Melcor Developments is updated and once again is rated Strong Buy at $14.52.
It is frustrating to see this stock languish at just under half of book value. Not only does the equity per share have a value that is likely around twice the share price but the shares are also trading at only about 8.4 times trailing adjusted earnings by my calculation.
The question arises as to whether the assets are actually worth at least book value if the company were to sell off its assets. Well, around half of the assets are investment properties. The valuation of those tends to be pretty clear based on the rental revenues generated. Yes, those values have declined somewhat with higher vacancy rates and lower rents in the office buildings in Alberta. But that is already reflected in the book value. And yes, the values could decline further with higher interest rates or a return to a deeper recession in Alberta. But for the moment those buildings are on the books at approximately their market value. About 37% of the assets are development lands. Some is raw land and some is developed and this includes capitalized interest. Some of this land is surely worth more than book value (perhaps far more). But some may be worth less than book if the land was purchased at times when the Alberta economy was stronger and oil prices higher. But overall, there is no indication that this land is not worth at least close to book value or more on average. So why are we able to purchase these shares at half of book value? Is it not likely that the demand for residential building lots in Alberta will stay fairly strong as pipelines eventually get built? Or as natural gas goes up in value if and when a large LNG plant is finally announced for B.C.? It’s always possible that land and building values will plummet either due to recession or far higher interest rates. But I just don’t see the justification for a 50% discount here.
It seems the share languish partly because they trade so thinly that analysts don’t recommend them despite the value. And without recommendations they continue to trade thinly due to a lack of buying interest. It will likely take some kind of catalyst to ignite the shares such as sharply higher oil prices and/or predictions of increased home building . Or maybe just a couple of strong quarters of earnings if that occurs. So there is certainly potential upside but it may not be imminent. Meanwhile I believe the 52% discount to book value should mean that the shares should not fall much in price. The 3.6% yield is also attractive.