McCarthy & Stone - 0.8x TNAV is historically the trough for most housebuilders

Wednesday, Jun 20 2018 by
10

McCarthy & Stone 106p     Mkt Cap £570m    TNAV £700e    TNAV / Share 130p

I made a small edit to the title, which was too gloomy. Yes they have had a profit warning but on a 3 yr risk / reward ratio these shares represent v good value in my opinion.

Yesterdays profit warning got me looking at prior comments on McCarthy & Stone. About 18 months ago we were debating the merits of McCarthy & Stone at 1.4x TNAV vs Bovis on 0.8x. https://www.stockopedia.com/co...

I suggested long Bovis (which i did) and short MCS. The rationale was pretty simple. Forget PEs for housebuilders and concentrate on Tangible Net Asset Value (TNAV). It has worked well for most housebuilders outside of an outright recession. The trough is usually about 0.8x, which is what it was then for Bovis.

In the subsequent months Bovis had another profit warning and the Board replaced the CEO and put in place remedies for the cost overruns. Fast forward a year from then and the situation is diametrically opposite. MCS, post yesterdays profit warning, is on 0.8x TNAV and Bovis on a big premium to TNAV.

Yesterday MCS announced forecast operating profits for FY18 will fall short of the £96m made last year and fall into the £65-80m range. The CEO, Clive Fenton, will be replaced and the Chairman, Paul Lester, previously of VT Group will implement a new restructuring focusing on delivering short / medium term ROCE in mid teens. Crucially the NAV hasnt taken any impairments "At year end, any debt is likely to be at a low level and we are forecasting a FY18 TNAV of c.£700m." That equates to roughly 130p / share of tangible NAV  compared to a share price of 106p.

This is precisely the time to start dusting off the MCS buy case, which starts along the lines of "everyone hates it, and it trades at 0.8x TNAV".

I wonder where i have heard that before in the housebuilding space...?

I have only had time to do some preliminary analysis but the average net debt looks manageable (the year end is always a low point in the net debt so ignore that). I guess an average net debt of c £35-40m. The most crucial point is how "money good" is the land value. I need to get a better sense of the Groups gross margins versus peers. If they are of a comparable nature It would imply the land is relatively well bought. There may be some write downs, but as long as these arent too drastic I think 0.8x TNAV will prove the bottom end of range for the share price.

Things just got interesting !

I have just bought a starter position at 106p.

Happy gardening

VegPatch


Filed Under: Stock Picks, Value Investing,

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McCarthy & Stone plc is a United Kingdom-based retirement house builder. The Company is the parent company of the McCarthy & Stone Group. Its subsidiaries include McCarthy & Stone Retirement Lifestyles Limited and McCarthy & Stone Management Services Limited. Ortus Homes is a trading name of the Company. more »

LSE Price
134.6p
Change
-0.2%
Mkt Cap (£m)
724.9
P/E (fwd)
13.2
Yield (fwd)
3.4



  Is LON:MCS fundamentally strong or weak? Find out More »


4 Posts on this Thread show/hide all

Carey Blunt 20th Jun 1 of 4
1

Keep us updated if you do more research on the gross margin vs peers.
I’ve followed your previous articles on TNAV and you have been right so far every time,

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VegPatch 22nd Jun 2 of 4

Thanks Carey, I have bought a starter position.

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Beginner 27th Jun 3 of 4
2

In reply to post #377379

Hi Veg
McCarthy & Stone (LON:MCS) has more complications than most builders, due to the facts that it builds for a particular demographic section, and that it takes 'trade in' properties. There is also the fact that some income is derived from leaseholds. I am sure you have read this, from two years ago, and the warnings enclosed:

https://www.stockopedia.com/content/mccarthy-amp-stone-just-a-housebuilder-128342/

Redrow (LON:RDW) , Telford Homes (LON:TEF) , and Crest Nicholson Holdings (LON:CRST) all have PERs of 7 or under, so we could argue McCarthy & Stone (LON:MCS) at 9.4 has further to fall.

Having said all that though, we do now seem to be in territory where the company is being fundamentally undervalued at under a pound. Therefore I have hopped aboard. God bless us, and all who sail in her!

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Frankyboy 11th Jul 4 of 4

Ed Croft, I think, produced an interesting and worthwhile study on the price recovery of stocks following a profit warning. His revelation was that a very high percentage of these take a few years to recover. I can't remember the figures but I do remember that they were off-putting enough to force me to remember the cautionary results.

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