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VALUE INVESTING
By
A & J Mucklow Group (LSE: MKLW) is a property company, to be found in the sector now known by the Americanism "real estate". I have written about Mucklow before, some time ago on the value shares discussion board. The critical features for valuing property companies are the discount to book value and the level of debt. Unlike trading businesses, for which the most common valuation tool is the Price/Earnings ratio, companies whose business is holding assets are priced according to the latest value of those assets, which will be revalued regularly. Most of the time the shares of asset companies, the most common examples of which are property companies and investment trusts, will trade at a discount to the net value of their assets. Put another way, the ratio Price/Book will be less than one. In consequence, unlike trading businesses, a P/BV below one for such companies is not in itself particularly attractive to a value investor. It is in the degree to which this ratio falls below one that value may be found. Here are the fundamentals on Mucklow: The company is based in the Midlands, specialising in industrial and commercial property investment and development. According to the last accounts 93% of turnover was derived from investment property, the balance from property trading and estate development. The gearing level is lowish for the property business. Many shares in the sector have debt far higher and thus Mucklow is attractive on this criterion. The company has been carrying out an extensive share buyback programme in recent times. When a company trading below book value buys back its shares in the market, it follows that book value per share is increased, which for a business that is valued primarily on assets rather than profits can't do it any harm. In fact several million of the company's approximately 66m issued shares have been bought in since April 2000. Looking at the history of Mucklow's net asset value per share, I find that it was 156p in 1996 rising to 260p by 2000. A forecast exists for the 2001 year end which puts the figure at 302p. If this materialises then asset value will have risen unbroken by 93% over five years. It is interesting to note that the share price has not moved by much in all that time and thus Price/Book has steadily declined as the asset value has risen without a corresponding rise in the price. Perhaps the fact that Mucklow attracts little interest by the market, as evidenced by the fact that its shares have gone nowhere for years, is what prompted the share buyback operation. If the 302p NAV per share forecast figure turns out to be realistic, then Mucklow at 176p will be on a 42% discount, which is far too high, at least in a reasonably buoyant property market. Discounts tend to narrow in good times for property, even going to premiums occasionally in a speculative bubble, but in a slump they widen dramatically. The weaker companies in such situations, those with large debt, often go bust. It is this large forecast discount that I find attractive from a value perspective, coupled with the modest debt by property standards. The yield is not bad either, though not massive. It must be borne in mind of course that like all forecasts, there is inevitably a degree of unreliability that comes with the territory. This is a share for the patient, I feel. It is not exactly amongst the market's fastest movers. But it appears to me that it has been a bit left behind, overlooked by the market, and that is where value can lurk. The biggest risk facing Mucklow, or any property share, is a slump in property values. Property is a cyclical business and consequently if possible you want to avoid being in such shares if a slump appears imminent. Not that easy, in practice, to foretell. Where Next?