The trading update from McCarthy & Stone should not have contained too many surprises, only two months after its flotation and the issue of a prospectus. The company came to the market and raised £90 million, allowing investors such as Goldman Sachs and private equity firms to exit.
It plans to invest £2.5 billion over the next four years in the UK retirement home market, of which it has about 70 per cent, to be funded out of free cashflow. The demographic advantages of this market are obvious enough and the company quotes a recent YouGov poll that suggested one in three homeowners aged 55 or more was considering moving and downsizing.
McCarthy & Stone was quoted until a decade ago, when it was taken private in a debt-driven deal just before the onset of the financial crisis. It had to be refinanced with a debt-for-equity swap that brought in those new investors.
It has set targets of building more than 3,000 specialist retirement homes each year — output is running at about 2,300 this year — and of moving the return on capital employed from 20 per cent at present to 25 per cent, the sort of return that the better housebuilders typically are achieving.
McCarthy & Stone has invested in this growth by opening three new regional offices since September. This will hit margins in the short term and will increase the usual skew towards the second half of its financial year to the end of August, as people are more likely to move into its homes in summer.
The weekly net reservations — a key measure of performance for the sector— are up by more than a quarter over the previous year and the forward order book is 40 per cent ahead at £354 million. As with the rest of the sector, price inflation is one negative, as wages for sub-contractors are rising, although the supply of land is coming through at reasonable prices.
The shares were floated at 180p. Investors who bought then will have no complaints — they fell 2½p to 275p on that first trading update. They sell on an earnings multiple of 14 and are on a premium of 2.3 times net assets, which is quite high for a housebuilder. That rather suggests that much of the good news is in the price.
Annual sales target 3,000-plus
25%-plus Target for return on capital
My advice Avoid for now
Why Company has set itself some impressive targets that look achievable, but shares have moved up a long way since the flotation
Some of us can remember Matthew Clark when it was an acquisitive and somewhat accident-prone quoted company in the early 1990s. The drinks wholesaler has since gone through several sets of hands and was bought from Punch Taverns by Conviviality, which operates off-licences under the brands Bargain Booze and the more upmarket Wine Rack, in the autumn for £200 million.
Conviviality has its own wholesaler serving its 630-plus estate, which is run on a franchise basis. The group came to market in July 2013 at £1 a share and the stock has had a good run since. It was boosted by the acquisition, adding another 9p to 209p after halfway figures that showed Matthew Clark was performing well, with sales up by 20 per cent year-on-year over Christmas, despite the inevitable disruption from a change of owner.
Conviviality has almost completed sorting through its estate, weeding out the less successful outlets and is growing again with perhaps 50 net additions over the next year.
The shares sell on 15 times earnings, which looks about right, although the engine for further growth is there.
Revenues £252m
Dividend 2.1p
My advice Avoid for now
Why Further growth looks to already be in the price
Floated at 190p in June 2014, shares in Allied Minds had shot ahead to more than 700p by April before the curious intervention of a hedge fund, which took out a short position and then criticised the company and, in particular, its investment in Federated Wireless.
Such criticism looks ill-judged. Allied has investments in 23 companies, all tech or biotech, which it gets from a range of American universities or the military, while Federated is developing a way of allowing others to use the wireless capacity of the US Navy, although few of those companies are even producing revenues yet. This makes Allied extremely hard to value, even if a similar model is used by other quoted companies such as Imperial Innovations, a favourite of this column.
Neil Woodford is a fan, having built his stake up to 28 per cent since the flotation. Investors in Allied are also allowed to co-invest in those companies. Federated has just been refinanced to take it on to its next stage of development and both Allied and Mr Woodford have taken part. Allied’s holding is now valued at $60 million, up from $9 million.
Making valuation even more difficult is the fact that the last net asset figure given was at the end of 2014 and, bearing in mind the advances made by some of those investments, that is out of date. On that basis the shares, up 19¾p at 302p, trade on about 1.3 times net assets, but when the figure comes out for 2015 it will be higher. Allied is a company where one should trust one’s instinct and be patient, but it has considerable potential.
Value of Fed Wireless stake $60m
My advice Buy long term
Why Company is hard to value but has huge promise
And finally...
Premier Oil shares roared back from their rather pointless suspension, almost doubling on their last quoted price. The deal to buy North Sea assets from E.ON is a good one and the shares had been the subject of some serious short-selling in the run-up to the announcement, so someone will have got their fingers burnt. Analysts were cautioning, though, that the deal does not shift the fundamentals greatly. Debt remains high and will be hard to shift without a substantial upwards move in the oil price.
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