Stephen Bland reviews the value credentials of A&J Mucklow.
For this week's value play I'm taking a look at property share and Real Estate Investment Trust (REIT) A&J Mucklow (LSE: MKLW).
Note that unlike with most other industries, earnings per share (eps) is of limited importance in this sector so that the ubiquitous measure of P/E is not particularly significant when evaluating a property business. Instead, property shares are judged far more on net assets per share and it is the relationship of this figure with the share price, discount or premium, which is one of the key ratios employed to assess shares in the sector.
Here are some fundies:
| Share price | 248p |
| Market cap | £149m |
| Eps actual 30/06/08 | 23.1p |
| Eps forecast 30/06/09 | 17.2p |
| Eps forecast 30/06/10 | 15.9p |
| P/E forecast 09 | 14.4 |
| P/E forecast 10 | 15.6 |
| Dividend actual 30/06/08 | 17.68p |
| Dividend forecast 30/06/09 | 17.7p |
| Dividend forecast 30/06/10 | 14.3p |
| Yield forecast 09 | 7.1% |
| Yield forecast 10 | 5.8% |
| Tangible assets per share 31/12/08 | 295p |
| Price/Tangible Book | 0.84 |
| Net debt 31/12/08 | £35.3m |
| Gearing 31/12/08 | 20% |
There are two ratios I consider first when looking at property shares. One is the above mentioned asset discount and the other is debt. The first thing in value is not to consider how much upside there might be but to minimise the potential downside. There can be no certain downside protection because this is a game of risk, but certain factors can help to ameliorate that risk and I consider high asset cover and low debt -- ideally net cash -- to be two of the most useful in that regard.
Property company discounts
Note though that unlike other industries, it is normal for property companies to trade at a discount to assets even in good times and in very good times they may go to a premium. So whilst it is generally attractive for a value player to discover Price/Tangible Book under 1, it is nothing special for property plays. Consequently it is in the degree of discount that value may be perceived here, rather than in the mere fact of a discount existing.
Mucklow stands on a discount of about 16% to the value of net assets, the latest figure being at 31/12/08. That is not particularly attractive on its own because, unless you have been in solitary confinement over the last year or so, you will know that the property values and consequently sector share prices have been hit savagely in the recession. What happens typically in this situation is that discounts widen as investors withdraw, causing share values to fall proportionally more than property values. The reverse tends to occur in booms.
My other key indicator, debt, is relatively small by sector standards and this is what I find particularly appealing here. A lot of property shares have gearing of nearer 100% and many well over that. That might work fine on the back of rising values, but it can be crippling when they fall. Mucklow's conservative approach to debt sets it up for the bad times as well as the good.
Is this the bottom?
The question in considering property shares right now is whether the fall in values is near the bottom. Directorspeak in the latest interim accounts commented that: "We suspect that property values will stabilise later this year and there will be more choice in the investment market and some excellent buying opportunities." I don't know how much reliance one might place on this statement but I do feel that Mucklow is better placed than most to survive and take advantage of the upturn when it comes. Which doesn't of course mean that values cannot fall further.
There has to be an outer for value plays and here it is the eventual rise in values and the beneficial leverage effect on share prices which occurs as discounts narrow. Property shares will I believe rise strongly at any evidence of a revival and already have to a limited extent. But once there is solid evidence of rising values reflected in their accounts or even before that in analysts' forecasts of net asset values, investors will likely have missed out on substantial gains.
Value players will be familiar with the contrarian position of buying cheap when everyone is selling but with property shares the risk is that one is fooled by cheapness and gets in too early only to suffer further falls or sideways movement for quite a long time. The ideal entry point is just before everyone else starts to think the revival is on the way with a lot of pessimism still around to keep share prices depressed. As so often with value, it can be more about perception, psychology if you like, rather than reality. Once property values really are rising, the shares will probably have long since risen.
Whenever the turn round occurs, Mucklow has a decent yield to help whilst waiting even with the dividend cut forecast. REITs have to pay out most of their rent income in dividends and with rents expected to fall for the time being, that is why dividends may fall too. This is particularly one for those with serious patience because of the uncertainty of when the property market will pick up.
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