Longer-term holders will be accustomed to such bumper returns because there can be no doubt that Mountview's business model has stood the test of time, having been incorporated 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 53 years Mountview's share price has risen 640-fold to the current price of 7,050p. And the company has paid healthy dividends, too, to reward shareholders. True, the founding Sinclair family control around 53 per cent of the shares in issue so this reduces liquidity. However, you can still easily trade the shares and, on a bid offer spread of 6975p-7,050p, the spread is reasonable.
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 is 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. Mountview owns more than 2,655 residential properties under regulated tenancies, assured shorthold tenancies and assured tenancies. These were in the books for £290m at the March year-end and account for over 90 per cent of the company's trading portfolio by value. Around £150m of these investments are located in London and a further £90m in the south-east and home counties, so there is a hefty bias to the best performing parts of the UK. The company also owns a further £26.4m of freehold and long leasehold investment properties.
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 asset 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 £40m by selling off 177 properties in the 12 months to end March 2013, for an average sale price of £225,000, up from £203,000 in the previous financial year, the company was still able to replenish its stock by buying another 236 units for £28.8m.
It was a similar story in the six months to end September 2013 when Mountview purchased over £20m of property to replenish stocks, all of which were in London and the south east. Gross rental income is around £16.7m and net rent rental income on the total portfolio is just under £10m, which is tiny when you consider that the company's portfolio of investment properties is worth £356m - 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 takes longer, but a key attraction 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 this year, Mountview owned 340 properties on life tenancies with a book value of £25.1m. The company also owns a portfolio of ground rents on 1,115 properties worth £1.8m.
It's worth pointing out that properties are valued in the accounts at the lower of book value or net realisable value, so with chunky 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 seeing.
Strong fundamentals
In fact, when the board updated shareholders this week it reported that revenue and pre-tax profits were both up 11 per cent to £28.8m and £13.2m, respectively, in the six month period. But since gross rental income only accounts for around 30 per cent of that revenue figure, it is clear that the sale of properties has generated the majority of profits. In turn, this drove EPS up by over 12 per cent to 275p which helped lift net asset value per share up 7.4 per cent to 6,410p. On a 12-month rolling basis, the company is generating EPS of around 600p, so the shares, offered in the market at 7,050p, are trading on 11.5 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 31 March 2014 with the ex-dividend date 19 February 2014. Factor in a final dividend of 125p a share and the dividend yield is solid at 2.5 per cent. It doesn't take a genius either to work out that if a company is making annual EPS of well 600p a share and paying out a dividend of 175p a share, then the difference is boosting net asset value, which is one reason why Mountview reported a 7 per cent increase in book value in the latest six-month period. Moreover, even if the company only puts in the same performance in the second half to end March, net of that half-year dividend paid, book value will rise to 6,700p at the end of March 2014. On that basis, the share price premium to book value narrows to 5 per cent.
And because properties are valued in the accounts at the lower of book value or net realisable value so that book value, the reported figures considerably underestimate what the true value of these properties really are which is another reason why earnings are likely to continue on an upward trajectory. Moreover, profits booked on future properties sales can only increase as the buoyant London and south east market rise, as seems realistic right now.
Importantly, the company is not taking financial risks by overgearing its balance sheet. In fact, net debt of £98.2m is relatively modest considering the company owns a portfolio of investment properties worth £356m. On an IFRS basis, balance sheet gearing is comfortable at 39 per cent of shareholders' funds of £249m.
New target price
True, Mountview shares have smashed my initial 6,300p target price, but they still only trade on a modest premium to book value and one that is very reasonably underpinned by conservative accounting policies. Furthermore, with the robust health of the London and south-east property market underpinning the resale values of Mountview's vacant properties, I can see little reason why the rerating should end now given the bumper earnings coming through.
The chart set up is positive too: the 14-day relative strength index (RSI) is not yet overbought; and the share price is trading in line with its 20-day moving average and has been tracking this short-term trend line for the past three months. In fact, every time the price has come back to this moving average there has been a decent bounce in this period. The share price is also modestly above the 50-day moving average (around 6,750p), so is not overextended on this basis either.
In my opinion, a revisit to the May 2007 all-time high of 7,975p now looks a distinct possibility. Offering potentially a further 14 per cent upside, I continue to rate the shares a buy at 7,050p.
Finally, in response to recent newsflow, I am currently working my way through a long number of updates including the following recommendations: Bezant Resources (BZT), PV Crystalox Solar (PVCS), Crystal Amber (CRS), API (API) and WH Ireland (WHI).
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■ Eurovestech ('Kalibrate to fuel Eurovestech', 27 Nov 2013)
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■ Netcall ('Dial into cloud-based profits', 28 Nov 2013)
■ Daejan ('Bargain basement prime property', 29 Nov 2013)
