Reading my blog you would probably get the impression that almost every time I research a company I end up buying shares. That’s not really the case, but often I find early on in the research process reasons for not wanting to own the company and I simply move on to the next investment. But today I’m going to do something different and explain why I’m not interested in buying London Finance (LFI.L).
The company was mentioned today at Whopper Investments and it caught my eye because at first sight it is trading at a big discount to NAV. The company has a 5.6M GBP market cap while it has 12M GBP in assets. It has the following assets:
- £5.4M in shares of three small UK companies
- £4.2M in a portfolio of UK and European blue chip equities
- £2.6M in cash
This was enough to get my attention, but there are some good reasons to discount this value. First of all the company does have almost £2M in debt reducing the net asset value. The company reported 34.6p in NAV/share on February 2012 and is now trading at 19.5p, a discount of 44%. European stock markets are down ~10% since, so the current discount to NAV is probably more something like 35%.
The discount is not only not as big as it first looked, more important are the costs of the London Finance entity itself. Last year the company had £749,000 in administration expenses, a huge number compared to the total NAV. They did earn £398,000 in management services fees (not sure where this money is exactly coming from, since as far as I can tell they only manage their own assets?), but even if the company has just net costs of ~250K a year this would translate to a 2.5% expense ratio (and they also have some tax costs as well that are not included in this figure).
You can argue what kind of discount would be fair based on the yearly costs, but if the long term return of the portfolio would be around 10% a fair discount would be around 25%, and I think that a return like that is pretty optimistic these days. Combine that with the fact that the current discount is somewhere around 35% today and I don’t think there is really a sufficient margin of safety available. Especially not since I don’t really understand where the management services fees are coming from. Without those the cost structure would just be beyond terrible.