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.

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…

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