There are many listed investments which are currently trading at the equivalent of 20% of NAV (“20 cents on the Dollar”).  An old salesman friend of mine once pointed out to me that in his experience, when things go wrong, securities always seemed to bottom out around 20 cents on the Dollar.  This thought came back to me when I looked at the recent results statement of MAB (Mitchells and Butlers).  Incidentally with lots of listed securities trading at such steep discounts to NAV, the logic of investors cashing out of hedge funds (at NAV) to re-invest in such securities cannot be faulted.  The same thought process should steer investors wishing to invest in commercial property towards REITs rather than commercial property unit trusts. 

MAB’s recent results showed adjusted EPS of 31.5 pence putting them on a p/e of 4.6x at 145 pence.  Lets be kind and ignore the fact that they actually made a loss due to the cost of closing out financial hedges and taking an impairment charge of £206 mln mostly against pubs & bars hit hard by the smoking ban.  The pub property portfolio is valued at £4.7 bln; subtracting net debt of £2.735 bln and using 405 mln shares outstanding of implies NAV of 485 pence.  In July 2008 MAB signed a £600 mln three-year unsecured debt facility maturing in Nov 2011.  Their lenders committed MAB to reducing its borrowings by steadily lowering the amount of credit made available to £550 mln in Dec 2008, £400 mln in Dec 2009 & £300 mln in Dec 2010.  As MAB had drawn down £514 mln on this facility at 27 Sep 2008, they had no room to pay a dividend.  Their strong cashflow needs to be diverted towards paying down this debt facility over the next couple of years and this means no dividends due until late 2010 (the next dividend is likely to be declared in Nov 2010 and actually paid in Jan 2011).

MAB do have two big shareholders – Elpida Group own 14% but the Magnier/McManus modus operandi involves selling out to a bidder (c.f. Manchester United) and not taking over the target company themselves.  Similarly Joe Lewis, who picked up a 22% stake at 130p (via his Piedmont vehicle) when Tchenguiz’s stake was liquidated following the collapse of Iceland’s banks, is an investor rather than a bidder.

There is undoubtedly long-term value in MAB but it will be a long wait until the credit becomes available for any future bidder.  In the meantime I like to be “paid to wait” in the form of a regular dividend income stream and MAB have just cancelled their dividend payments.  Consider switching out of MAB into other shares which currently trade at similar valuation levels but which are still making dividend payments.