Mountview : strong results and firmly undervalued
Mountview Estates. £112
Very solid interim results from LON:MTVW today. Stated NAV rose 9% over the last 6 months to £77.30 / share. Trading on a 45% premium to NAV.
Except they aren't really.
The true asset value is around £178 / share. I'll explain why...
As I have said before http://www.stockopedia.com/content/mountview-not-a... the trick to understanding the value in Mountview is to read the accounts.
For a quick recap on where the value is hidden
MTVW buys regulated tenancies (a bit like LON:GRI or LON:DJAN). 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. Mainly the properties are in London and SE, but aren't flashy, they are often terraced houses in places like Balham, Catford or Soutwark. Not exactly Belgravia. Have a look at the front page of the annual report for an idea of their property http://www.mountviewplc.co.uk/AR2015.pdf The reason I mention this is that I feel it has benefitted less from the rise in London prices than the top end. Also it is less likely to be affected by the increases in stamp duty.
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. Key word here is "lower". So when you see the stated NAV this is the historic cost, not the open market cost as most property companies mark their property to. When the properties are sold Mountview books a profit on disposal and pays tax at 20% on the profit (ie difference between sales price and balance sheet historic cost).
The open market value
Only as recently as the Sept 2014 interim results did the company finally revalue the trading properties, ascribing a current market value, in what appears to be a one off exercise.
The Financials
Historic Book cost of the properties is £330m 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%, which is lower than the 65% GM current being reported) = 330/40% = 825m open market value. This is some way in excess of the £666m open market value ascribed by the one off valuation at the Last revaluation in Sept 14. 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 c20%, so this is : £825m open mkt value, minus book cost £330m = £495 * 20% = £99m
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 = £725m
Other assets £32
Total assets : £758m
Debt and other liabilities : £61m
True undiscounted Net book value: £697m
Shares in issue 3.9m
*true* Net Asset value per share : £178 vs stated TNAV by company based on lower of cost / net realisable value £73.80. So a pretty large difference.
Share price £112
P/TNAV 0.63
I think this is now firmly back in the undervalued camp and I am likely to buy more
VegPatch
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12 comments
Hi all,
Thanks for the write-up, I've only previously looked at CLI in the (commercial) property sector.
My only other death-related 'play' is TLI where the Grim Reaper's random finger pays out on life insurance policies, a second 'play' based on bricks and mortar has some attractions, as does reported management ethos.
Cheers !
also don't forget that as the property that MTVW buys has a sitting tenant, whom you don't know when they will leave (die / go into a home) and the rents which are regulated ie low, means that you get paid less to wait until the tenant vacates. The average tenancy lasts for 8yrs (from memory) before they vacate according to Grainger management. Thus MTVW buys at a discount to open market value because of the low rent and the sitting tenant.
From memory again - the average reversionary tenancy is bought at 70%ish of open market value
Mayn is completely right re the gross margin. Considering 48% was in the property lows of 2009, it gives me confidence that the properties are significantly undervalued compared to book value.
The main concern I have is that they aren't making regulated reversionary tenancies any more and thus the pool of them the MTVW can buy to replace its old stock is falling. In Grainger's case that is why they have diversified outside of these reversionary tenancies.
Hi eezy -- I'm not VegPatch, but MTVW's gross margins have bobbed around over time, a high of 66% being reported in 2008 and a low of 48% in 2009. The margin is dictated by the original cost of the stock and market conditions for selling. One significant unknown is exactly which properties will come up for sale in any given year -- nobody knows for sure because they are only sold when the tenant leaves or (more often) dies. So that particular factor influences margins to some extent -- properties sold can have been held for decades or in theory just days.
Future sales ought to be conducted within the (albeit wide) historical range of margins as house prices ought to rise over time and the holding period between purchase and sale ought to even out as well. I suppose you could go back ten years and ask the same won't-margins-be-lower-in-the-future question -- only to discover margins actually held up well. FWIW, over the past ten years, MTVW has sold the average property for c2.6x its original cost and that I think is a good as any guide as to what the next ten years may hold.
Mayn
Are property sales not of older properties, that have been bought lower? Therefore future sales at lower margins? Therefore your "real" NAV somewhat too high?
Hi Veg, thanks for the reply. I too have spoken (albeit briefly) with Mr Jenner and was given the same impression. He claimed DJAN remains quoted because the family like the financial-reporting discipline that a quotation requires. I had never come across that response to a 'take private' question before, so I think the reasons could be genuine! Similar to what he said to you, he mentioned to me that what external shareholders could see was very much 'the tip of the iceberg', as there were many sites in the books that, with a bit of refurb, could be valued much higher. I will dig into the books again for signs of regulated tenancies.
Mayn
Hi Mayn
I was pretty certain Daejan did have some reversionary tenancies but I must admit I am less sure now. It may do, but looking at the Accounts suggests that if it does, they are accounted as Investment Properties, rather than Trading Properties. Investment properties differ from Trading Properties as they are marked to market (ie revalued to current market levels) each year. Trading properties, the accounting convention that Mountview uses, remain on the balance sheet at the LOWER of historical cost or net realisable value. So I think with Daejan, what you see is what you get with the NAV. Having said that I know the company is incredibly conservative on valuations.
One thing to bear in mind with both Daejan and Mountview is the huge family shareholdings. Both companies are run for the families, with shareholders, in my opinion, treated as an inconvenience. They are multi generational with Daejan first being listed in the 50s or 60s from memory. This is not a bad thing as you know neither will do anything stupid. To give you an insight, I once met the company secretary at Daejan. He talked me through the business, hence my impression on the conservative accounting as they were valuing a prime asset, which was being redeveloped, at a fraction of its true worth on the balance sheet. Also the Freshwater family funds a lot of Jewish charities, so they need the dividend income to fund this. Hence my view they won't mortgage the company up to the hilt. So neither Daejan nor Mountview are conventional property investments, but I have owned both (sold the Daejan a few years ago - Doh!) and made a lot of money. Worth knowing though in my view. Hope this helps.
Veg -- thanks for the writeup. I wonder if you knew how significant regulated properties are to Daejan, or have any references to Daejan owning such properties? I follow Daejan, but never realised this firm also dabbled in regulated tenancies. That might explain why Daejan's operating costs are very high in relation to its rental income -- a proportion of the rental income is the peanuts received from the regulated tenants.
Mayn
In one £DJAN owned block in central London there are 12 flats, 2 of them are regulated tenancies, two or three are long tenancies but still owned by Daejan and the balance are privately owned long leaseholds (mostly 60-70 years, value to Daejan of each of these is reflected in the lease extension cost of £100k+).
Altogether associated blocks have 200 flats. this is one of their larger residential holdings. A long lease is typically worth £1.5m ish for a flat in decent condition.
These flats were practically unmarketable at the time Daejan bought the freehold (I once spoke to a local estate agent who said that they refused to take them on the books as they were unsellable) so I wouldn't be surprised if the regulated tenancies are in the books for £30k. This could mean gross uplift of up to £50m on eventual realisation..
A few sums based on the numbers implies a total value to Daejan for the 200 flats of £173m plus the gross £50m on reversion of the regulated tenancies before discounting time from the latter value.
I suspect that this isn't typical of other blocks but hope it helps.
Belated thanks Richard for your helpful post.
I see from old DJAN accounts that the firm does own reversionary properties. Such assets were itemised as trading stock on the balance sheet pre-2006, but were amalgamated with investment properties thereafter following the introduction of IFRS. Why the differing bookkeeping approach to MTVW I do not know.
Anyway, DJAN's 2005 figures show trading stock of £364k sold for £5,574k giving a profit of £5,210k. The 2005 annual report also claimed the residual £21,572k of UK trading stock had a market surplus over book value of £148.5m on valuations performed in March 2002.
So yes, these properties should have enjoyed substantial uplifts on their eventual disposal.
Hi VP. Interesting insight.
My initial reaction was that with sitting tenants the property values are much lower for a reason, but thinking this through, UK property in the last 30+ years has significantly exceeded general inflation so waiting for vacant possession can only increase the eventual realisation value of the asset.
To my mind, the key question then becomes what is the (presumably) negative cost of carry on the assets (ME's weighted cost of capital) vs. the sub-market rental yield plus costs of maintenance etc.,.
I suspect more digging in the accounts will provide some insight into this but definitely something to look into.
ATB,
Gus.
Newcomers may need to be careful with the decimal point on these.
fair point Alan
they are £112 each or 11200p !