Unwary investors can be caught out by hidden banana skins when valuing miners Rio Tinto (LSE: RIO) and BHP Billiton (LSE: BLT), and brewer and pubs group Fuller, Smith & Turner (LSE: FSTA). Here’s what you need to watch out for with these stocks — and a few others.
For companies rich in hard assets — such as miners — investors often look at the valuation ratio of price-to-net assets, also referred to as price-to-book (P/B). The table below shows the calculations we might do for FTSE 100 miners Rio Tinto and BHP Billiton.
| Price (P) | Book value (B) | P/B | |
| Rio Tinto | 1.41bn shares x 2,927p share price = £41.3bn | US$54.6bn (£35.1bn) | £41.3bn/£35.1bn = 1.2 |
| BHP Billiton | 2.11bn shares x 1,586p share price = £33.5bn | US$86.2bn (£55.4bn) | £33.5bn/£55.4bn = 0.6 |
You’ll also find Rio on a P/B of 1.2 and Billiton on 0.6 among some of the financial websites that do the work for you. The ratings, particularly BHP Billiton’s, make these two world-class giants appear surprisingly cheap, compared with the mining sector average P/B of around 1.5.
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The reason is, if we’ve done the calculation as in the table above, we’ve inadvertently stepped on a banana skin.
Rio Tinto and BHP Billiton happen to be dual-listed companies (DLCs). A DLC functions as a single operating business, but is actually two corporations with separate legal identities, stock exchange listings and registers of shareholders.
The book values in the table above are for the single operating business (as presented in the companies’ accounts), but the number of shares relate only to the London-listed side of the companies: namely, Rio Tinto plc and BHP Billiton plc. We also need to include the shares of Rio Tinto Ltd and BHP Billiton Ltd, which are listed on the Australian stock exchange.
Rio has 0.44bn Australian shares to add to the 1.41bn UK shares, which pushes up the “P” number in the table above from £41.3bn to £54.1bn, and the P/B from 1.2 to 1.5. In the case of Billiton, 3.22bn Australian shares need to be added to the 2.11bn UK shares, which pushes up the “P” number from £33.5bn to £84.5bn, and the P/B from 0.6 to 1.5.
The reality, then, is that neither company is cheap relative to the mining sector average, and that Billiton isn’t cheaper than Rio.
There are a number of other DLCs to look out for, including cruise operator Carnival, which has shares listed in London (Carnival plc) and New York (Carnival Corp). I should also note, though, that many companies’ shares are traded on foreign exchanges, and that this doesn’t in itself make the company a DLC.
I’m not quite finished yet! There are some companies listed on the stock market that have other shares that aren’t even listed at all. But we still need to include the value of these unlisted shares in our P/B calculations.
Fuller, Smith & Turner, for example, has 32.36m shares on the London stock exchange, currently priced at 1,030p. This would give us a “P” for our P/B calculation of £333.3m, with the “B” being last reported net assets of £277.7m: so, a P/B of 1.2 — which looks very attractive relative to a peer such as Greene King on a P/B of 1.8.
However, Fullers has two classes of unlisted shares, which bring the total number of shares to 55.66m, making the “P” £573.3m and the true P/B a rather less attractive 2.1.
Again, Fullers isn’t the only company on the stock market to have unlisted shares. Another example is Haynes, publisher of the eponymous car repair manuals.
