In my last post on DVN, I noted "Well, I got this one completely and utterly wrong". It turns out I was even wrong about that. Some trades you (I) just get wrong from start to finish. DVN is mine. After deciding to hold on to most of my holding after the sale process fell over, DVN released a shocker profit downgrade last week noting their forecast profit of $10-$13m for the year 31 December will now be zero.
And this is despite a strong property market.
Clearly, this business is run poorly and clearly I should have seen this a bit sooner. The share price has been sold-off more to the current price of 55c, representing a good loss (my biggest in a long time) yet an absolute monster discount to NTA. NTA (30 June) was $1.55, so if that number roughly holds true, the discount is 65%. That's pretty incredible in an otherwise normal market.
To add on top of that, plenty of people now think we have passed the top of the housing cycle, which if true means there are potential macro headwinds facing DVN. And as noted in previous posts, companies tend to upgrade and downgrade in cycles meaning there is potentially more bad news to come from DVN.
Tough situation: it feels hard to sell a stock selling at such a big discount to hard assets yet the fundamentals of the business have gone backward and management have been incredibly shy in providing transparency to the market and there are better businesses out there. It's a situation I'm pondering.
Kristian
Disclosure: own DVN
DVN is a development company and as such its inventory is the largest component of its asset base. Inventory is held at "the lower of cost or realisable value". In other words, the highest carrying value the company can hold inventory at is at a zero margin (ie no profit). Given a development project can take many years to complete, the present value of its cash flows can be much lower than its carrying value. In this regard, many of DVN's projects are impaired (ie zero margin) and therefore a discount to carrying value is warranted in my opinion.
ReplyDeleteAdding to this is the overhang of a major shareholder who has no interest in putting more capital into the business and who, in fact, wants to exit but will have difficulty doing so given it would trigger a large writedown in their own P&L as well as the options available to them are somewhat limited given the poor performance of the business in general and the failed sale process that has already been run.
Well it appears that Cimic have finally come to their senses and realised there is no way they can exit the business without taking a significant hit to their own P&L. Today's bid for the 49% of DVN they don't already own will come as a relief to existing shareholders who have gone through a strategic review, a failed sale process, and a series of profit downgrades and impairments. At a >50% discount to NTA though, clearly the bid is a last resort outcome for shareholders and Cimic alike.
DeleteAgree. Given that DVN couldn't make money during a good market tells the story. Check others like SIO and TWD - they have been making great money. Big lesson for me though: management is just so important in analysing stocks.
DeleteIf only management bought back a few shares at the current price. What value would be created for shareholders! But the creating value for shareholders is obviously not a point of focus at DVN!!
ReplyDeleteFor sure, however I think job security has probably been a higher priority recently...
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