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Comparing the MCap of £6.8m with cash of £5.4m (no debt) and NCAV of £7.8m I judge that there is a sufficient margin of safety on the quantitative side.
Qualitative considerations
Business prospects.
For the NCAV portfolio we are not looking for a high quality economic franchise as we would for a Buffett-type share. Ben Graham asked only for the following:
“The buyer of bargain issues places particular emphasis on the ability of the investment to withstand adverse developments. For in most such cases he has no real enthusiasm about the company’s prospects. True, if the prospects are definitely bad the investor will prefer to avoid the security no matter how low the price. But the field of undervalued issues is drawn from the many concerns – perhaps a majority of the total – for which the future appears neither distinctly promising nor distinctly unpromising.”
I can definitely say that “I have no real enthusiasm about the company’s prospects”, but I don’t think the prospects are definitely bad. They have quite a long list of corporate clients who have stayed loyal; this foundation can be built on.
With such a high NCAV relative to MCap there are four potential routes out:
1.The economics of the industry might improve through say rivals going bust or a series of mergers reducing over-capacity and silly pricing of services.
2.The managers might pull their socks up, control costs and find revenue.
3.A takeover. Arden might be able to sell itself in a round of industry consolidation.
4.Liquidation. If the possibility of return to profits is slight, then money tied up in the business could be returned to shareholders.
Which of these is most likely I cannot tell in the case of this company. It’ll be interesting to ask Luke Johnson at the AGM how value will be created.
Managerial quality
With most NCAV shares the profit record…………To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
