BEING a value investor often means being brave, going against consensus and, occasionally, taking a little more risk with your cash. This is not always the case – it is often possible to spot undervalued shares with little risk to your capital. But in today´s market, with many shares now fully priced, those in search of substantial returns are being forced to be a little more adventurous. If you are risk averse, read no further. But if you are happy to take a little bit of a gamble, then read on – it may well be worth your while.
Austal Limited (ASB) is an Australian company that designs and manufactures aluminium vessels such as coastal patrol boats and US marine defence ships. It currently has a contract to build nine joint high speed vessels for the US military under a 10-ship, $1.6billion deal. Its product range also includes passenger and vehicle-passenger ferries, and luxury private live-aboards. Austal is also a provider of vessel maintenance and management services.
However it has accumulated significant debt in recent years caused by cost overruns at its US operation and the building of two ships on spec in 2009, just after the financial crisis kicked in. Orders subsequently fell through the floor.
The company has just completed a somewhat controversial capital raising by issuing more shares at a deeply discounted price, diluting the value of the stock for existing investors but raising an extra $86million in the process.
The result is a much lower debt and healthier balance sheet which should enable the company to improve performance going forwards and gives the company much longer to pay its remaining debt down.
Nevertheless, as a result of the capital raising the share price has more than halved since the beginning of November.
This represents a huge discount to book value, but the share price will probably only increase to its full potential if the company manages to sell the two vessels it built “on spec” at prices close to their book value.
Good news emerged last week when the company announced it had sold a third, lower value vessel – a luxury yacht, for an undisclosed sum.
It has also shifted some of its manufacturing operations to the Philippines, making it extra competitive, and is refocusing its strategy on military and border patrol vessels instead of the global ferry market which has yet to see demand recover since the global financial crisis hit in 2009.
These steps, combined with the sale of the unsold vessels, should see financial performance improve significantly next year, although there are of course risks that its strategy will not pay off as planned.
These are the factors investors must weigh up before deciding whether to invest. It is not an easy call, but for anybody who has benefited from a good turnaround story in the past, if the company gets this right, the share price should bounce by a large margin indeed.
This is probably the highest risk stock that I have put before our Yahoo readers to date. But for patient investors with the right risk profile, it may well be worth careful consideration.
Company: Austal Limited (ASB)
Current price: 58c (21st December)
Forecast value: 87c and above ++
Potential upside: 50%
Readers of Yahoo!7 Finance can obtain a free 14-day trial offer of the MyClime online share valuation and research service at www.clime.com.au.
Investors should not rely on this information alone and should seek independent financial advice from a qualified expert before considering any share market investment.
++Fair or forecast value is the price placed on the share after calculating a range of factors including profitability, assets, debt and, most importantly, Return on Equity – the same measure used by Warren Buffett to assess long-term value.
Shares are assessed by Clime Asset Management to calculate which companies are undervalued or over-valued based on their return on equity. History has shown that the most successful companies are those that produce the highest returns per dollar of shareholders' equity, yet this is not typically how shares are valued. This system highlights shares that are undervalued on this key measure. Shares are expected to reach this value in 3-5 years, as price tends to follow value in time.
Information is intended as a guide only. For specific advice contact your financial services professional.