For a 76-year-old company worth over £200m, Mountview Estates (MTVW) is easily overlooked. No stock broker covers it, no public relations agent represents it, and its trading updates are at best perfunctory. But to overlook Mountview would be a shame, because much value is hidden within.
- Hugely reliable business model
- Well-covered and reliable dividend
- Shares trade at 10 per cent below book value
- Book value conceals hidden value
- Management may try a new strategy
- Illiquid shares
It owns a portfolio of so-called regulated tenancies, half in London. These are homes let on contracts that predate the rent-reform laws of the late 1980s. Tenants cannot be ejected, and their rents are capped at sub-market rates, causing the houses to trade below market value. Mountview buys them, waits for the tenants to 'vacate' (in many cases, by dying) and sells them at a big profit on the open market.
The strength of this business model is the predictability of the capital returns. Unlike a standard buy-to-let portfolio, Mountview is no pure play on house prices and its income is pretty secure because the tenants have a lot to lose if they default.
The model has two weaknesses. Most obviously, regulated tenancies are disappearing, with none created since 1988. Mountview bought 450 in the year to 31 March 2012, but the stock cannot last for ever. The company has diversified into life tenancies (a form of equity release) and ground rents, but these operations are still tiny.
In the long run, Mountview will have to change direction or wind itself up. This poses more of a strategic than a financial risk to shareholders. In the event of a gradual liquidation, investors would do well. But if its bosses try to find a new identity for Mountview, it could prove costly. This is a distant danger, but one to watch.
The second weakness is that rental returns are modest. The company generated net rental income of £8.6m in 2011-12. That comfortably covered its administration and debt costs of £7.8m, but not dividends of £6.4m. Shareholders therefore depend on sales of vacated properties for their payout.
MOUNTVIEW ESTATES (MTVW) | ||||
|---|---|---|---|---|
| ORD PRICE: | 5,150p | MARKET VALUE: | £201m | |
| TOUCH: | 5,100-5,150p | 12-MONTHHIGH: | 5,325p | LOW: 4,100p |
| DIVIDEND YIELD: | 3.2% | TRADING PROP: | £316m | |
| DISCOUNT TO NAV: | see text | |||
| INVESTMENT PROP: | £26.5m | NET DEBT: | 44% | |
| Year to 31 Mar | Net asset value (p) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 4,816 | 29.5 | 530.1 | 155 |
| 2009 | 4,809 | 13.1 | 241.0 | 155 |
| 2010 | 5,208 | 29.3 | 554.8 | 165 |
| 2011 | 5,510 | 23.6 | 435.3 | 165 |
| 2012 | 5,826 | 22.8 | 447.7 | 165 |
| % change | +6 | -3 | +3 | nil |
Normal market size: 20 Market makers: 4 Beta: 0.1 | ||||
Fortunately, Mountview has a large enough portfolio (2,591 units) and a prudent enough dividend policy (cover has varied from 1.6 to 3.4 times over the past five years) so this has never posed a problem. Indeed, the current dividend yield of 3.2 per cent is about the same as shares in the big commercial landlords, which have nothing like the same cover or potential for capital growth.
One reason why the dividend yield is decent is that Mountview's shares trade at a 11 per cent discount to the latest book value of 5,970p, which itself substantially understates the open-market value of the portfolio. The core regulated tenancy portfolio is held at the lower of cost or net realisable value. Last year, those properties sold on vacancy fetched three times their cost.
