The path for Paragon (PAG)

Lots of work is being done on the run-off value

After yesterday’s Armorgroup fiasco (thank you to Interactive Investor and Controlled Greed for not taking the piss) I feel a strong desire to write about someone else’s research on a company in which I don’t own shares.

Various brokers have been crunching the numbers on Paragon since the funding warning last week. Credit Suisse are one who have done more detailed modelling of the residual value if the company were put into run-off.

They summarise their work like this:

“In this research we have considered the potential value flows to Paragon shareholders in the event of a wind-down. It is complicated because there are twelve separate SPV vehicles and one large warehouse facility, each of which is likely to throw off different amounts of equity over time.”

“However, even assuming a fairly negative scenario in which house prices fall 10%, the repossession rate moves to 1% and making markdowns on the non buy-to-let portfolios, we see significant upside potential.”

“The reason is that most of the assets have matched funding, and losses in each individual SPV are limited to the first loss pieces. If there were to be a rights issue we see around 8% upside potential.”

“However, we feel that the balance of probabilities is in Paragon’s favour to refinance its £280m corporate facility with the supporting banks, in which case we see around 34% upside potential to the current share price. We also believe that should the outlook for the credit and housing markets improve we could see significantly greater upside potential.”

The Credit Suisse price target is 175p; Paragon is up 10 per cent today at 137p. I don’t have the full note so I can’t comment on the methodology but I think the basic approach is right.

I’ve decided not to buy because I feel my market beta is already too high, and I think there is a small chance of serious falls in the UK housing market, but the run-off value should put a floor under the stock for now.

November 28, 2007 | Filed Under Companies

 

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