Mountview Estates: Technical index selling creates buying opportunity.

9th Jun '16 by VegPatch

5 comments 5415 reads

Mountview Estates: Technical index selling creates buying opportunity.

I have explained in the past how the accounting convention needs to be understood to uncover the hidden value in Mountview Estates (LON:MTVW). A brief reminder is that the reversionary tenancies are held as trading assets at the lower of historical cost or open market value. The ‘tell’ is that the gross margin on sales is around 60-65%, implying that the historical cost is therefore only around 40% of the true, open market value. There are quirks about sitting tenants etc but I will let you read this in a piece I wrote a while ago : http://www.stockopedia.com/content/mountview-not-a...

Not much has changed since I last wrote in terms of trading. The November trading update was good and the company has replaced a fair amount of the stock that it sold. I expect that the lower end of the housing market has remained robust in London and the South East. Furthermore updates from the national housebuilders would seem to indicate demand remains good. The Company will update the market with its full year results on 14th June. The November NAV was £77.30 / share. My guesstimate is that the real, post tax NAV is in the region of £175 to £200/ share.

The “Good” news is that Mountview will be excluded from the FTSE Allshare

“FTSE announces the annual changes to the FTSE UK Index Series. All constituent changes will be applied after the close of business on Friday, 17 June 2016 and will be effective on Monday, 20 June 2016”. source: FTSE

Mountview is the second largest constituent to be excluded and as it isn’t a terribly liquid share the selling by index funds is depressing the share price. I say “good” because I prefer to buy bargains rather than fully priced shares and I feel this is selling is temporary phenomenon and not driven by fundamentals. So in the way that Benjamin Graham espoused his theory that markets are voting machines in the short run and weighing machines in the long run, I feel that we have a voting issue at the moment.

The current discount to my calculated “real” NAV is 46%. Admittedly this isn’t the widest its ever been with around a 70% discount appearing in the years 2009-12, but this was before the company raised its skirt…

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JohnEustace

9th Jun '16

I'm a holder of Mountview Estates (LON:MTVW) and did well from the lift on the Alsops valuation exercise.
But a property with a lifetime tenant is worth less than one without. It will be worth more in the future when the tenant is no longer in occupation - that's the basis of the Mountview business. But it can't be sold for the higher value today. So you can't really value the business today as if there no tenants in occupation.
I think the value in the event of a sale of the whole company is likely to be closer to the Alsops valuation, plus the pretty robust market increase since that valuation was performed.

VegPatch

10th Jun '16

Hi John,
I don't disagree at all. Sitting tenants are a pain and do detract from the open market value.

I would make the point that any prospective buyer should pay a premium for control but in this case any price paid will be a negotiation between the Sinclairs and associated family members and the buyer. Also any buyer is not probably paying for what the business is worth now, rather in 5 plus years time.
So my view is that the £143/ share allsops valuation is 2 years out of date. Assume that is say 15% light = roughly £165/share. Maybe a bit of a premium for control...£175 is not out of the question at all.

Importantly the buyer will do the maths and conclude the real NAV is £200 plus so they will feel they are getting a reasonable deal. Then hopefully everyone's happy!

17th Jun '16

FY16 Results were released yesterday. In general they were good with the historic NAV rising by 8.4% to £79.9 per share. Turnover rose 12% to £80m and gross margin on sales was 66.5%. The Group managed to buy £11m of properties during the year, partially replacing the inventory sold. As purchases have lagged disposals in recent years the Group has raised the dividend from 155p in 2009 to 300p today, giving Mountview a yield of just under 3% and the dividend is covered 3x by earnings. Also as a consequence of higher disposal proceeds than Mountview has been able to reinvest, balance sheet debt has fallen from over £100m in 2009 to £42m today and gearing (debt / property assets) has fallen from 33% in 2009 to just 11% today. So the business is lowly geared at a point when admittedly house prices to average incomes do look stretched. Don't forget these arent mega mansions in Surrey that Mountview owns, rather quite modestly priced properties. The average disposal price in 2014 was £270k and £278k in 2015. Given London properties account for c50% of the trading portfolio these really arent expensive units and I think would weather any UK property downturn better than flats in say Vauxhall.

There was no update to the open market valuation conducted by Allsops 2 years ago. However if I apply a the same premium over historic book that Allsops applied, ie 206%, then tax the uplift at 20% (the rate that Mountview pays) I arrive at a post tax NAV of £152/share. I am told by another shareholder who knows his onions that the Allsops valuation is very conservative.

JohnEustace pointed out that my methodology is less conservative than Allsops as i assume all properties are vacant, which i think is fair. However, I think one needs to understand what the potential is. On my methodology which grosses up the trading assets based on the margin on sale (66%) that Mountview achieves, I come to £206 per share. Splitting the difference gives me £179/share. So if you want to be conservative I would say that the shares should trade at a 30% discount to my £179 / valuation which would be c£125/share, nearly 25% upside from here.

The technical selling from the index reweighting I think should stop tomorrow but given Mountview's illiquidity I guess it may continue into next week if the index funds haven't yet completely sold down their holdings. I dont really know on that front.

What I do know is that this is a fantastic source of value and we are (IMHO) being offered the opportunity to buy quality merchandise at discounted prices. Any Brexit leave vote may well have serious consequences for UK housing, so if you want wait to see the outcome of next week's vote then that's understandable.

VegPatch

I own shares in Mountview

ExpectingValue

Veg,

Thanks for all your work on this. I have been reading with pleasure.

I am quite surprised how lightly they are levered, personally. They have a more stable income source than the vast majority of residential real estate players, given their tenants do not want to either default nor vacate, and as such the rental income is very solid. Said income went up both in 2008 and 2009. I am fairly sure a bank would be more than comfortable if they had half of their rental income (£18m) going out in interest payments, and at a 3.5% interest rate that equates to a capacity of about £260m of debt, still less than the balance sheet value of their properties.

It is always difficult to tell what the whims of the controlling shareholders are, but I assume they are just a conservative bunch. Notably, to their great credit, it looks like they put money into significant purchases in 2008 - with debt - when their capacity could be put to most effective work.

Anyway - my ramblings aside - my point is that their excellent shareholder return over the last decade vs. the sector underplays their superiority. They have done so with meaningfully less debt and meaningfully less risk than their peers.

I think your approach re: valuation is a good one. Your approach frames the upper band should tenants all vacate tomorrow. A sale scenario would likely end up at some discount to that... but in the current interest rate environment, these sort of 'low-cash now, high value future' assets are much less 'discounted' than they used to be.

ExpectingValue
Thanks for the kind comments. In response to your questions / points -
I think Mountview would like to buy more regulated tenancies and would use debt to do it. The only problem is that there aren't that many around. I think the introduction of the assured shorthold tenancy (AST) agreement in 1989 effectively put an end to the creation of new regulated tenancies. So its more because there simply isnt much stock of regulated tenancies rather than management's innate conservatism.

Having said that the Chairman Duncan Sinclair is, along with his sister, the majority owner. The business was established in 1937 and floated in 1960. Therefore the Chairman has a great deal of family history and one gets the impression he will not do anything reckless just to boost short term returns.

Mountview Estates: Technical index selling creates buying opportunity.

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VegPatch

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