cnp and cer confusion, page-6

cmwilson did a great job summarising the situation and I just wanted to add a few points to this on a nuts-and-bolts level.

There is a saying in investing that 'price' is what you pay and 'value' is what you get. Nothing is closer to the truth when it comes to working out the CNP/CER relationship.

The direct and indirect CNP holding of CER adds up to 51%. Of this, CNP directly owns 24.7%, DPF owns around 7% and DPFI owns around 19%. CNP owns 51% of DPF and 67% of DPFI. DPF owns 27% of DPFI. It's a complicated structure.

The YE accounts are due in a couple of weeks but meanwhile, the latest financials we have available are for Dec 07. A lot will have changed in the last 6 months (as we are about to witness) but for the time being, we'll use these accounts.

Just taking a step back for a mo, there are a number of ways of establishing the value of an entity which is owned or part owned.

Typically, you or I might use a mark-to-market method which essentially takes the number of shares you own and multiplies it by the current share price. On this basis, the current total mark-to-market of the entire CER entity (aka market capitalisation)is around $823,103m, the 24.7% direct holding that CNP has is worth $225.5m and the 51% total holding across CNP/DPF/DPFI is worth $411.5m.

However, when an entity owns more than 20% and less than 50% of another, Australian accounting standards permit the owner to 'equity account' (EA) the investment which essentially means it can account for its share of the balance sheet of the held company. There's more complexity to this which is not worth going into now, but if you have completely run out of things to do in life, you can read about IFRS here:

https://www.pwc.com/Extweb/service.nsf/docid/981951434174C5ED80256C7E004BBC97

If you want the quick version on equity accounting, it's here:

http://www.intelligentinvestor.com.au/articles/145/Equity-accounting-explained-part-1.cfm?articleID=27088

In this situation then, CNP is permitted to equity account for the CER holding. There is much debate about equity accounting - when times are good people bitch and moan that it can undervalue a holding. When times are bad, people B&M that it overvalues, etc, etc. In most situations though, including this one, I think it's fair.

If you have a look at the CER balance sheet on p5 of the Appendix 4D (available from CER section on ASX website or from Centro website directly) you will see that the total shareholder equity is around $3.8bn ($1.72 per share - which highlights the difference between price and value considering the current CER SP is $0.36).

If you turn to the CNP balance sheet on p5 of the CNP Appendix 4D (different doc also available on ASX and Centro website), you'll see that CNP has a total of $3,659,140 in equity accounted investments and has 'note 4' beside the line. Page 22 details the note 4 breakdown of the EA investments, of which CNP has 5. The current EA value of the CER holding is $922,978 which is roughly 24.7% of the $3.8bn shareholder equity from the CER balance sheet. Again, there are some complexities but keeping it simple is the best approach here. I'd also reiterate that a lot has changed in the last 6 months so the figures will have moved; but you get the point. You can also see the EA values for DPF, DPFI, SuperLLC and the domestic investments on the same page.

There are numerous points of discussion as to whether valuing the 24.7% CER holding at $923m is valid or not.. If CNP wanted to offload the holding in a hurry on the ASX, it might be lucky to get $225m (24.7% of CER at $0.36) but dumping 1.1bn shares would probably sent the SP a bit lower so it's unlikely. If CNP simply wound up and sold all of the CER properties, it would get closer to $923m but would have to sell at a discount of, say, 15% which might realise $780m for the holding ($0.91 per CNP share). The fact of the matter though is that CNP doesn't want to sell the holding because it simply generates too much income. We don't want them to sell the holding for the same reason.

The interesting point here is that because CNP owns around 1.1bn CER shares, for every 1 share of CNP you and I hold, the company owns just over 1 CER share in our favour. You can do the maths on this point.

Now, the way in which DPF and DPFI hold their CER shares is complex and out of scope for this posting. Some are valued at mark-to-market and some held in a trust (CRIT). However, I am of the opinion that they are both undervaluing their holding but the extent of this is difficult for a layperson to tell at this stage.

Anyway, in summary on a 'pure' basis, the CNP shareholding in CER is worth an absolute ton of money BUT (as cmwilson pointed out) the market is offsetting this because of a) the liability side of the CNP balance sheet b) the fact that CER is affected by Centroitis which has dragged the SP down c) some uncertainties that remain about CER.

If CER was to be liquidated, CER shareholders would probably receive a lot more than $0.36 per share (which in part is why value investors are buying so much CER stock). Until CNP returns to health though, the CER holding will continue to be overlooked. When CNP and CER do get back on their feet, you can see the value that could be attributed to the holding.

I hope this helps. If there are any questions, just shout. If anyone thinks my maths or methodology is wrong, please shout louder...