# Trading at a discount or premium



## tom82 (6 September 2013)

How does one work out if a share /LIC/ETF is trading at a discount or premium?
Is this where the following calculations come in NTA/share, Price/NTA and Price/NA?


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## coolcup (6 September 2013)

tom82 said:


> How does one work out if a share /LIC/ETF is trading at a discount or premium?
> Is this where the following calculations come in NTA/share, Price/NTA and Price/NA?




Hi Tom

If you are looking for discount / premium to net tangible assets then this is easy. A lot of LIC's and ETF's will announce what their NTA actually is - often on a monthly basis. You can look this up on the ASX's announcement platform or on their websites and then compare the trading price to calculate the premium or discount to net tangible assets.

Just to add further colour on this (in case you were unaware), the NTA is the net tangible assets of the business. It is calculated as assets less liabilities less intangible assets. This basically gives an idea of the residual book value of a company for its shareholders after all liabilities are paid. You can then divide this by the number of shares on issue to get an idea of the NTA per share. The NTA is usually a very useful measure for companies who hold their assets at market value (eg LICs, ETFs and REITs). For other more commonplace industrial companies, the NTA can be less relevant. For example, think Woolworths, Wesfarmers, BHP, etc. These companies hold their assets at historic cost and do not revalue them to market value. Hence, the NTA gives a sense of historic residual value rather than market value.

If you are trying to work out the discount / premium to the true underlying value of a share then this can be a lot harder. You need to come up with a view of the value of the company and then compare that to the trading price. This often requires a fair bit of analysis and research of the company's financials and future prospects.

Hope this assists.


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## tom82 (6 September 2013)

coolcup said:


> Hi Tom
> 
> If you are looking for discount / premium to net tangible assets then this is easy. A lot of LIC's and ETF's will announce what their NTA actually is - often on a monthly basis. You can look this up on the ASX's announcement platform or on their websites and then compare the trading price to calculate the premium or discount to net tangible assets.
> 
> ...




Ok thank you.

If LIC and ETFs announce their NTA, one doesn't need to calculate it them self?

Ok so I have the shareholders equity. assets - liabilities = 4 626 692

Ok so I am looking at an LIC's NTA announcement and it lists Before Tax and After Tax and Ex Div and Cum Div, which figure do I use?

How do I compare or calculate the NTA to the trading price?


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## tom82 (6 September 2013)

tom82 said:


> Ok thank you.
> 
> If LIC and ETFs announce their NTA, one doesn't need to calculate it them self?
> 
> ...




Ok so what I have done is calculate with the Difference divided by the previous, then all multiplied by 100
((5.80-4.60)/4.60)*100= 26.08%

I used the after tax ex div amount.

Is this the right way?


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## So_Cynical (6 September 2013)

tom82 said:


> How does one work out if a share /LIC/ETF is trading at a discount or premium?
> Is this where the following calculations come in NTA/share, Price/NTA and Price/NA?




LIC premiums / discounts to NTA tables may be of some use to you.

http://www.asx.com.au/products/market-update-managed-funds.htm


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## coolcup (7 September 2013)

tom82 said:


> Ok so what I have done is calculate with the Difference divided by the previous, then all multiplied by 100
> ((5.80-4.60)/4.60)*100= 26.08%
> 
> I used the after tax ex div amount.
> ...




Hi Tom

If you just throw numbers around without any context (eg what LIC are you actually talking about) it is a bit difficult to assist you.

In relation to your prior enquiries:

NTA pre tax or post tax - many LICs such as ARG and AFI are long term holders of stock. They need to include a theoretical tax liability on their balance sheet which represents the tax they would pay (predominantly capital gains tax) if they realised their entire portfolio on the day the balance sheet was put together. The reality is that these companies do not plan to sell their entire portfolio which is why they quote the pre tax NTA number. They believe that more realistically represents their true NTA. Which one to use? Well that is really up to you.

NTA cum div / ex div - LICs usually pay out dividends over time. The date to determine whether you are entitled to a dividend is called the "ex dividend date". So if you buy the shares prior to the ex dividend date, then you are entitled to the next dividend. If you buy the shares after the ex div date, then you are not entitled to that dividend. Usually the LICs price will move by the amount of the dividend on the ex dividend date (all other things being equal). For example, if ARG announces a dividend of $0.10 per share with an ex div date of 1 June, then if you buy on 31 May you will keep the $0.10 dividend but if you buy on 1 June you won't get that dividend. Usually the price will be $0.10 lower on 1 June than 31 May. In terms of which to use? Well it depends on whether the stock has gone ex div or not. If it has gone ex div, then use the ex div NTA. The company is trying to tell you what the NTA would be if you miss out on the dividend.

Hopefully this makes some sense.

- - - Updated - - -



tom82 said:


> If LIC and ETFs announce their NTA, one doesn't need to calculate it them self?




Correct.


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## Judd (7 September 2013)

Just to add to the valid points made by other posters, the NTA is calculated in the past.  In other words it is backward looking.  For example, on 4 September, ARG announced its NTA as at end August.  Since 31 August, ARG's price has changed.  Make of that what you will but I suggest that you don't stress about it all too much.


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## tom82 (7 September 2013)

coolcup said:


> Hi Tom
> 
> If you just throw numbers around without any context (eg what LIC are you actually talking about) it is a bit difficult to assist you.
> 
> ...




Thanks for the replies. Ok, so I was referring / using to Australian Foundation Investment Company AFI.

Did I use the right calculations or is there something I need to work on?


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## tom82 (7 September 2013)

So_Cynical said:


> LIC premiums / discounts to NTA tables may be of some use to you.
> 
> http://www.asx.com.au/products/market-update-managed-funds.htm




Thanks very much for that! Thats awesome! I just have to learn how to compare the NTA to the current share price.


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## Valued (7 September 2013)

It's fine to learn about NTA etc but it's not that relevant. It's good if you want an introduction to just one of Graham's stock picking tips (but he has others). Back then lots of decent (not great, but chugging along nicely) type companies were trading at big discounts to their NTA, making it worth while investments. Now, this is very hard to find unless there is some sort of risk the company will go bankrupt or the assets arn't worth as much as the book says they are. In liquidation assets might not be sold for the price the book says they are worth.


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## Judd (8 September 2013)

tom82 said:


> Thanks very much for that! Thats awesome! I just have to learn how to compare the NTA to the current share price.




I very much doubt that you will be able to do that.  My reasoning is that in order to do so (accurately), you will not only need to know the share price of each of the LIC's holding but also the number of shares it holds for each company.  You will not necessarily know if the LIC has bought or sold any or part of it holdings since the last NTA announcement or whether it has options over each holding.

I suspect that you may be making the whole thing overly complicated instead of using the previews month's NTA as a guide.  For example DJW has historically been priced more than its NTA due to it writing options to generate income but has been providing a yield of 5.8%ff. WHF's price has been below its NTA for ages, mainly as it concentrates on industrials rather than resources but providing a yield of 4.8%ff.

Finally, you may save yourself some sleepless nights by simple going to the web-sites of each LIC and reading what each in on about. And before you ask, you can get the web-site from the ASX or simply doing a google search.

Ya pays ya money and ya makes ya choice.  Your dosh, your decision, your responsibility, I'm afraid.


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## tom82 (8 September 2013)

Judd said:


> I very much doubt that you will be able to do that.  My reasoning is that in order to do so (accurately), you will not only need to know the share price of each of the LIC's holding but also the number of shares it holds for each company.  You will not necessarily know if the LIC has bought or sold any or part of it holdings since the last NTA announcement or whether it has options over each holding.
> 
> I suspect that you may be making the whole thing overly complicated instead of using the previews month's NTA as a guide.  For example DJW has historically been priced more than its NTA due to it writing options to generate income but has been providing a yield of 5.8%ff. WHF's price has been below its NTA for ages, mainly as it concentrates on industrials rather than resources but providing a yield of 4.8%ff.
> 
> ...




Thanks for the comments. Isnt the number of shares usually in the companies report / financial statements?

I went to GOW (Gowings) website yesterday.


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## Judd (8 September 2013)

tom82 said:


> Thanks for the comments. Isnt the number of shares usually in the companies report / financial statements?
> 
> I went to GOW (Gowings) website yesterday.




Your statement assumes that the LICs do not undertake any buying or selling from one year to the next and also when the company advises of its monthly NTA it is based on the shares held as per the annual report.  Not so.

You need to appreciate that even though most LICs are considered as buy and hold organisations, they do change shareholdings at various times.

I went to the ASX and looked up WHF and downloaded the quarterly report it produces (apparently some do and some don't produce these reports but I don't have a list of which that do).  If have attached it here. 
	

		
			
		

		
	

View attachment 42hv8m4zz04m71-1.pdf

	

		
			
		

		
	
  If you read it, you will see that the company mentions it has added some shares and sold some shares in various companies during the quarter.

Now I do not know what you are attempting to achieve in comparing the NTA with shareprice and I don't wish to know; it's your business but I think you are beginning to walk up a path with a dead end.

Anyway that is all I have to say on the matter.  Best of luck with whatever you are doing.


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## tom82 (8 September 2013)

Judd said:


> Your statement assumes that the LICs do not undertake any buying or selling from one year to the next and also when the company advises of its monthly NTA it is based on the shares held as per the annual report.  Not so.
> 
> You need to appreciate that even though most LICs are considered as buy and hold organisations, they do change shareholdings at various times.
> 
> ...




I have not assumed anything. That is your interpretation of the statement / question.

Of cause the company or lic is going to buy or sell.

I wanted to know how to compare the NTA with the share price to see if an lic is trading at a discount or premium, which I clearly stated in the first post.

I never made any suggestions or assertions that lic did not change their  shareholdings.


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## Judd (9 September 2013)

tom82 said:


> I have not assumed anything. That is your interpretation of the statement / question.
> 
> Of cause the company or lic is going to buy or sell.
> 
> ...




OK, now I see where you are at.  Simple rough solution.  Divide the share price by the latest published NTA.  If the resultant is greater than 1, it is trading at a premium.  If it is less, then it is trading at a discount.

Example.  Latest NTA for Company X is $3.10.  Share price is $3.25.  Result is 1.048 so it is trading at a premium of 4.8%.

Cheers


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## burglar (9 September 2013)

Judd said:


> OK, now I see where you are at.  ...



When starting out - you don't know what you don't know.
Even asking the right questions is hard.


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## tom82 (10 September 2013)

Judd said:


> OK, now I see where you are at.  Simple rough solution.  Divide the share price by the latest published NTA.  If the resultant is greater than 1, it is trading at a premium.  If it is less, then it is trading at a discount.
> 
> Example.  Latest NTA for Company X is $3.10.  Share price is $3.25.  Result is 1.048 so it is trading at a premium of 4.8%.
> 
> Cheers




Ok, thanks very much for this, appreciated!

So you ignore the number before the decimal and the remainder is a per cent?

Lets use AFI again as an example. Share price is 5.82, NTA (after tax) 4.60.
5.52 / 4.60 = 1.26 so it is trading at a premium of 26%.

Is that the correct way to do this?

Thank you


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## Judd (11 September 2013)

Yep, it's one (quick) way - aside from visually observing that the shareprice is larger than the NTA (or less as the case may be.)

Cheers


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