Correction: Airea not trading below liquidation value

Oops! I did it again

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There’s a mistake in Airea’s liquidation value worksheet (published last week). The equation for adjusted net assets only deducted current liabilities, when it should deduct all liabilities. It’s all very well blaming misbehaving formulae but I type them in, so I’m sorry about that.

The upshot is floored carpet manufacturer Airea is not trading at a 19% discount to estimated liquidation value as I reported, It’s trading at a 4% premium.

That’s still extraordinarily cheap if the company’s viable. It’s 35% below net current asset value, and 66% below tangible book value. You really have to take a very pessimistic view of the value of Airea’s assets to come to any other conclusion.

But before I present the revised spreadsheet, there is another caveat.

Two readers, Trident and Jeremy, say I should account for the pension obligation in the valuation. In one sense I have, the deficit (the difference between the value of its obligation, and the value of its assets, which is just over £1m) is included as a liability and deducted from the asset values used to calculate liquidation value, net current asset value and book value.

The problem, though, is the size of Airea’s defined benefit pension obligation. In common with many established and contracting businesses, it’s big. I can’t say exactly how big, because details of the pension fund were not published in the preliminary results, though they will be in the annual report.

Last year, though, Airea’s pension obligation was just over £40m, bigger than the company itself, which has total assets of about £25m and sales of about £29m.

A big pension fund attached to a small company is like a giant fly-wheel attached to a rather rickety machine. When it’s running smoothly everything’s fine, but a small hiccough can unbalance everything.

Although we don’t know the size of the pension obligation, we do know the deficit, the difference between the value of the fund and the size of the obligation has come down since last year, from £5.5m to £1.2m because the government has changed the inflation measure used to determine index linked retirement benefits.

This time, changes in the many complex assumptions used in calculating Airea’s pension obligation have worked in the company’s favour, but the dramatic effect it has illustrates the problem with large pension funds.

If Airea’s deficit this year was the same as it was last year (nearly £6m) the company wouldn’t look nearly as attractive an investment. It would be trading at a 37% premium to net current asset value, and in terms of estimated liquidation value, there would be very little value left.

So, unfortunately, the pension fund is another factor that reduces the certainty of the valuation, and my confidence in it.

Here’s the revised worksheet, with the correct liquidation value and the current pension deficit:

I’ve rearranged the bottom section to show the discount or premium the market price offers in comparison to each valuation measure.