McCarthy & Stone’s (LSE:MCS) shares have fallen from 290p in 2016 to 72p. The precipitous fall since March has pushed them significantly below net current asset value per share. Furthermore, the main current assets (valued at £709m) are properties held by the company either ready for sale apartments to elderly folk, rentable assets or land with planning. Even if I allow for the possibility of a severe property recession by knocking off one-third of the balance sheet value of that property the market capitalisation of £387m is less than the net current asset value by a comfortable margin of safety.
Because most property companies are reliant on borrowed money the sector has been rejected by Mr Market. But is there really a high risk that MCS will be unable to finance itself in a severe recession?
At first sight borrowing looks high at £198m (a revolving credit facility to March 2023, with interest at Libor + 1.6% or 1.7%). But then you look at the cash balance and see what the managerial team have done. They are prepared for a period of 2.5 years of no sales at all by building cash up to £147m. Net borrowing is only £54m.
Additional preparation comes in the form of arranged access to another £300m under the government/BoE Covid Corporate Financing Facility. MCS can sell commercial paper with a term of 12 months. Drawdown can take place any time until 23 March 2021.
Currently, cash balances are so high that they do not need to draw down the CCFF. In fact, they probably never will because they are still selling property despite the Covid-19 restrictions.
Thus, I’m confident that with a 70% share of the independent retirement living market MCS will survive the recession. Even better, it might find plenty of site acquisition opportunities at low prices over the next two years especially near or in town centre locations, e.g. shops up for sale.
The Business Model
MCS build and sell (with a few rented) retirement properties for communities of retirees. They have experience of constructing over 60,000 since 1977. Annual output is, in non-Covid years, over 2,000 apartments.
After the sale of apartments MCS provide management and care services. The care is not like that in a care home – MCS provide independent living in retirement with a social circle. Care it’s much simpler than in old-people’s homes. It merely consists of things like one hour of cleaning per week, entertainment events, a bit of shopping, helping care for pets, changing bedding, safety cameras, 24-hour emergency cover and on-site restaurant meals.
MCS generally buy brownfield sites near town centres to accommodate around three to four dozen apartments on 0.5 – 3 acres. Average selling price c £300,000.
To help sales along MCS frequently (recently as much as 49% of the time) buy in part-exchange the old family home of the retiree. These are quickly sold on – the time taken………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
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