Sorry, don't mean to be obtuse, but I do caution that we...

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madamswer

16,409 Posts.

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26/07/21

17:36

Post #: 54784295
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Originally posted by madamswer ↑

"Personally I ignore distribution yield and look only at NAV."

@IndexInvestor,

That is obviously an improvement on taking distribution yield at face value.

However, even an NAV approach requires some important caveats.

Firstly, CDP is almost never valued by the market at NAV; CDP's long-term average discount to NAV is around 19%, based on my analysis.

Second, the thing that ultimately determines the sustainable level of distributions is the same thing that ultimately underwrites the NAV, namely the discounted free cash flows that get generated by the underlying assets.

And the problem for CDP is that it is a mature asset and its stream of free cash flows has been declining over time.

Now, to date, that decline in free cash flows has been masked by the decline in the rate at which those cash flows get discounted in order to arrive at the NAV figure.

But if we've reached the end game of the decade-long decline in the rate at which the discount rates has been declining, and the cash flows continue to decline, then there is nothing to prevent the NAV from declining, too.

I think that while Covid was ostensibly the reason the valuation of the company's asset base was written down, I suspect part of it was a bit of a valuation catch-up exercise, which would have occurred at some point anyway due to the cash flow profile of the underlying asset.

So I'd be wary of using NAV as the basis for investing for a company in CDP's situation.

That they are now issuing DRP shares at a discount to NAV is, in itself, NAV-dilutive.
Moreover, should they need to raise more substantial amounts of equity capital for the any refurbishment will further dilute the NAV.

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Sorry, don't mean to be obtuse, but I do caution that we investors - few of us probably having more than 12 or 15 years of investing experience (and many with far less) - have become fully accustomed to operating within a certain tailwind paradigm, one which looks like it may have run its course.

When declining interest rates has been a permanent feature of the investing landscape of many peoples' investing careers, the scope for believing and behaving like it will always be this way, is high.

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CDP Price at posting: $4.25 Sentiment: None Disclosure: Held
3 Upvote

0 Great analysis

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