A Newbie Guide to Investing

[Clement]

Hi Guys, I have a question on how to evaluate a company after divestment of some of its businesses.

Say Coy A has:
EPS = 4 cents
NAV = 40 cents
and prices normally trade @ PE of 8 so about 32cents and price-to-book is then 0.8

It divested one of its biz which contributes EPS of 2 cents @ 20 cents so:
new EPS = 2 cents
new NAV = 60 cents

Say it is normally valuated using PE so based on PE of 8, its price becomes 16cents after divestment and ROE also dropped from 10% to 3%.

However PE is looking at further potential but with this divestment, it realized that potential now rather than over 8 years. So how do one value the Coy after the divestment given that its future EPS and ROE becomes lower but it has already got the other half fully realized EPS (earning) in its pocket?

I hope this doesn't sounded like a stupid question.

The NAV after transaction is wrong. It should be 40ct because you are selling NAV 20ct for 20ct.

Ok if it is a case of turning 20cts of assets into cold hard cash without earning ability, then it may be worse off.

However , say if the disposal resulted in a net gain of 20cts (say they divest 30 cents worth of NAV at 50 cents ie the part of the biz that has a lower ROE), how then do we value the Coy?

In such a situation, the P/E of the company will typically increase drastically, especially if there are arrangements made to return excess cash to shareholders.

Typically, enterprise value + net cash is a common way to value companies with alot of cash on the balance sheet. So we will need to value the remaining part of the company, and then add the net cash per share on top of it.