The price of Guinness Peat Group shares makes no sense

Sir Ron Brierley and his team at investment company Guinness Peat Group (GPG) are some of the smartest investors that I have ever come across, and this makes the current share price for GPG somewhat puzzling.

For those who are unaware, GPG is an investment company domiciled in the UK but also listed in Australia and New Zealand. GPG’s chairman is Sir Ron Brierley (a New Zealander). Brierley is a legendary character to many in New Zealand and Australia due to his exploits over the past five decades (but especially in the 1980s as a corporate raider).

Brierley has always written very candidly in GPG reports – he gives his shareholders a clear picture of GPG and is also quick to admit to mistakes when they occur. Brierley in many ways is a complete contrast to the many charlatans (and young inexperienced money managers) who have appeared on the investment scene in recent years. Brierley and his team have vast investment experience, have made many millions and retain a significant proportion of their own net worth in GPG.

Brierley is an old fashioned value investor. GPG takes shareholdings in companies that it perceives are under-valued, badly managed or “better off dead than alive” (i.e. companies that should be liquidated to release value to shareholders). Sometimes a company qualifies on all three fronts. (Incidentally, it’s not lost on me that GPG itself now fits the exact profile that GPG looks for in other companies, i.e. a very under-valued situation).

GPG directors are well known for showing up at annual meetings of companies that they have interests in (and believe are under-performing) and giving the directors of those companies a very hard time.

GPG (under Brierley) began in 1990 with approximately ₤30 million in equity and as at

31 December 2008 it had ₤720 million (compared with ₤951 million one year earlier).

Every year, GPG issues one bonus share (for every 10 shares held). 2009 will be the 16^th year in succession that GPG has done this. What this means is that if a shareholder started in 1994 with 1,000 shares, they will have (after the 2009 bonus issue), 4,595 shares. This is not well understood by many people who simply look at the share price over time but don’t take into account the large number of bonus shares issued over the years.

In 1995 you could have purchased GPG shares at prices ranging from A$0.446 to $A0.71 per share. Let’s say 10,000 shares were purchased in 1995 at A$0.58 (about the mid point of the selling range for that year), this would have cost $5,800. Once the 2009 bonus issue is made, that 1995 shareholder will have 41,770 shares, (assuming that the 1995 bonus issue was received). Those shares would be worth $22,556 as at 13 March 2009 – even after the current crisis in equities markets. That’s approximately 10.2 percent compound per annum (excluding dividends). For comparison, the All Ordinaries index (Australia) has returned approximately 4.0 percent compound per annum over the same period (31st March 1995 to 13^th March 2009).

It should also be noted that if the increase in book value of GPG (as opposed to share price) was used to calculate the return, GPG’s compound return per annum would be much higher than 10.2 percent. Companies like Berkshire Hathaway have always used the increase in book value not share price when measuring their returns.

GPG pays a standard one pence per share dividend every year. Because of the bonus issue, the actual dividend paid grows at 10% every year. Once again, a very simple concept but not very well understood by people.

Apart from the thread manufacturer Coats (which is wholly owned by GPG), the rest of the equity in the company largely comprises of cash and marketable securities. GPG released a report showing that the book value of each share was A$1.12 on 22 December 2008, versus a 13^th March 2009 share price of A$0.54.

Even if one was to play devil’s advocate and value Coats at half of what it’s on the GPG books at (an improbably low valuation) and then factor in a 10% decline in the value of the equity portfolio since 31 December 2008, a valuation of $A0.85 would still be obtained. Comfortably more than prices of A$0.40 to A$0.55 at which GPG has been recently trading.

Have mistakes been made by GPG? Yes they have.

Coats has been much more time consuming and difficult to restructure than was initially anticipated. In addition, GPG should have pulled the plug on Capral Aluminium a few years ago instead of continuing to support a company that is simply not profitable anymore. The entry into CSR was ill-timed and the attempt to build a major shareholding in Tattersalls has resulted in significant loss (although this was primarily due to the incredibly inequitable policies of the Victorian Labor Government more than anything else).

On the positive side there have also been many exceedingly good investments made by GPG (too numerous to mention). In order to grow equity by 24 times in 18 years, great skill is obviously needed.

Sir Ron Brierley had previously advised of his intention to stand down as chairman of GPG in 2010, however, given the current state of affairs in financial markets, it wouldn’t surprise me to see him extend his chairmanship for a little longer. GPG will want to wait for some level of recovery in markets before it eventually liquidates its investments and this is probably some years off.

Note: None of the above constitutes financial advice. You need to do your own research and consult appropriately qualified people for advice (where necessary).