Centaur Media – Do Intangibles Have Value?

This small-cap media company can be yours today for only 39p a share.  It has a long history of (adjusted) profitability and dividend payments, and the yield is currently about 5%.  That may not sound like much, but the dividend is currently in ‘recession mode’ at 2p per share, down from over 4p in 2008.

Those are interesting numbers but far from exceptional, so what is it that drew this outfit to my attention?

Lots of intangible assets

Yes, I said intangibles.  I’m guessing that traditional asset-based deep value net-net style investors (who typically assign a value of zero to intangibles) have now left the room, so please allow me to explain myself.

Centaur has £126m of intangible assets on the balance sheet.  This gives the company a book value of £124m (because tangible book value is negative).  This, in turn, means that they have a lot of ‘assets’ relative to their earnings, so they are more likely to turn up on low book value-based screens like the one I use for small caps.

Traditional deep value investors wouldn’t touch a negative tangible book company with a barge pole.  One of the margins of safety they often use is that if the company fails and is sold off, the sale of physical assets (factories, equipment and inventory, for example) may still be enough to give the investor a profitable return.

For me, there are a couple of problems with that approach.

The first is that if you look at low-debt companies, very few of them go bust, perhaps less than you’ll see in the rest of the market.  This means that the liquidation value is often irrelevant.  In my case, I only pick net-cash businesses, which typically (like Centaur) have little or no debts.

The second problem with a focus on tangible assets is that by ignoring intangibles, you exclude a wide variety of companies that don’t have many physical assets, such as media companies.

Because it is hard enough to find low debt and low price-to-book companies in sufficient numbers to create a widely diversified portfolio, it may be reasonable to value intangibles at face value and include media, pharmaceutical and other such companies when they appear on the list.

Investing by numbers

Following my pre-defined system, I’ve assigned 1/60th of my small-cap value fund to Centaur.

Author: John Kingham

I cover both the theory and practice of investing in high-quality UK dividend stocks for long-term income and growth.

4 thoughts on “Centaur Media – Do Intangibles Have Value?”

  1. Another good article. well done John.

    The problem with large intangibles is that it may be a sign of incompetent management. Usually intangibles consist of the excess over asset value for acquisitions. Therefore large intangibles could be a sign that management have paid too much for acquisitions.

    The best companies rarely make acquisitions of course as they fund organic expansion through free cash flow.

    1. Hi Marcel. Generally I’d agree with that but for certain industries it may not be quite so bad. With media companies they don’t have much in the way of assets and physical assets are not how they generate earnings, so if Centaur bought up a competitor at 10x earnings (a fair price) then it might be 100x book value which would of course load up their own balance sheet with lots of goodwill.

      Whether the goodwill can actually generate enough earnings to justify its existence is another matter entirely.

      Also, in my experience media companies do like to expand by acquisition. Perhaps it’s more exciting to be involved in takeovers?

Comments are closed.

%d bloggers like this: