With the advent of my post in FCN, I plan to cover a concept I developed. This concept may already have been invented in the financial world - if you know about it, please let me know so I can give the credit accordingly.
I call this concept - The Spec Factor
What is the spec factor? Simply put, it is the multiplier applied to Net Assets to get Market Cap. In other words, it answers the question: "For every dollar that the company owns, what is it currently worth to the shareholders?"
I had started using this factor to evaluate companies that plan to do consolidation and capital raising (CR) at the same time.
To make a valuation of a company after these events is tricky. Simply adding the CR amount on top of the market cap to get the projected valuation gives some distorted valuations. For instance, lets take KSO as an example (from my post here):
------------------- Was trying to find a simpler way to evaluate the SP post-col, came up with the following:
Simply put, add the net increase in Net Assets post-consol to the Market Cap and divide this with the shares issued post-consol:
So, according to this method of valuation, diluted SP (not taking into consideration performance shares) will be (5M + (5.2M-1.3M))/85.2M = 10.7c post-consol. EV would be (5M + (5.2M-1.3M)) + 6.3M - 5.5M = 9.7M
After this post, I replied:
Hmm, realised something - Net Assets might be worth more due to a premium that the market puts on it. 1.3M Net Assets has been given a 5.0M Market Cap (SP @ 0.6c). Accounting for the market premium, it would be post-consol:
5+ (5.2- 1.3)*(5/1.3 [this is the premium]) /85.2 = $0.23 per share. EV would be 5+ (5.2- 1.3)*(5/1.3) + 6.3-5.5 = 20.8M
That looks about right.
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In short, the spec factor gave a more realistic valuation of KSO.
Here's where it gets interesting:
With the same method of valuation, NOR works out to be $0.34 pro-forma.
At first, it seems unlikely, until we see the spec factor - at the time of the prospectus, shareholders were valuing $30 for every $1 the company had in net assets - that's speccy! In these cases, I would only buy on a non-spec rate, which works out to be $0.11. That makes the current price not a bad buy.
Here's a more technical valuation for FCN: consolidation with CR afterwards:
Right now, FCN is at 0.031c. This suggests that it will bag at least once. Let's see how this all pans out in the months to come.
Here's the spreadsheet for all to play around with. Enjoy.
