Following a turbulent week on the Australian share market last week, I went in search for some bargains.
One of my favourite starting points, when I'm looking for value, is Enterprise Value (EV).
What is Enterprise Value?
Think of enterprise value as the theoretical takeover price. In the event of a buy out, an acquirer would have to take on the company's debt, but would pocket its cash.
EV differs significantly from simple market capitalisation in several ways, and many consider it to be a more accurate representation of a firm's value.
The value of a firm's debt, for example, would need to be paid by the buyer when taking over a company, thus EV provides a much more accurate takeover valuation because it includes debt in its value calculation.
EV is just the starting point. The company also needs to be cheap, with a low price to earnings ratio (P/E) and a low price to book ratio (P/B). It needs to have a solid capital structure, which is represented by a low debt to equity ratio, and positive cash flows.
You'll notice that often these companies have been severely punished in out-of-favour sectors but, if you're prepared to go against the crowd and you're patient, you may see significant returns.
The price to book ratio (P/B) doesn't work well with the Financials and A-REITs, so I've excluded them from my findings.
Here are 5 stocks that meet all of my criteria:
| Company | Market Cap $ | EV $ | P/E Ratio | P/B Ratio % | (*)Net Debt/Equity % |
| OZ Minerals Limited (ASX: OZL) | 1.07B | 664M | 11.52 | 0.48 | negative |
| Independence Group NL (ASX: IGO) | 1.1B | 963M | 11.75 | 0.76 | negative |
| Fairfax Media Limited (ASX: FXJ) | 1.96B | 1.9B | 12.67 | 0.99 | negative |
| CSR Limited (ASX: CSR) | 1.29B | 1.22B | 8.18 | 1.13 | negative |
| Evolution Mining Limited (ASX:EVN) | 2.04B | 1.83B | 7.36 | 1.23 | negative |
(*) A negative debt to equity ratio means that the company's debt minus its cash, divided by its equity is negative. That's a good thing!
OZ Minerals Limited
OZ Minerals Limited is an Australia-based mining company with a focus on copper. The company's principal activities are mining of copper, gold and silver, carrying out exploration activities and development of mining projects.
The company is selling for $1.07 Billion, compared to its EV of $664 Million. It has a low P/E ratio of 11.52 and a P/B under 1. Its debt to equity is negative, which is excellent.
Independence Group NL
Independence Group NL is engaged in mineral exploration, nickel, copper and zinc mining and the development of the Tropicana Gold Project. The company operates in four segments: nickel mining, copper and zinc mining, Tropicana Gold Project, and feasibility and regional exploration activities.
The company is selling for $1.1 Billion, compared to its EV of $963 Million. It has a low P/E ratio of 11.75 and a P/B under 1. Its debt to equity is negative, which is excellent.
Fairfax Media Limited
Fairfax Media Limited is an Australia-based multi-platform media, marketing services and real estate services company. The company is engaged in publishing of news, information and entertainment; advertising sales in print and digital formats, and radio broadcasting.
The company is selling for $1.96 Billion compared to its EV of $1.9 Billion. It has a low P/E ratio of 12.67 and a P/B under 1. Its debt to equity is negative, which is excellent.
CSR Limited
CSR Limited (CSR) is an Australia-based company engaged in the manufacture and supply of building products in Australia and New Zealand. The company operates through four segments: Building Products, Glass, Aluminium and Property.
The company is selling for $1.29 Billion compared to its EV of $1.22 Billion. It has a low P/E ratio of 8.18 and a P/B just over 1. Its debt to equity is negative, which is excellent.
Evolution Mining Limited
Evolution Mining Limited engages in identifying, developing, and operating gold related mining projects in Australia and New Zealand. It owns and operates seven gold mines in Cowal in New South Wales; Cracow, Pajingo, Mt Carlton, and Mt Rawdon in Queensland; and Edna May and Mungari in Western Australia. It primarily explores for gold, silver, and copper.
The company is selling for $2.04 Billion compared to its EV of $1.83 Billion. It has a low P/E ratio of 7.36 and a P/B just over 1. Its debt to equity is negative, which is excellent.
