Bet your Henry Boot(s)

In boom times, the high sensitivity of land profits to house prices is a plus point. But even when conditions are less favourable (profits plummeted during lockdown) it doesn’t mean the shares lack a proper investment case. Indeed, the Sheffield-founded business has been an excellent long-term holding. Over the past 20 years – a period that includes two seismic shocks to property and asset valuations – the shares have generated an average annual return of 12.4 per cent, assuming dividends are reinvested. The FTSE All-Share average is half that.

But while buy-and-hold investors recognise the power of compounding, the fact is that businesses with uncertain outlooks are often overlooked in favour of growth stories. In Henry Boot’s case, that looks like a mistake right now. Not only is the stock trading just above book value (see chart), but medium-term targets to generate a 10 to 15 per cent return on capital and “low double-digit” dividend growth both look achievable.

Boots on the ground

Although its roots date back to 1886, today’s Henry Boot is a simple business. The core of land promotion involves buying plots and adding value by putting them through the planning process. This process can be complex and slow, which is why a large land bank helps to spread the risk of hold-ups. The model also ties up far less working capital than construction. It is further de-risked by Boots agency and option agreements which means the company only forks out cash when certain requirements are met. This helps bring its outlays closer to payments it receives from follow-on buyers. These buyers often include larger housebuilders. Henry Boot also sources some land for its own industrial and residential development arms.

Housing supply looks set to fall short of annual government targets throughout the decade. Its industrial development pipeline gives the group exposure to a market facing a critical lack of supply over the coming years. And where it sees fit, Henry Boot adds attractive developed assets to its investment portfolio.

The pre-pandemic track record was particularly strong. Between 2010 and 2019, operating profit margins ranged between 12 and 18 per cent, while the return on capital was generally rising. Working capital and cash-flow management was efficient. And earnings per share (EPS) grew by an average 14 per cent a year in the period, just ahead of dividend growth.

In any given year, a good portion of Henry Boot’s profitability is hidden, given fair value gains in the land bank are only booked on sale. But current demand and land value trajectories – particularly in the Midlands and the South, where the group is focused – bode well for the 92,253 plot land bank, of which 14 per cent has planning approval. A £1.1bn development pipeline focused on industrial and logistics assets adds solid options.

Boots on the register

Although it has diluted slightly over the generations, Boot family ownership has endured the company’s long history. This goes a long way to explaining why just under half of all shares are held by insiders (see chart), according to FactSet.

The highest profile member of this group is Jamie Boot, who joined the company in 1979, joined the board in 1985 and from 1986 to 2015 served as a managing director. After stepping back from operations, he assumed the role of non-executive chairman in 2016 and now has a stake valued at £21m. In 2019, he oversaw the search of a successor to long-serving chief executive John Sutcliffe, a process which resulted in the hire of Tim Roberts, the head of the office and residential divisions of FTSE 100 property developer British Land (BLND). This month, his wife Sarah Jane Roberts doubled her holding in the company, acquiring 35,500 shares in the open market at £2.78.

This type of purchase is part of a trend. Except for one Gillian Mary Boot – who has gradually reduced her stake since 2017 – recent insider share trading has leaned towards purchases in the last year, suggesting the long-term faithful see the company as cheap at the current market price.

Might that view be shared by a large outsider? Or to put it more bluntly, would the Boot family ever sell the family silver? The company has some parallels with the ‘fork-to-table’ strategy of WM Morrison, another family-founded Yorkshire-born business. We can speculate if the supermarket’s takeover by private equity would have gone ahead if Sir Ken Morrison and his family hadn’t trimmed their holdings a decade ago. But everyone has their price. And in a world of low interest rates, well-managed UK companies are always going to look attractive to international capital.

Undervalued, to boot

Assuming Boot remains a public company – a discipline Roberts likes – then the make-up of the shareholder register suggests income seekers’ needs won’t be overlooked. If achieved, a goal of low double-digit growth could easily see this year’s 6p forecast dividend double by the end of the decade. And yet that underplays the net asset value (NAV) growth potential through the deployment and recycling of capital.

The outlook for Henry Boot's shares is not dissimilar to Harworth (HWG), whose shares are up a tenth since we outlined their investment case two months ago. The two companies also share a major shareholder in London & Amsterdam Trust (LAT), the fund run by hedge fund manager turned real estate developer Nicholas Roditi. Last month, LAT acquired nearly 3m shares in Henry Boot, pushing up its stake to 6.4 per cent. Meanwhile, the investor has gone from a standing start to become the largest individual holder in Harworth, having assembled a 26.2 per cent holding in less than three years (see chart).

Might Roditi angle for a merger between the two companies? We wouldn’t rule it out entirely, given the two companies' significant overlap in planning permission and geographical focus. In some cases, combining land banks and areas of expertise might offer more flexibility in the planning process.

But the answer could be more prosaic, and LAT may simply have a strong macro view on long-term demand for land in under-served parts of the UK. The investor’s purchases have also tended to come in dips in both companies’ values, either toward or below book value – all of which highlights the market’s probable focus on the stocks’ lower dividend yields relative to Reits and property developers. If this is true, then it has been short-sighted, as Blackstone’s recent £1.2bn takeover of land regeneration specialist St Modwen Properties highlights. The deal, which was struck at a 20 per cent premium to book value, suggests some long-term real estate investors are prepared to focus on hidden balance sheet value, and think through the cycle to longer-term cash returns.

As the Boot family would tell you, a long-term mindset is a better approach than trying to time investments in the notoriously cyclical UK property development sector. But, then again, this does not look like a bad moment to take a stake, considering the shares’ premium to book value has averaged 30 per cent over the last five years. In 2018, they traded at 1.7 times forward tangible net assets and were arguably even good value then.

Last IC View: Buy, 293p, 13 Sep 2021