With this in mind, property company Mountview Estates (MTVW: 5,000p) has been on my watch list for some time now and, with the share price breaking out above 4,850p, a level which capped progress last September, I believe now is the opportune time to buy into this asset-backed special situation - especially as I believe the breakout is the real deal and one underpinned by a strong fundamental case for investing, too.
A simple business model
Mountview's business is focused on residential property in London and the south-east, in particular. So, with these markets in good shape, it looks ideally positioned to capitalise on the growth in residential property values.
That's because the company holds a portfolio of investments in three specific niche areas: regulated tenancies; ground rent units and life tenancies. The book value of regulated tenancies was £274m at the end of March last year, of which £149m of these investments were in London and a further £73m in the south-east and the home counties. Mountview owns more than 2,500 residential properties under regulated tenancies, which in aggregate account for 90 per cent of the company's portfolio by value. It's not a difficult business to understand, either, as the company makes its money by buying tenanted residential property and then selling them when they become vacant. The trade-off in the interim is that rental returns are below open-market rates, but the payback comes when the property is sold and the company reaps the full open-market value of the property at the time. Before the properties are marketed for sale, Mountview adds value by carrying out refurbishments.
It's worth noting that, due to the Housing Act 1988, supply is constrained as no new tenancies have been created for the best part of 20 years. That said, having banked £27.8m by selling off 137 of properties in the 12 months to end March 2012, for an average sale price of £203,000, the company was still able to replenish its stock by buying another 450 units for £47.2m. It was a similar story in the six months to end September 2012 when a further 178 properties were purchased for a total of £20.9m to replenish stocks after Mountview banked gains of £11m on properties sold. Annualised rental income on the total portfolio is around £8.7m, which is tiny when you consider that the company's portfolio of investment properties is worth £343m - but it does highlight the trade-off between rents and capital gains inherent in the business model.
The second largest business segment is life tenancy properties, which can be purchased for deeper discounts to open-market value. Payback may take longer, but a key attraction here is that property maintenance is normally the responsibility of the life tenant, which reduces the ongoing cost of sprucing up the fabric of the property to protect its value. At the end of March last year, Mountview owned 351 properties on life tenancies with a book value of £25.6m. The company also owns a portfolio of ground rents over 1,100 properties worth £1.8m.
It's worth noting that properties are valued in the accounts at the lower of book value or net realisable value, so with premiums being achieved for some properties in sought-after areas of the capital - for instance, leafy Belsize Park in North London - then this can lead to some significant uplifts when these properties are sold on the open market when vacant. And that is exactly what we have been witnessing in the company's trading updates in the past six months.
Strong fundamentals
In fact, when the board updated shareholders this week they reported that trading in the third quarter to end-December has maintained the "same solid progress seen in the first six months of the financial year". Revenue and rental income have risen strongly and earnings are up by over 25 per cent year on year. This follows on from first-half results to the end of September 2012, which revealed pre-tax profits up 22 per cent to £11.9m and EPS up 25 per cent to 245p. On a 12-month rolling basis, the company is generating EPS of around 500p, so the shares, offered in the market at 5,000p, are trading on 10 times earnings.
There is a decent dividend, too, and investors buying now will be able to receive the half year dividend of 50p a share (payable on 25 March 2013 to shareholders with an ex-dividend date of 20 February 2013). Factor in a final dividend of 115p a share and the dividend yield is a healthy 3.3 per cent.
The decent yield aside, the company is also attractively priced on a hefty 16 per cent discount to net asset value of 5,971p at the end of September 2012. It doesn't take a genius to work out either that if a company is making EPS of 500p a share and paying out a dividend of 165p a share, then the difference of 335p is boosting net asset value, which is one reason why Mountview reported a 7 per cent increase in book value in the six months to end September. Moreover, even if it only puts in the same performance in the second half, net of that half-year dividend paid, book value will rise to around 6,200p at the end of March 2013. On that basis, the share price discount to book value widens to 19.5 per cent.
Importantly, the company is not taking financial risks by overgearing its balance sheet as net debt of £103.4m is relatively modest considering the company owns a portfolio of investment properties worth £343m. On an IFRS basis, balance sheet gearing is very comfortable at 45 per cent of shareholders' funds of £233m, which will have fallen since the end of September as the company has paid down debt.
Long-term returns
Mountview's business model has certainly stood the test of time, having been incorporated 75 years ago in 1937, barely two-and-a-half years before the onset of the second world war.
A couple of decades later the company obtained a full quote on the London Stock Exchange in 1960 when the shares were sold for eleven shillings, or 55p. Adjust for subsequent share splits and scrip issues and that equates to a share price of 11p, which means in the past 52 years Mountview's share price has risen 450-fold to a current share price of 5,000p. And the company has paid healthy dividends, too, to reward shareholders. True, by my reckoning, major shareholders and the founding Sinclair family control over two-thirds of the shares in issue so this reduces liquidity in the shares. However, you can still easily trade them and, on a current bid offer spread of 4,900p-5,000p, the spread is a reasonable 2 per cent - half of which will be recouped by the aforementioned half-year dividend.
Target prices
In my view, a share price of 5,600p a share is fair and would narrow the discount to book value at the March 2013 year-end to closer to 10 per cent, which seems reasonable considering the health of the London and south-east property market underpinning the resale values of Mountview's vacant properties. The company reports full-year results on 27 June 2013 and I can see the shares moving up to my target price by then.
■ Please note that I released a triple whammy of online articles yesterday - 'A share set to hit the jackpot', 'A highly profitable arbitrage play' and 'Seeking Alpha among the housebuilders'. My next column will be published on the morning of Wednesday 13 February on my homepage.
Finally, I will be taking a four-week break during April to complete a book on 'Profitable stockpicking', my follow-up to Trading Secrets: 20 Hard and Fast Rules to Help You Beat the Stock Market. The book will be published in early summer.
MORE FROM SIMON THOMPSON ONLINE...
Since the start of this year I have written no fewer than 27 online articles, all of which are available on my homepage. These include articles on the following companies or investment strategies:
Bellway and housebuilders first-quarter trade (Seeking Alpha, 11 February 2013)
Marwyn Value Investors (A highly profitable arbitrage play, 11 February 2013)
Netplay TV (A share set to hit the jackpot, 11 February 2013)
Oakley Capital, Randall & Quilter, Inland, Terrace Hill, Heritage Oil, Cairn Energy, Polo Resources, Trifast, Noble Investments, Fairpoint (Bargain Shares for 2013, 8 February 2013)
Telford Homes, MJ Gleeson, Stanley Gibbons, Molins, Indigovision, Trading Emissions, Mallett, Bloomsbury Publishing, Rugby Estates, Eurovestech (How the 2012 Bargain Shares fared, 8 February 2013)
Future (Decision time after a bright start, 5 February 2013)
Sanderson (An 'app' online investment, 5 February 2013)
Aurora Russia ('Time to play Russian Roulette', 4 Feb 2013)
BP Marsh & Partners ('Hyper value gains', 31 Jan 2013)
Bellway ('Profit from the London property boom', 30 Jan 2013)
Telford Homes, MJ Gleeson, Mallett, Rugby Estates ('Taking profits after a winning streak', 28 Jan 2013)
Market timing ('Lessons to learn', 24 Jan 2013)
Communisis, Netcall ('Bumper trading gains', 23 Jan 2013)
Crystal Amber, API, Sutton Harbour ('More upside to come', 22 Jan 2013)
PV Crystalox Solar ('Seeing the light', 21 Jan 2013)
Bloomsbury Publishing ('A publisher for the digital age', 18 Jan 2013)
Housebuilders first-quarter effect and performance table on all my recommendations from the final quarter of 2012 ('Stockpicking Marvels, 16 Jan 2013)
Eros ('A share firmly in the picture', 15 Jan 2013)
Netcall ('Jumping the gun: take two', 15 Jan 2013)
Moss Bros, Communisis ('Jumping the gun', 14 Jan 2013)
Stanley Gibbons, MJ Gleeson, Spark Ventures ('Small cap wonders', 11 Jan 2013)
IQE, Trading Emissions ('A tech share worth buying now', 10 Jan 2013)
S&P 500 portfolio of dog shares ('Dog shares barking back', 8 Jan 2013)
Air Partner ('A share ready to take off', 7 Jan 2012)
FTSE 100 traded options strategy ('Highly profitable options', 3 Jan 2012)
Telford Homes, MJ Gleeson, Molins, Noble Investments ('Rampant bargain shares', 31 Dec 2012)
