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McCarthy & Stone is just too cheap

Referendum worries have pulled shares in McCarthy & Stone lower, but given the growth profile this looks to be overdone
May 19, 2016

One of the leading demographic trends in the UK is the growth in the number of people living long into retirement and McCarthy & Stone is in a prime position to profit from the chronic undersupply of specialist accommodation for such people. Longer lifespans mean that there is a growing temptation for pensioners to downsize into accommodation more befitting of their lifestyle. With children having left the roost, moving into purpose-built homes for older people has its attractions, not least of which is releasing some of the money tied up in a large family home.

IC TIP: Buy at 220.5p
Tip style
Value
Risk rating
Medium
Timescale
Long Term
Bull points
  • Negligible debt
  • Largest player in a niche market
  • Pensioner numbers set to grow substantially
  • Undersupply of retirement accommodation
Bear points
  • Vulnerable to any downturn in the housing sector
  • Current modest dividend

This is where McCarthy & Stone (MCS) comes into the picture as the leading builder of retirement homes, with an estimated 70 per cent market share. In the year to August 2015, it sold 1,923 age-restricted apartments, producing revenue of £486m and underlying operating profits of £95m. But this is just the start because, by 2019, it plans to boost output to 3,000 homes a year and to achieve a return on capital employed in excess of 25 per cent, which compares with 18 per cent in the six months to the end of February. Cash will be tilted towards investment in construction and acquiring new land for the next year or two, but the presently meagre dividend payout is still expected to grow fast and is forecast by broker Peel Hunt to hit 12.4p by 2018, equivalent to a 5.6 per cent yield.

 

 

McCarthy & Stone looks as though it has the balance sheet to deliver on its growth ambitions. It has been around since 1961 and was taken private in 2006 before floating on the London Stock Exchange in November 2015. Around 187m shares made up the offer - about 35 per cent of the total market capitalisation - and raised £336m. This is already being put to good use, and in the first half the company added 40 sites, equivalent to about 1,700 plots, taking the land bank up to 10,800 plots or around 5.6 years of supply based on the 2015 output. What's more, nearly three years' worth of this land already has full planning consent.

McCarthy's growth plans are not expected to bring it head-to-head with big conventional housebuilders. Its needs differ because it operates on smaller urban sites that pass under the radar of the big builders, such as closed pubs, fire and police stations. There are other advantages, too. Local authorities are more kindly disposed towards the building of retirement properties, and consequently impose lower Communities Infrastructure Levy and S106 costs than for conventional housebuilders.

Crucially, there are very good grounds to expect demand to easily justify McCarthy's expansion. By 2033, the number of over-65s is forecast to grow by a half to around 17.2m and by 2037 almost a quarter of the entire population is expected to be in this age bracket, compared with 18 per cent now. And yet at the moment just 1 per cent live in retirement properties compared with 13 per cent in Australia and 17 per cent in the US. It seems the UK's low penetration of retirement properties is not for want from retirees. Over 3.5m people have expressed an interest in buying a retirement property, and yet up to April 2016, only 141,000 have been built.

MCCARTHY & STONE (MCS)
ORD PRICE:220.5pMARKET VALUE:£1.18bn
TOUCH:219.6-220.5p12-MONTH HIGH:295pLOW: 180
FORWARD DIVIDEND YIELD:3.7%FORWARD PE RATIO:9
NET ASSET VALUE:121pNET DEBT:4%

Year to 31 AugTurnover (£m)Pre-tax profit (£m)*Earnings per share (p)*Dividend per share (p)
2013311213.7nil
20143886310.6nil
20154868815.1nil
2016*62212319.45.5
2017*76416424.58.1
% change+23+33+26+47

Normal market size: 5,000

Matched bargain trading

Beta: 0.39

*Peel Hunt forecasts, adjusted PTP and EPS figures

Buying a retirement home is not exactly cheap, with McCarthy's average selling price growing in the latest half-year by 12 per cent to £253,000. But, on the whole, retirees should not struggle to find the money with over-65s owning 4.7m mortgage-free properties with equity totalling £874bn.

So what does a buyer of a McCarthy property get for their money? 'Retirement living' apartments comprise one or two-bedrooms and come with a house manager and some shared facilities such as a residents' lounge, guest suite and laundry. And for those less capable of managing there are assisted living apartments, which offer a more comprehensive assistance package. Service costs range from under £2,000 to about £10,000 for the most expensive assisted living packages. But even at the top end, compared with a nursing home, this is cheap. There is also a new range under the Ortus Homes banner aimed at the 55-plus market, which offer larger apartments but fewer communal facilities.