Saturday, September 20, 2014

Putprop Earnings Looks Too Good

Putprop finally came out with the year end results after two pre-annoucements. The company earned 2.48 Rand per share which, on the face of it, is fantastic for a company priced at 7.35 Rand per share.

Putprop is a South African real estate company primarily engaged in renting to businesses. South Africa follows the IFRS accounting standards, as is most of the world but notably not USA. IFRS defines what is the standard regular earnings, but it also allows companies to report a variation called headline earnings. I read that companies use headline earnings to present a more meaningful measure of operations. For Putprop, regular earnings is equal to headline earnings plus its share of associates' earnings plus fair value gains on property. In other words, headline earnings removes the effect of mark-to-market accounting and focuses only on the core company's earnings. But the mark-to-market gains are huge, worth 39% of the regular earnings. The company's gains from the associated companies Belle Isle Investments Proprietary Limited and Pilot Peridot One Proprietary Limited are also large at 26% of the regular earnings.  This leaves headline earnings per share of only 0.86 Rand.

Company management emphasized they have been diversifying away from renting to the bus business which is their largest customer by far. To that end, the company acquired shares in other rental companies. This made a dramatic contribution to the bottom line, adding 19 M Rand to earnings versus 1 M in 2013. This is the bulk of the 0.74 Rand earnings per share increase between 2014 and 2013.

I think the regular earnings per share is the most useful number to gauge the company. But doing so implies the company trades at 3 times earnings! How is that possible? Well, my impression is that the market uses the headline earnings as the gauge. A month ago the company pre-announced that its earnings this year would rise significantly over a year ago. The stock shot up 30%. However, two weeks later the company revised its pre-annoucement. It maintained its regular EPS but removed the associates' income from the headline earnings. The stock then dropped back to its previous levels. See the table below.

Official EPS Headline EPS Subsequent Price
2013 results 1.74 0.877.00
1st Pre-accouncement 2.40 1.509.00
2nd Pre-accouncement 2.400.867.35
2014 final results 2.480.867.35

The company also announced it will maintain its dividend, which is a 5% yield. And the stock trades at 56% of book with no long-term debt. I don't know why this stock hasn't doubled yet.