Friday, August 22, 2008

Amisco: Liquidation Value

As mentioned here, Amisco is a Canadian furniture manufacturer that has been ravaged by coinciding forces of cheap Asian imports, a rising Canadian dollar and a weakening US consumer. As observed, the price to book value of the stock is priced cheap at 0.38 times. This means you can buy the company's shareholder interests for 38 cents on the dollar. However, you may not want to own these assets even at a discount to their book values, so it's worth looking at what one could expect to receive under a potential liquidation scenario. If the market has priced the stock well below its liquidation value, this could be a bargain purchase, despite the fact the entire industry is suffering.

Obviously cash is liquid, so it gets valued at 100%. Accounts receivable should be largely collectible so no major discount is required. The temporary investments are mutual funds which were valued as of May 31, 2008. Its possible the mutual fund prices have slid a bit, so I will discount them to 80% of the balance sheet value. A discount value of 60% to inventory is applied since it is largely comprised of finished goods and work in progress. Under a liquidation scenario this inventory might get marked down significantly in order to sell.

Capital assets are much more difficult to value without intimate knowledge of the company and the industry. To deal with this, one can use conservative valuations for the assets to protect against placing too high a value on them. Besides the land and buildings, most of the assets are believed to be specialized for the manufacturing furniture business. It is doubtful that an abundance of new entrants are coming into the Canadian furniture industry and existing entrants may already have manufacturing overcapacity due to shrinking sales. For these reasons, I wouldn't expect to recoup much of the equipment and machinery costs. To be conservative I severely marked these assets down.

Operating leases can be thought of as debt since they are payments bound by a contract. Since Amisco is leasing commercial rental property, a lot of these costs could likely be transferable to another interested party. For this reason, I only considered 25% of the present value lease payment as applicable to Amisco as a liability.

The results of the liquidation value are tabulated below.

Since the current stock price is $1.64 per share and the calculated liquidation value is $3.30 per share, the market is offering the stock at a 50% discount to its current liquidation value!

Even though we calculated a liquidation value for the stock, the company does not seem to be in immediate danger of insolvency. The company has no balance sheet debt and has a current ratio of 3.7 to 1. The company is still earning a small profit and are continuing to execute on the strategy of exploiting weaknesses of cheaper foreign manufacturers by improving on quick delivery times and offering customized furniture options.

To quote the superb value investor Francis Chou, "Good things can happen when you buy stocks at bargain prices". I'll leave it to the reader to decide if Amisco is priced as a bargain.

Disclosure: The author has no shares in this stock


heterocedastico said...

Great Post!

Only one question. About the 25% for operating leases. Is that a rule of thumb?

Thanks. Great job.

heterocedastico said...

Another question:

The values you have for fixed assets are gross values? How do you define the markdowns? Based on amortizations already made?


Reyer said...


Thanks for the comments and questions. Firstly, no, I don’t have a rule of thumb for operating leases. Basically I look at what they are leases for and then figure out how easy and likely it would be for someone to take it over. I am being pretty conservative with 25% cost not recovered on the operating leases (imho) because it is commercial office space. I suppose, if this was furniture equipment, I would charge all 100% as debt to Amisco.

I used gross values as a starting point and then looked at the net values as well when coming up with the write downs for the capital assets. My liquidation values in aggregate are less than the net capital assets on the books. I could have started from the net as well. The reason I didn’t do that, is I want to be cognizant of the costs when looking at the buildings in particular, because this asset class generally appreciates (in terms of value) over time, and so I wanted to give a slight discount to its cost just to reflect a liquidation event where it might be a bit tougher to get fair value for the asset. It’s also possible that the building could fetch quite a bit more than I estimated, but I wouldn’t think they would fetch a lot less.



Doug the Second said...

Looking at your table, when you say "operating liabilities", is this equivalent to just total current liabilities or is it equivalent to the sum of current and non-current liabilities?

Reyer Barel said...


operating liabilities (perhaps I could find a better name) is essentially all the liabilities. However, I did make some adjustments to the liabilities and threw them all in the bucket called "operating liabilities".


Anonymous said...

Interesting writeup. If a company has both deferred tax assets and deferred tax liabilities, how would you value those line items in a liquidation scenario? What liquidation factor would you give?


Anonymous said...

Seems as though Amisco folded.
But, critically, presumably any buying following your article would have led to shareholders preserving their capital, assuming they received c.$1.50/ share.
Is this the case?

Saj Karsan said...

Hi Anon,

Looks like it was bought out at $1.60. But the article was written by Reyer (who no longer writes for the site) and I have never owned any shares of this company, so I may not know all the relevant details.


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