Member Info for Madikwe

Just did a quick comparison of MBH vs FORT as at their last year end (31.12.21).
FORT has a lower PE, higher dividend, & higher net cash percentage than MBH. So not sure why you are saying MBH is better on every metric?
In addition FORT has a new factory coming on stream which should improve efficiency and it is listed on the main market so less risky in that sense compared to MBH which is on the AIM.

Hi Vlad,
I am in full agreement that tangible assets and tangible asset growth is a key factor in determining the attractiveness of an investment. That is what prompted my investment in Inland. Furthermore, I think we are both agree that the PPAs are key in assessing the true value of Henry Boot. The big question is how much cost has Henry Boot allocated to these PPAs? If they are allocating salary costs to the value of PPAs then there is potential for things to go badly wrong, i.e. treating salaries paid out as assets and not as expenses. PPAs are shown as an asset in the 2020 FS - note 2 of the FS states that PPA assets total approx £150m - that is a large chunk of their £375m market cap. As I mentioned previously, roughly £60m of that is in inventory and I do not know where the remainder is (possibly under investment properties). Capitalising salaries is a dangerous game and one that is not uncommon in the software industry - I don't know if it is happening here.

I also have a niggle about their financial prudence in terms of the employee defined benefit scheme. For the last 2 years they have changed the financial assumptions underlying the scheme and in both years this resulted in a significant cost to the company. To my (limited) knowledge changing assumptions that incur significant cost for 2 years running is very rare and I suspect they should have done it all in one go but didn't want to show the true cost in 2019 so they massaged it and pushed some out to 2020. This is speculation on my part but in any event the DB scheme is a risk to future returns.

Oi_Oi_ Thanks for the clarification re PPAs.

Vlad, re PPAs - I believe there is a difference in BOOT recovering external costs for PPAs in real time versus recovering them after the planning process has been completed - i.e. in the latter case those costs may not be recoverable if the planning application fails. Furthermore, I (we?) don't have clarity on whether they are capitalizing payroll costs related to these planning apps. If they are not capitalizing these costs then there is considerable upside once planning is obtained. However, if they are capitalizing related payroll costs then profits on completion will be significantly lower.

Sorry - re post below - the page references to the 2020 FS should be pages 159 and 177, and not pages 161 nd 179.

Hi Vlad,
Just following up on my post earlier today on the INL board (the subject of which was really Henry Boot).
I believe that the options and PPAs are included in the assets of the company - page 161 of the FS states that PPAs assets are £151m, while page 179 states that inventories include c.£60m in options and PPAs - please correct me if I am wrong.
While the PPA/Option land bank is increasing in size, it is debatable whether the value is increasing. One could argue that the land bank back in 2016 was potentially worth c. £900m (60k plots at an average profit of £15k as per 2016 FS), and is now potentially worth c. £528m (88k plots at an average profit of £6k as per 2020 FS). Obviously, both of these numbers are huge relative to the market cap but both are only potential and logic suggests that the easiest wins are converted to profit first with the difficult planning cases taking longer and therefore incurring more cost.
I am not saying that BOOT is a poor investment, just not sure that it is a clear winner......

Hi everyone,
Apologies if this post should really be in another chat group as it is mainly to do with Henry Boot plc. having said that - from a review of BOOT accounts I see that they use external valuers to value their investment properties - this is more comforting than INL who use Director valuations.

Vlad,
As promised, I've had a look at BOOT's last FS and to be honest I don't know whether there is significant hidden value in their PPAs - my gut tells me they are as likely to be a hidden liability as a hidden asset. It appears that the PPAs in BOOT are significantly different than the PPAs used / seen by Oi_Oi_ in his company. The FD says the average length of a PPA is 11 years versus c. 2 years as experienced by Oi_Oi_. Furthermore, planning costs and fees are covered by BOOT (again this is at variance to Oi_Oi_ experience) and these costs are capitalised in the FS as assets. Direct costs of PPAs are capitalised and this could include some payroll costs which would be a concern. I'd imagine that the longer a PPA is on the books the more cost is allocated to it (i.e. capitalised) and it is possible that the average profitability of plots is therefore falling as the land bank gets older? Page 32 of the FS shows that the average profit per plot has fallen from £15k per plot in 2016 to £6k in 2020 - while it is not a straight line decrease, the trend is worrying. (I think I saw some figures that indicated the profit per plot so far in 2021 was below £6k per plot although I cannot find it now!). Lastly as per page 161 of the FS PPA assets are £151m but as per page 179 only £60m of this is in inventories - I don't know where the difference is.....
BOOT also has a defined benefit pension scheme which looks pretty onerous. Changes in financial assumptions regarding the scheme cost £25m in 2019 and a further £27m in 2020 (as per note 28 of FS). Are there likely to be further adverse changes in financial assumptions in future years? A stock market downturn is also a risk here....
In summary, I'd need to know more about the PPAs before making a big bet on BOOT but I'm interested enough to put them on my watchlist.

Hi Vlad,
Sounds interesting - I'll have a look at Henry Boot over the weekend and come back to you with my inexpert/amateur opinion then. My only initial thought is whether they bill land owners for planning costs associated with PPAs as they are incurred or do they capitalize them and then recognize a profit/loss if/when the land is sold.
Cheers

Thanks Vlad. Yes, I have just checked what I think is the relevant accounting standard (IAS 40). It states that where an investment property is transferred from investments to inventories then the current "fair value" of the property becomes the "cost" of the property to be included in inventories as long as the investment property is being developed. I don't know how many properties have been re-classified by Inland in this way over the last few years - I'll try to get a look at historical accounts over the weekend to estimate this....
I also agree that the PBV ratio is out of kilter with every other house builder on the market. The market cap of c.£110m is not a huge amount and besides house builders you'd wonder why some PE groups have not tried a takeover and then sell down the assets over a period to release the "hidden" value if indeed it is there.

Thanks Demos - that does add some comfort.
I see that they also transfer investment properties to inventory where they intend to dispose of it. While inventories are stated at the "lower of cost or net realisable value" I assume that such properties are transferred at carrying value rather than adjusted to cost / NRV, so there may be some exposure here as well.
I agree with you that inv properties are extremely unlikely to be overvalued by 100% or anything like that!

Hi everyone,
I bought into Inland a while ago largely based on the attractive PBV ratio. I'm now sitting on a paper loss of approx 20% and wondering whether I should have paid more attention to the Financial Statements before I invested!
On the one hand a PBV ratio of close to 0.5 for a "bricks & mortar" operation looks like incredible value but I see from the FS that the valuations are carried out by the directors. I could find no mention that valuations are independently verified (an external audit doesn't really add any comfort here). If the property valuations are significantly overstated then the investment case for Inland is a lot weaker.
Added to the valuations issue is the fact there there is no director buying. Only 2 directors have significant holdings and one of those effectively cashed out some shares last November when he exercised an option to buy 1.5m shares at 18.25p, and then sold 1m of these shares. As per the FS, the sale was to cover the option price and the related tax but he must have pocketed a fair amount of cash as well?
Does anyone here have concerns over the property valuations or the lack of director buying? Or is it normal for housebuilders / developers to carry out their own valuations?
Any thoughts would be appreciated!

This is the only recent news I can find
https://www.londonstockexchange.com/news-article/CSH/response-to-regulatory-judgement/15098103
it sounds like bad news. I suggest you read the actual regulatory report. CSH seems exposed with approx 17% of income coming from this one source....