Abbey (ABBY.I) – To NAV and To Hold
(This is the sixth installment in my series of case studies on the shares that make up my portfolio. To see the other five articles, on Glanbia, Irish Life & Permanent, Datalex, Trinity Mirror and Datong, click on the company names)
A bulletproof balance sheet, a conservative management team, a remarkably cheap rating. That pretty much sums Abbey plc up. What could possibly dissuade investors from piling into it? One push-back I’ve received from some investors is: “It’s an Irish housebuilder”. Given the outlook for Irish housing, that would be a good reason to instinctively shy away from it, except Abbey isn’t an “Irish” housebuilder. It generates 85% of its revenues outside of Ireland, with the UK (circa 77% of group turnover and 71% of net assets) its main base of operations (the rest of the group’s ex Ireland operations are in the Czech Republic).
Drilling down into the financial statements reveals five distinct business units. Its Irish building and development operations have unsurprisingly contracted massively since the property bubble popped. In FY08 the group completed 249 house sales in Ireland. By FY11 (Abbey’s financial year-end is April) this had dropped to only 58. The group has taken significant write-downs against its Irish landbank, and at the end of FY11 only €11.6m of its non-financial assets (circa 5% of total group assets) were held here. This is an important point, as the continued sclerosis in the property market may make some investors nervous of the possibility of further write-downs. However, given the relatively modest balance sheet exposure I don’t see this as a material issue. The group’s priority in Ireland is centred on clearing its inventory of finished units.
In the UK, its building and development operations in that market account for the bulk of the group’s activities (circa 60% of turnover). In line with its large sector peers, this operation, which is centred on the more buoyant South-East of England, has seen improving trading conditions of late. The third strand to the group is its UK plant hire business, which trades as M&J Engineers. This accounts for around 15% of revenue and is modestly profitable, generating €0.5m in net profit in 2011 (which represented a disappointing 3% return on segmental net assets).
The fourth part of the group is property rental in the UK and Ireland – this produced revenues of €449k in FY11 – not bad for a segment where gross assets amount to only €1m. But clearly this is a small part of the business.
The fifth and final strand of the group is a housebuilding operation centred near Prague in the Czech Republic. This sold 21 units in FY11 for an average price of €241k apiece (the group average across its three markets was €180k).
Recent trading figures reveal a mixed performance across the group, with an improved UK performance offset by ongoing sluggishness in Ireland and the Czech Republic. Against that, the group hopes for “better days ahead”, and has begun investing in growing its landbank once more. It has also been engaged in a significant share buyback programme, under which it aims to buy back 15% of its shares in issue (to date it has bought 2.8m shares back out of the 3.7m earmarked for buyback-and-cancellation). This programme continues to underpin the share price, which has been remarkably stable over the past year.
So, with the birds-eye view of the group and a peek at recent trading out of the way, let’s take a look at it from an investment perspective. In my opening I said that it had a bulletproof balance sheet, conservative management team and a remarkably cheap rating. Taking those in turn, the first point of interest is the balance sheet. At the end of October (end-H112) this showed total assets of €199m. €74m of this was accounted for by cash and cash equivalents, with inventories standing at €89m. Other items of note include the surplus on the defined benefit scheme of €3m. The company has no short-term or long-term debt.
In terms of the management team, the group has been led by Executive Chairman Charles Gallagher since 1993. His interests are very closely aligned with the group, with Gallagher Holdings owning a 46.5% stake in the company. His conservative approach to managing the business is reflected in the strong balance sheet noted above and the way the company is one of the few genuine survivors from the carnage seen elsewhere among firms exposed to Ireland’s housing market.
Looking at the rating, it’s clear that the group’s balance sheet is the key to its value. Based on shares out of 21.84m and last night’s closing share price of €5.20, the group is capitalised at only €115.6m. As mentioned above, the group has cash of €74m and a surplus on the pension scheme of €3m, so the enterprise value is a ballpark €40m. In my model I estimate EBITDA of €11.6m in FY12, €14.8m in FY13 and €18.7m in FY14, so even allowing for the cash outflows related to the ongoing buybacks and additions to the landbank, on an EV/EBITDA multiple the stock is clearly inexpensive.
Looking at it another way, the group’s net assets of €161m translate into an NAV/share of €7.38. The group is currently trading at a discount to this of 30%, and this discount is set to widen as profits recover and the balance sheet continues to improve.
Or if you want to look at it in yet another way, with the net cash per share standing at c. €3.38 this means ‘the business’ is valued at €1.81/share. Consensus EPS for FY12 is 34.9c, while for FY13 it’s 50.8c. So the shares trade on an ex-cash PE ratio of 3.6x FY13 earnings.
So, no matter how you approach the valuation, the stock looks cheap. Three areas that may discourage some investors are the low dividend yield (1.5%), the small free-float (53.5%) and ongoing worries about the economic outlook. Mitigating against those I would point to the low rating, aligned shareholder and management interests and the strong balance sheet, which could facilitate opportunistic purchases of distressed land and related assets.
Summing up, to me Abbey is a stock that’s cheap, well run and financially strong. In these uncertain times, that’s the type of name I want to have in my portfolio. Unsurprisingly, I’m a happy holder.