Mountview. Not as undervalued as it once was, but still interesting

Full year results from Mountview Estates (LON:MTVW) today show a real slowing in Q4 revenues. Full year revenues up 7%, but H1 was +28%, Q3 +18% and full year to end March 2015 +7%. My guess is the election was a huge contributing factor to this. No matter though, it doesn't affect the long term value of this company.

For a reminder MTVW buys regulated tenancies. It charges a below market rent and the tenant has the right to remain until they move out or die. Upon vacation Mountview typically sells the property, often unmodernised. The creation of new regulated tenacies was phased out under legislation in 1989. There are still a number around and Mountview buys a number each year to partially replace stock it has sold, but the remaining pool depletes each year.

Knowing your accounting, or reading the notes to the accounts is the trick to investing in Mountview. The tenancies are held as "trading properties" on the balance sheet and valued at the LOWER OF COST OR NET REALISABLE VALUE Only as recently as theSept 2014 interim results did the company finally did not revalue thetrading properties, ascribing a current market value, in what appears to be a one off exercise. When the properties are sold Mountview books a profit on disposal and pay capital gains tax on the difference between sales price and balance sheet cost. 

Historic Book cost is £323m but if you notice the gross margin on disposal is c65% then you realise the open market value is far in excess of the stated historic cost. My simplistic view is to gross up the £330m of historic book at c60% profit margin (implying COGS of 40%) = 330/40% = 807m open market value. This is some way in excess of the £666m open market value ascribed by the one off valuation at the H1 stage, but not repeated at the FY stage. Why? Because valuers are conservative and value the properties at today's value but with a sitting tenant ie Not vacant. You typically pay less for a property with a sitting tenant. However I am trying to value it assuming no sitting tenant and also based on the profit on sale that the company achieves, ie from the data in front of me.

If these were sold then there is tax to pay at c22%, so this is : £807m open mkt value, minus book cost £323m = £495 * 22% = £106m
Thus undiscounted (I say undiscounted because you have to wait for the tenants to move out which will take a number of years) post tax value to shareholders = £700m
Other assets £35m
Total assets : £735m

Debt and other liabilities : £70m

Net book value: £665m

Shares in issue 3.9m

*true* Net Asset value per share : £170 vs stated TNAV by company based on lower of cost / net realisable value £73.80. So a pretty large difference. 

Share price £120

P/TNAV 0.70

Still cheap but given illiquidity which gives reasonably large gyrations in the share price I am not tempted to add here, but I am still a happy holder. Below £110 it looks v cheap