Bargains In The Market
26 October 2018 | Joani van Wyk
 


Bargain shopping is always a delight once the opportunity has been spotted. No one ever complains about a shirt they bought that is worth more than the price they have paid for it. Luckily, the same ’bargains’ exist in the market.

A bargain in the equity market can be found by comparing the value of a company’s equity on its balance sheet to the value it is currently trading at in the market. This difference is called a discount or premium. Should a company be trading at a significant discount to its NAV per share, that could be an indication that there is upside potential to the share price or downside to its underlying investments. Similarly, a premium could indicate that the share is overvalued or the underlying is undervalued. The reason for a discount or premium over the long term could be attributable to numerous factors but some reasons are cost inefficiencies (discount) or synergies created during mergers (premium).

Let’s take Remgro as an example: its share price in the market is currently R181 and the value of its net assets per share is R232. Its net assets include holdings in RMB Holdings, Firstrand, and Mediclinic. This amounts to the share price being 22.0% less than the underlying investments

Now, to determine at what level of premium or discount a share is over or undervalued, we look at the historic average of the % difference between the share price in the market and its NAV per share. On the Graph below, the historic discount is plotted for Remgro over the past 5 years. The mean and standard deviation lines show that over the past 5 years, the average discount has been in the area of 13% which means that Remgro’s share price should either increase by about 8.7% or the underlying investments in RMH, FSR and MEI should decrease in value in order to trade at the 13% historic discount level again.

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Source: Sharenet Analytics, INET

The table below gives a summary of Remgro and other companies that are currently trading at a discount to their NAV price and RMB Holdings, PSG and Reinet paint a similar picture trading at a discount below its 1 Standard Deviation line.

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Source: Sharenet Analytics, INET

Whether these shares are undervalued or their underlying holding are overvalued can only be told by time but for now you can have a look at the discounts as well as these companies’ listed holdings to find possible trading opportunities. To make this a bit easier, the table below shows the main listed holdings of these companies.

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joani

Joani van Wyk
Analyst

Joani van Wyk joined the asset management team in January 2017, responsible for quantitative research of equities across all industries. Joani completed her degree in Mathematical Science in 2015, as well as an Honours degree in Financial Risk Management in 2016, both at the University of Stellenbosch. She is currently a CFA candidate.


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