GPG is a listed investment vehicle in wind-down mode. All of the assets are being sold and shareholders will be left with a 100% stake in Coats. This is a true cigar-butt story and money can be made if the sum of the parts is greater than the purchase price.
In my last post (click here for the article) I provided an analysis of GPG excluding Coats and I promised to provide an analysis of Coats in this next post. GPG has since come out with preliminary full year numbers (to 31 December) and an updated investment position. Before looking at Coats, let's do a quick update of the remaining balance sheet.
GPG excluding Coats
The balance sheet excluding Coats is shown in the table below:
As GPG points out, the pension figure can change substantially as the amounts are discounted using high quality bond rates; which can change substantially. It is also worth noting the AUD is slipping against the GBP; so that is another source of risk for Australian investors. I have included an estimation of future corporate costs, which amount to A$30m (assuming $3m per month for the rest of CY2013). Based on these factors, I arrive at an estimated NTA of A39c.
Coats
GPG has a book value of £48m or about A5c per share. The composition of that book value is assets: £481m, debt -£226m employee benefit obligations -£207m. Given there have been significant write-downs on the balance sheet, it is likely the book value understates the true value of Coats - the big question is how much. It's worth having a look at the question backwards: what does Coats need to be worth as a minimum for us to buy GPG at the current price of 48c? Let's assume we want to make 15%*; that means we need to value GPG at 55c and therefore Coats needs to be worth at least 16c (55c - 39c) or $245m/£166m net of all liabilities.
Pre-exceptional items (including a monster EU fine), Coats generated NPAT of £32m. Historical sales and profits of Coats have actually been pretty good and considering the economic tough times it has held up well. Management has indicated a restructuring program is working well; but we've all heard that one before! However, would I choose to buy a company that isn't really growing and I don't understand particularly well? No. So the investment case for GPG is to grab Coats at such a discount I don't really need to care whether it is a great company or not. On a very simplistic basis, I wouldn't want to pay a PE of more than 4-5 in order to get a good margin of safety and allow the PE to expand once we end up with a sole investment in Coats. So, assuming £32m is maintainable and applying a PE of 5 means we have a required valuation of $236m/£160m or 15c. On that basis, we will make our money on a PE expansion basis when GPG is converted purely into a Coats investment.
To be frank, I'm not sure if I have missed something in this analysis. It's not as simple as buying cash or property on the cheap. The potential upside might be around 58-63c if everything holds up well at Coats. I'm going to mull this position over before buying.
As GPG points out, the pension figure can change substantially as the amounts are discounted using high quality bond rates; which can change substantially. It is also worth noting the AUD is slipping against the GBP; so that is another source of risk for Australian investors. I have included an estimation of future corporate costs, which amount to A$30m (assuming $3m per month for the rest of CY2013). Based on these factors, I arrive at an estimated NTA of A39c.
Coats
GPG has a book value of £48m or about A5c per share. The composition of that book value is assets: £481m, debt -£226m employee benefit obligations -£207m. Given there have been significant write-downs on the balance sheet, it is likely the book value understates the true value of Coats - the big question is how much. It's worth having a look at the question backwards: what does Coats need to be worth as a minimum for us to buy GPG at the current price of 48c? Let's assume we want to make 15%*; that means we need to value GPG at 55c and therefore Coats needs to be worth at least 16c (55c - 39c) or $245m/£166m net of all liabilities.
Pre-exceptional items (including a monster EU fine), Coats generated NPAT of £32m. Historical sales and profits of Coats have actually been pretty good and considering the economic tough times it has held up well. Management has indicated a restructuring program is working well; but we've all heard that one before! However, would I choose to buy a company that isn't really growing and I don't understand particularly well? No. So the investment case for GPG is to grab Coats at such a discount I don't really need to care whether it is a great company or not. On a very simplistic basis, I wouldn't want to pay a PE of more than 4-5 in order to get a good margin of safety and allow the PE to expand once we end up with a sole investment in Coats. So, assuming £32m is maintainable and applying a PE of 5 means we have a required valuation of $236m/£160m or 15c. On that basis, we will make our money on a PE expansion basis when GPG is converted purely into a Coats investment.
To be frank, I'm not sure if I have missed something in this analysis. It's not as simple as buying cash or property on the cheap. The potential upside might be around 58-63c if everything holds up well at Coats. I'm going to mull this position over before buying.
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