor Jellyworks set up during the dotcom bubble a decade ago…

  • 2 The Investor June 11, 2012, 4:00 pm

    @Neverland — Thanks for the feedback, lots of food for thought. Just briefly as I don’t want to crowd out anyone else’s comments, I would point out that Daejan has one of the longest dividend records in the FTSE, so I think optionality is a bit harsh/unwarranted. Totally agree about Jellybook — as I say in the post it’s probably the riskiest of all these — but when you’re being offered a big discount to pure cash, I think it’s worth considering (not that I have invested myself…)

  • 3 ermine June 11, 2012, 10:05 pm

    Somethign you’d expect to happen but doesn’t seem to be happening at the mo is if you buy £1 of shares for 70p then your oughta be getting £1 worth of return for 70p.

    Not sure that’s the case with some of these (and appreciated that you don’t do hedgies for the divi 😉 ) and of cousre not all ITs are income tareted etc. However we don’t seem to have yet reached the easy pickings to be had when I read this article way back when!

  • 4 The Investor June 11, 2012, 10:24 pm

    Well that’s the joy of buying income. As long as your dividend stays intact, it’s a lot easier to just sit and wait for years on end. 🙂

    Of course, you also have to sit and wait when you buy any kind of asset play, paying dividends or not, but it’s a lot tougher with the latter! I don’t see private equity becoming flavour of the month for 3-5 years, for example, though I suspect the bottom is in, and they’re getting a great opportunity to pick up cheap stuff from deleveraging banks etc. Time will tell.

    Caledonia is upping its income though. The Ventus 2 shares are slated to deliver around 10%, but they are definitely risky.

    All that said, you write:

    Something you’d expect to happen but doesn’t seem to be happening at the mo is if you buy £1 of shares for 70p then your oughta be getting £1 worth of return for 70p.

    Hang about, the article only went up at lunchtime! Seriously, value can take years to out, unless you can see a specific catalyst (like with Gresham above, for instance, which is liquidating its portfolio).

    Definitely absolutely no guarantees. Anyone who says the market gives away free money without risks is a numpty. But I think all the above have good odds for the patient.

  • 5 Neverland June 12, 2012, 8:23 am

    @Investor

    “Well that’s the joy of buying income. As long as your dividend stays intact, it’s a lot easier to just sit and wait for years on end. ”

    As far as I remember Electra never pays a dividend?

    The only regular dividend payers I can identify on this list are Caledonia and Daejean and they both yield less than the FTSE…

  • 6 The Investor June 12, 2012, 9:13 am

    @Neverland — I’m replying to Ermine’s comment that he bought income trusts a few years ago and felt (as I am reading his comment) more immediately rewarded.

  • 7 ermine June 12, 2012, 6:46 pm

    > paying dividends or not, but it’s a lot tougher with the latter!

    That was the sort of light-bulb moment for me, following the income hugely rolled back my stress level from worrying about the volatility to having to wait out till things got cheap enough. A good steady income history ain’t bad and Caledonia does this is spades, just a shame, as Neverland said, they’re yielding less than the FTSE. At the moment, though I have dabbled, and slowly accumulating. Well, some might say averaging down, but I have high hopes for our Greek friends to improve yields 😉

    > Definitely absolutely no guarantees.

    yep, we know, no worries 😉 I am a happy camper with those income ITs, indeed the only regret was running out of ISA space!

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