MEA continues to be the cheapest and most frustrating stock on the market. If you strip out the $40m in cash, the market is valuing it at 3 x cash flow. I’ve said this before, 3 x cash flow is the price you have to pay to buy your local fish and chip shop. Can anyone name me a cheaper stock?
Mr Market is not totally stupid, of course, so all this just means the market doesn’t trust management to manage the business profitably through the market cycle. And using shareholders’ money to make VC-style punts on start-up businesses doesn’t help with the trust.
All they have to do is:
1. Put their heads down and focus on building the business (despite all the talk about the potential for organic growth in the East Coast, I don’t see any more branches being opened). It's a great brand, why not leverage it to grow?
2. Don’t get distracted by “tech” gambles. It might not be as exciting for management as punts on “tech” but property is still a great business with a very high return on capital. (Warren Buffett’s Berkshire owns one of the largest real estate brokerages in the U.S)
3. Announce a dividend policy of paying out 70% of net profit out as dividends each year (this would result in a 10% fully franked dividend on current share price). They have $40m cash and nothing sensible to spend it on, so why not commit to a decent dividend policy into the future? This step alone would lift the share price 30%.
Or just put it on the market?
If John and the Board can’t get excited about building the property business then they should put the company on the market.
If I were John McGrath I would partner with private equity to take it private. They could immediately pocket the $40m cash, and then put in place a highly incentivised management team to actually grow the business and trim head office costs. An easy path to a huge return.
