Airea – Ripe for selling after a 166% return

PUBLISHED: 16 Sep 2016 @ 00:38 | Comments (0) |

Buying these shares at 11.95p in November 2014 and selling them this week at 30.9p has resulted in a 166% return if you chuck in the dividend of 0.9p. It seems that some deep value shares take a frustratingly long time to come to maturity (if they ever do), but others, like Airea (LSE:AIEA), shoot the lights out very quickly – it doubled after only 10 months.

A quick summary of why I bought back in 2014

(More detail in Newsletters: 11th – 18th November 2014, 10th Dec 2014)

Airea was a classic net current asset value, NCAV, investment in the Benjamin Graham school of thought (see The Intelligent Investor and the article by Ying Xiao and Glen C. Arnold (2008) Testing Benjamin Graham’s Net Current Asset Value Strategy in London. The Journal of Investing. Winter, Vol. 17 No. 4. P. 11-19 – earlier draft of the paper on my personal website: www.glen-arnold-investments.co.uk )

The relevant numbers from the balance sheets are shown in the table. Note, at the time of buying the most recent NCAV figure I could observe was for June 2014. This gave £5.5m compared with a market capitalisation of £5.41m.

Balance sheets to 30th June

£000s	2016	2015	2014	2013	2012
Property, P&E	5,489 (of that £3.45m is property) Plus £2.7m of “investment property”	5,333 (of that £3.3m is property	5,704 (of that £3.4m is property)	6,428	7,308

Inventories	9,338	10,647	10,220	8,874	8,661
Receivables	4,601	4,412	4,313	4,331	4,659
Cash	3,114	1,883	1,930	2,747	1,342
Current liabilities	-5,630	-5,308	-5,236	-5,440	-5,365
Non-current liabilities	-6,926	-7,444	-5,762	-5,709	-8,298
NCAV	4,497	4,190	5,465	4,803	999

NAV	13,951	11,080	12,492	12,707	10,896

The difference between Airea’s 2014 NCAV and MCap would ordinarily be too little to justify an investment, especially when you consider that the NCAV shown has not been subject to the usual one-third downward adjustment to inventories and the one-fifth downward adjustment to receivables. There were two other factors that overcame my worries on that score:
1.The non-current liabilities might shrink. Virtually all the non-current liabilities shown in the BS is pension fund deficit. The present value of schemes liabilities in 2014 was estimated at £46.9m whereas the fair value of the schemes assets were £41.2m. If the actuaries raise the discount rate used to convert the liabilities to a present value then they will fall and NCAV will rise . Roughly, a one percentage point increase in the discount rate eliminates the deficit.
2.There were………..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

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