I didn't have to look far because shares in two companies - Telford Homes and MJ Gleeson - in my Bargain shares portfolio (12 February 2010) are now trading on a huge discount to net asset value (NAV). Moreover, there is ample scope for this discount to narrow as we are rapidly approaching a time of the year when value investing does well and housebuilders have historically outperformed the market.
In fact, the average fourth-quarter return in the sector is 5 per cent since 1980 and in recent years there has been a tendency for these gains to be concentrated in the second half of the quarter. It's therefore worth noting that since the end of September shares in the seven FTSE 350 housebuilders have actually fallen in value by an average of 8.2 per cent and now trade on an average discount of 30 per cent to book value, with Berkeley Group being the exception as its shares trade on a 30 per cent premium. So, not only has the share price momentum been overly negative - the FTSE All-Share has risen by 4.3 per cent in the last six weeks - but the hefty discounts to book value should prove attractive to value investors.
Shares in Telford Homes and Gleeson have performed even worse, falling by 13 per cent since early October to take their respective share price discounts to NAV to a massive 47 per cent, which looks anomalous compared with the larger players.
Anomalous valuations
For instance, urban regeneration and strategic land specialist Gleeson currently has a market value of £52.2m with the shares priced at 100p, but has shareholders' funds of £97.8m, equating to 187p a share. And £18.4m of those net assets are in cash, equivalent to 35p a share. In other words, net of cash the company's adjusted net assets of £79.4m are being attributed a value of £34m. Or, to put it another way, those assets would have to fall in value by 57 per cent for the shares to trade at current book value.
That is hardly a realistic possibility given that Gleeson owns 3,862 acres of valuable strategic land in the Homes Counties which over time will be sold to housebuilders as the company turns its land bank into cash. And although its urban regeneration business has found trading tough - sales fell from 313 to 174 homes in the year to June - management has focused on conserving cash, reducing overheads and driving down costs. It's worth pointing out that with such a cash-rich balance sheet Gleeson can afford to bide its time when realising the value of its assets. The company also has a policy of returning excess cash to shareholders and paid a 15p a share special dividend in March. I wouldn't bet against another bumper payout next year which makes the 47 per cent share price discount to NAV even more anomalous.
East London residential developer Telford Homes has put in a resilient performance despite tougher market conditions. Since the start of April the company has sold 206 new homes with open market completions of 133 units against 224 at the same stage in 2009. Sensibly, management has taken a cautious approach to new investments, but it did take the opportunity in September to buy out the Royal Bank of Scotland from their joint venture. The deal was done at cost with payment deferred and the acquisition will enhance profits in future years. Importantly, Telford remains well funded - balance sheet gearing was 59 per cent at the end of March - and profitable, too. However, with the shares trading at 69.5p, the company is being valued at £34m against a book value of £63m, or 130p a share. Add to this a 2.9 per cent dividend yield and there is value on offer here. In my opinion the sell off in both Telford and Gleeson shares looks overdone and I rate both a buy at these depressed levels.
BARGAIN SHARE PORTFOLIO UPDATE 2010
| Company | Price on 11 Feb | Price on 12 Nov | % change with divs | % change without divs |
|---|---|---|---|---|
| Bowleven | 113.5 | 294 | 159.0% | 159.0% |
| Acal (note 5) | 141 | 234.5 | 69.6% | 66.3% |
| Delta (note one) | 140 | 185 | 35.6% | 32.1% |
| KBC Advanced Tech (note 3) | 45 | 57 | 30.3% | 26.7% |
| Jacques Vert (note 6) | 16.25 | 15.75 | 0.9% | -3.1% |
| Bloomsbury Publishing (note 4) | 124 | 117 | -2.0% | -5.6% |
| MJ Gleeson (note 2) | 130 | 101 | -10.8% | -22.3% |
| Telford Homes (note 7) | 91 | 69.5 | -22.3% | -23.6% |
| Average | 32.6% | 28.7% | ||
| FTSE All Share | 2644 | 2964 | 12.1% | |
1. Delta received a cash bid of 185p on 4 March and paid a dividend of 4.8p on 26 April 2. MJ Gleeson paid a special dividend of 15p on 31 March 3. KBC paid a final dividend of 1.1p on 18 May and half-year dividend of 0.55p on 13 October 4. Bloomsbury paid a final dividend of 3.65p on 1 July and an half-year dividend of 0.81p on 19 November (shares trading ex-dividend) 5. Acal paid a final dividend of 4.67p on 30 July 6. Jacques Vert paid a final dividend of 0.65p on 16 October 7. Telford Homes paid a final dividend of 1.25p on 16 July | ||||
■ Shares in West African explorer Bowleven have risen 159 per cent to 294p since I advised buying at 113.5p on 11 February. The latest surge was on the back of two "potentially significant" discoveries at its Sapele-1 well on block MLHP-5, drilling offshore Cameroon on the Etinde permit. The well will now be drilled to a total depth of around 4,450m to test more stacked horizons and will take a month to complete. This is clearly good news, but the shares have now hit analysts' fair value targets and I would advise banking profits.
