Compelling case for an investment., page-17

What I personally find appealing at current levels is that, having defined the liquidation value of the company as LV = [Current Assets] + R*[PP&E] – [Total Liabilities] – [Operating Leases Commitments], then in A$mm we have LV = 63.11 + R*253.26 – 119.77 – 17.48 = R*253.26 – 74.14 where R is the recovery rate on the book value of PP&E (I am using figures from the 2015 annual report).

If we then let current LV equal current market cap, and solve for the implied value of R, we get 37.99 = R*253.26 – 74.14, i.e. R = (37.99+74.14)/253.26 = 0.44; in other words, the market is pricing in a recovery value of 44% for the company’s PP&E from its present book value.

As per one of @madamswer ’s previous posts, the historical recovery rate on BOL asset sales is actually in the region of 80% including writedowns; if we use this value in the equation above, we get LV = 63.11 + 0.8*253.26 -119.77 – 17.48 = 128.47 = 27c/share. That looks like a pretty attractive risk/reward profile to me.

The inherent limit to this reasoning is obviously that it assumes an immediate liquidation of 100% of PP&E, whereas the actual process may take a number of years and also be limited to just the amount of asset sales that deleverages the balance sheet enough to keep lenders happy, but not more than that.
At which point, the fair value of the company would have to be a function of future earnings, on which I personally have very little visibility.

So, it could be argued that, under the conservative hypothesis of zero future operating cashflows, the fair value of R for the LV calculation should be somewhat lower than 80%; if we use R = 60%, for instance, we get LV = 63.11 + 0.6*253.26 -119.77 – 17.48 = 77.82 = 16c/share, which still represents 100% upside from today’s price.

That looks to me like a sufficient “margin of safety” to buy in at these levels (8c/share, as I write). All IMHO+DYOR+GLTAH.