Just when you thought it was far too hot for anyone to engage in corporate hostilities, along comes a lively little skirmish in the sleepy world of investment trusts (Patrick Hosking writes). M&G is laying siege to UK Mortgages Ltd, a specialist investment trust which aims to squeeze returns from residential mortgages, and yesterday turned the screw a bit more by lifting the terms of a tentative all-cash bid to 70p per share, or £191 million.
London-listed UKML responded by saying the new offer still materially undervalued the company and its prospects, and refused to talk to M&G or open up its books for due diligence. It pointed out that the offer was “final” and could therefore only be increased if an alternative buyer were flushed out.
The fight began last month when M&G, which wants to combine the company’s assets with its own specialist mortgage investing vehicle M&G Specialty Finance Fund, went public with a 67p possible offer after being rebuffed in private several times. UKML responded with an emphatic veto but promised a strategic review (code for a possible wind-up) if M&G went away.
It hasn’t been a happy time for UKML since it launched in 2015, dangling in front of investors a potential total return of 7 to 10 per cent a year. They lapped up the idea of a specialist vehicle focused purely on low-risk mortgages, with returns spiced up through a bit of leverage. Why buy shares in high street banks when you could get pure home loan exposure with none of the headwinds of casino banking arms or legacy mis-selling claims? It raised £250 million.
However, competition to buy mortgage books from banks and building societies has been fiercer than expected, while funding costs have increased. This has hit companies like UKML which packages up the loans and sells them on in securitised vehicles. There’s a hint of Northern Rock about its recent troubles. The recession has added to its problems. Defaults are low for now, thanks to forbearance and mortgage holidays, but ultimately there are likely to be some write-offs as borrowers struggle.
The shares, floated at 100p, were trading as low as 41p before M&G came along. They closed yesterday up 1p or 1.5 per cent at 64¼p, but well below the official net asset value of 79½p. M&G incidentally disputes that NAV figure, arguing it is too optimistic.
Shareholders face a knotty decision. Do they hold on for a couple of days in the hope of a rival approach? Do they play the long game, hoping that the jitters plaguing the sector are short lived or that a wind-up of the assets produces a higher return than M&G’s offer?
Or do they sell in the market now? If M&G walks away, which UKML argues it will have to under Takeover Panel rules unless a third party hoves into view, the share price in the short run looks likely to retreat. M&G’s latest offer is 26 per cent higher than before it first made its interest known.
Its approach does look opportunistic. It came just at the time when securitisation markets froze, making it impossible for UKML to clinch an important deal — which has now belatedly been done. Mortgagees are starting to return to paying interest bills after taking advantage of mortgage holidays. The removal of stamp duty on the first £500,000 of transactions has boosted confidence in the housing market, at least for now.
Investors needing the cash might do well to sell in the market.Those on the pessimistic side about the economy and housing market should also take the money and run. More patient investors should assume that ultimately a higher price can be squeezed from these still perfectly good assets, and hold.
Advice Hold
Why Value is still there for the patient investor
Topps Tiles
DIY enthusiasts making the most of extra time at home helped sales to rebound at Topps Tiles, leading to predictions that it will make a profit this year rather than the loss it feared (Ashley Armstrong writes).
The flooring retailer, which was started in 1963 and has 356 shops in the UK, said that average weekly takings had risen from £800,000 in April, when all its stores were shut, to £3.9 million in the final week of June, which is only 5.4 per cent lower than a year ago. Over the past six weeks retail like-for-like sales have increased by 15.5 per cent. Sales in June were just a fifth below last year’s levels compared with an 80 per cent slump in April.
Investors have often used Topps Tiles as a barometer for consumer confidence in times of economic stress. The strength of the housing market has an impact, but Topps Tiles is also benefiting from a home refurbishing renaissance. With each retail customer spending £300 to £400 per transaction, it is telling how confident people are feeling about their finances and the future.
Rob Parker, chief executive, said that “people have had a bit more time on their hands, they are watching YouTube videos to feel prepared to take on DIY projects”. He added that its commercial order book was full until October, suggesting that there will not be a slowdown.
Topps Tiles has also benefited from a recent investment in its website, with a 139 per cent increase in online orders as customers continue to avoid trips to stores.
It has taken steps to bolster its balance sheet and completed a sale and leaseback of its central office and warehouse for £18.1 million. It has also accessed the government’s coronavirus business interruption loan scheme for a £10 million facility. As a result, it has a net cash position of £3.9 million and available headroom of £52.9 million.
Using the scheme means that Topps Tiles will not be permitted to pay a dividend this year, but analysts at Liberum are now expecting profits of £2.2 million compared with a £4.3 million estimated loss previously. If Topps Tiles sales stay on track, there should be a return to shareholder payouts next year.
Advice Buy
Why Sales rebound could lead to higher profits
