Why Are KPG Trading Below NTA? Part I

The folks on have been stating how cheap KPG shares are recently, so I thought it might be worth a look.

I’ve been thinking about how to value KPG, but I don’t think it’s fitting to my strategy to invest based on price relative to NTA (despite property companies typically trading at NTA). This is because KPG (being in the business of leasing property) are not likely to change their business to one that builds and sells property so I won’t be buying based on a discount to NTA in order to get value / return on the sales. Though the lease price is in some ways related to the value of the properties leased, this is too removed from the relationship between the lease price and NPAT for me to base a returns-based valuation relative to the NTA.

I have decided that a PE relative to historic and forcast NPAT growth (my usual prefered method) also probably isn’t relevant because in a sense KPG doesn’t have control of its NPAT as its revenue is market driven. This means that no matter how well they run their business, revenue will always be more strongly related to demand driven by the economy than anything they can do to try to lease more properties.

That said, they are somewhat responsible for their cost efficiencies, so NPAT and costs should play a part in the value. Specifically for these reasons, I think a valuation based on dividend is most relevant. I don’t think I need to be too fancy here; doing a Discounted Dividend Model valuation is a bit over the top and probably a bit redundant because I can’t forecast property that far out. I believe that property prices are a little random because despite prevailing trends, they are impacted mostly be action or lack of action by whatever government is in power at the time.

Therefore I will make my investment case based purely on dividend, reviewing the financials to make sure there’s nothing funny going on, and my opinion on what next year’s dividend might look like (considering what happened to things like their debt and stuff, during COVID19 lockdown).

I need to be careful to invest based on an investment proposition that suits my strategy, rather than FOMO caused by wanting to buy stock that is currently cheaper than it normally is. That said, if the financials & prospects look OK, then it’d be nice to have some of this stock for diversification. Nevertheless, let’s do the analysis correctly and see what comes up…

Click here to read Part II.


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