RE:book valueIt's a great question. I typically like to put together a list before I invest as to "what could go wrong" or "what are others seeing that I am not" before I invest.
For Melcor, the company has traded at a discount to book value for a long time.
- Primarily located in Alberta with a very volatile market due to oil price swings.
- Controlled by the founding family that runs it in a manner similar to a private company. There is a question of succession and how this impacts Melcor Development.
- Independant Board Members who are comfortable with the status quo.
- A capital allocation preference towards growing the fiefdom rather than focussing on a return on equity. This has led to the purchase of more and more investment properties at low returns. The last decade of ROE is low.
- A valuation methodology that puts a great emphasis on an income approach rather than market observed inputs using comparable transactions (ie: the market isn't sure that the book value is real).
- Retail properties that have faced headwinds from online shopping.
- Office properties which have and will struggle from employees working from home.
- A convoluted flow through structure where raw land is converted to be sold as lots or constructed into investment properties. The raw land is valued at cost and unless either the lot or the finished property is sold, the gain is a paper gain that is recognized only from the cash flow stream the company hopes to generate.
- A failed attempt at launching a REIT under the previous CEO which now needs to be cleaned up by Melcor and could either come with an outflow of cash or potential dilution.
- Concerns the company will struggle to refinance debt at a combination of higher interest rates and lower loan to value ratios.
- A dividend that while based on a yield perspective appears normal (5% to 5.5%) compared to peers, represents a low amount when compared to cash flow. Using the divided growth model to value Melcor you would arrive at a share price similar to where it currently trades.
- Low volume of shares traded and no need to raise capital creates apathy from investment community. Major funds would struggle to accumulate.
- Management that has indicated a Substantial Issuer Bid is not in the plans.
- No clearly articulated plan that they acknowledge that the share price is undervalued and will take steps to close the gap.
There is no one source for all of this and others may disagree with some of my bullet points (either in substance or severity). The starting place is to go through the Company's own reports and conference calls. You can supplement that with industry analysts information.
I like to go back several years before I make a decision on a company so that I can get a feel for it.
As you will see from my other posts regarding Melcor, I am a shareholder and believe that the circumstances that have lead to the undervaluation don't have to last forever!
LR