…& When Book Value Is Real

Refer to my earlier article, ‘When Book Value Is Rubbish‘, as an introduction to this article.

Now, sometimes the book value of a company is very much real and (to a degree) the discount that its share are trading at is not justified.

Let me give you a good example based on a position I have recently built in the AWSM Fund: Hosken Consolidated Investments Ltd (HCI).

HCI is an investment holding company, built from and empowered by the Southern African Clothing and Textile Workings Union (SACTW). HCI is run by joint-founder, John Copelyn, and his management, and they have (much more quietly than PSG Group) amassed an impressive portfolio of businesses.

Directly and indirectly, HCI owns the following investments:

  • Tsogo Sun (TSH): A Group that has good barriers to entry (see here), excellent profitability and great cash generation. Tsogo is the largest single contributor to HCI’s profits.
  • Hospitality (HPB): A REIT vehicle that Tsogo Sun has used to spin-out its hotel properties in, but with exciting prospects to scale and diversify all on its own.
  • E Media Holdings (EMN and EMH): eTV’s holding company with a number of other media-related assets, like OVHD.
  • Niveus (NIV): A Limited Payout Machine (LPM) Group that has recently entered into an agreement to sell its LPM business to Tsogo Sun in exchange for TSH shares. In the event that NIV is unwound and this asset is distributed, HCI’s effective shareholding in Tsogo will actually rise, as it holds a great percentage of Niveus shares…
  • Deneb (DNB): A deeply discounted, small industrial conglomerate with some property, textile and distribution/marketing interests. Interestingly, Deneb holds the rights to Microsoft XBox’s local distribution.
  • Golden Arrow Bus Service (GABS): A wholly-owned, unlisted bus service that runs in Cape Town. GABS is the second largest contributor to HCI’s profits.
  • A number of other smaller assets include some profitably running coal mines. Given GABS and these assets, HCI’s head office actually runs at a profit! Worth remembering this when considering at what discount HCI should be trading (read this to see what I mean: What Astoria’s Discount Should Be)…

As you can see, a large number of HCI’s interests are listed, thus we can get some very realistic valuations for them. In fact, as compared to HCI’s modest share price of c.13200cps, my calculations of the market value of just HCI’s listed investments is the equivalent of c.21944c per HCI share!

And that is my point: realistic valuations, thus making HCI’s book value quite real.

Finally, where HCI’s share price is currently trading, you are paying almost exactly the same amount as the market value of the number of Tsogo Sun shares that they hold. Note, I am not valuing Tsogo Sun, but merely using its stated share price (there are a number of analysts out there who think that Tsogo itself is quite undervalued).

Taking into account all the listed investments, HCI’s share price is trading at about a 66% discount! Incredible…

So, allow me to recap in bullet form what is going on here:

  1. Some companies’ book values are very much quite real.
  2. HCI holds Tsogo Sun shares.
  3. Tsogo Sun is a good quality, profitable business that is listed, well traded, and has a share price and, thus, a market value of HCI’s holding of its shares (ignoring any control premiums).
  4. HCI’s share price is currently trading at almost exactly the same price as its Tsogo Sun investment’s market value.
  5. You are getting the rest of HCI “free”.
  6. The “rest of HCI” is a whole collection of good-to-great businesses, including a large unlisted bus service that is both very profitable and the market is giving a nil valuation to.

In conclusion, this is a great example of what I mean when I say that “not all book values are created equal“.

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