Why is Royal Dutch Shell selling so much lower than net asset value per share? The current NAVPS is £27 but only trades for £14 and the share price has never exceeded NAVPS in the last 5 years. Am I missing something?
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Can't comment on Royal Dutch Shell specifically but I cover metals & mining, and NAVPS is a common metric we look at. A few reasons why companies generally trade at a discount to NAV / DCF value:
- Market pricing is based on real-time data, whereas NAVPS (often broker consensus estimates used) takes time to adjust. For resource companies, a key assumption in your NAV / DCF model is the commodity price deck over the life of the project(s) - even if analysts are bearish on the underlying commodity long-term, they rarely adjust their price deck immediately after short-term, black-swan market events (i.e. COVID oil crash). They generally adjust their price deck outlook accordingly based on latest market developments, their own outlook, etc., which may cause a disconnect in perceived value vs. what the market is pricing in today
- Similar to the above and as in any other industry, the market may perceive and price (either correctly and incorrectly) information flow based on their own views on the implications to the sector / company, which may not be fully aligned with the research analyst(s) providing the NAVPS estimate. Perhaps Royal Dutch Shell is a great company on all accounts from a cash flow perspective, however one or a few specific factors can act as an overhang on the stock (i.e. location of assets, perceived quality of management team, etc) which can lead to the company never realizing "full value"
- In natural resource sectors, often there are other considerations to take into account i.e. capex overruns, initial production date of development or expansion projects (and potential delay), government / social / permitting risks, risk of potential increases in royalties, taxes, etc., which may not be factored into broker models that the market is pricing in as an inherent risk
To summarize, you can think of a NAVPS estimate as a DCF per share value - there's always going to be a disconnect between market value and "intrinsic value" based on your cash flow analysis. For resource companies whether it's mining or O&G, often times you'll see companies trade either at a premium or discount to NAV based on where we are in the commodity cycle.
Commodity companies are depleting resources. They constantly need capital reinvestment to maintain as a going concern, otherwise their resource base would just run down to zero. So net assets at any point in time is not a good reflection of the actual going concern value of the company.
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