Ashley House – Extra Momentum in Extra Care #ASH
Ashley House (ASH) – Latest share price: 9.5p, market cap £5.8 million
Readers of Cube will already be aware of my penchant for the Construction and Support Services Sector; this largely being a function of my professional career which has been based in this sector for nearly 30 years. Makes me feel old!
This brings me onto Ashley House plc (ASH), the AIM (and SSX) listed housing and health property developer. Readers of Stockopedia may recall my article on the Group from back in 2016 and I suggest it’s worth revisiting this article for a recap on what the Group do and some of the pro’s and con’s pertaining to the investment case at that time.
I don’t want to duplicate what I’ve already covered before so will crack on with the salient points of interest for investors as of today:
Morgan Ashley JV
In December 2017, the Group formed ‘Morgan Ashley’ a 50/50 JV with £3 billion turnover construction and infrastructure business Morgan Sindell (MGNS). Whilst this JV resulted in Ashley House waving goodbye to profits from 50% of its large Extra Care pipeline, it brought in much needed cash at a precarious time for the Group and has also brought additional clout and expertise to the delivery of the growing number of projects on their books.
Investors should note that all profits from Morgan Ashley come into the accounts by means of ‘Share of results of joint ventures’; nothing is shown at the top line (sales) and this is reflected in the big drop off in sales shown in the market forecasts for FY 20 (see ‘Summary’ below).
The Group now owns 84% of the F1 Modular business which, despite being a not-insignificant cost centre for the Group, provides diversity of service offering and allows the Group to capitalise on the increasing momentum behind the drive towards Modern Methods of Construction (MMC) otherwise often known as ‘offsite’ or ‘modular’ construction.
F1 Modular has recently completed a 40 bed extra-care facility in Aberdare for Linc Cymru Housing Association/Rhondda Cynon Taf Council as well as a further extra care scheme in Peterborough, various school projects via the Government’s ‘Education & Skills Funding Agency’ (ESFA) modular schools framework and other small projects such as modular kiosks for the likes of Greggs, Pirelli and Costa Coffee. Recent inclusion on the Government’s NH2 framework for modular housing development should also see futher growth in sales.
The Group is currently awaiting an order for a significant modular hotel project in Yorkshire for a private sector client which will further broaden their expertise and profile.
Partnering Health Ltd (PHL)
The Group owns a 33% share in Partnering Heath Ltd a growing healthcare business based out of Fareham in Hampshire. I recently met with the CEO of PHL and was impressed with the culture he has created in the business as well as its prospects.
Accounts for PHL for the year ending 30th September 2018 show sales of £12m, gross margins of 42% and a maiden profit after a few years of turnaround and management changes. I anticipate healthy sales growth going forward which will not only drive further profitability (and hence 6 figure contributions to Ashley House’s bottom line) but will also increase the valuation of PHL.
I noted with interest the acquisition last month of Greenbrook Healthcare by Totally plc for £11.5m. Using the multiples from this deal and looking 1-2 years ahead I can see a valuation of circa £6 million for PHL; the Ashley House 33% shareholding hence being worth circa £2 million. The current mcap of Ashley House is currently less than £6 million.
Extra Care Pipeline Realisation
There has been a notable ramp up in Extra Care schemes getting to financial close (FC); this being the point at which the parties are legally committed and the development can progress to site.
This has historically been a protracted process, however, management have been working hard to improve the process including working more with slicker partners such as Living+ (part of supported living provider Places for People) and leveraging any relationship Morgan Sindell may already have with the parties.
The recent ‘Schemes Update’ provided by the Group in early May 2019 gave investors a useful update on the status of some of the Group’s projects including recent FC for their schemes in Freshwater (IoW) and Burnholme in Yorkshire. I also found yesterday a useful article on the Housing LIN website noting that the Group’s 54 bed extra care project in Romsey, Hants has started on site, implying that FC has been achieved. This is fantastic news as a significant proportion of profits are recognised at FC and hence will be captured in the FY19 accounts.
The same Housing LIT article also noted a new project at Oak Park Havant, this project “is much larger and will comprise a ‘health hub’ development containing 99 mixed tenure extra care and independent living apartments and an adjoining 80 bed nursing home. This development has been awarded (subject to contract) to Hampshire Integrated Community Living which is a consortium led by Morgan Ashley LLP“.
The CEO recently noted the market opportunity for Ashley House as “huge“; this is driven by a need for Local Authorities all over the UK to provide increasing numbers of ‘supported living’ or Extra Care facilities within the community. With a growing and ageing population this demand isn’t going to slow up soon.
In summary, the Group seems to have finally got a run of good luck and this leads me onto market forecasts and valuation. House broker WH Ireland have a forecast for FY19 of £19.4 million of sales and £0.6 million PBT giving EPS of 1p.
Source: WH Ireland
I believe from my own research of the various projects closed or completed in FY19 that these market forecasts should at the very least be achieved, if not easily beaten. Equally, the forecasts for FY20 look very achievable given the momentum of extra care project closures, assuming other projects like the modular hotel in Yorkshire are awarded over the next financial year and increased profit contributions ffrom PHL. Even if forecasts are missed purely due to timing issues, the investment thesis remains intact.
The sector median PE ratio is around 8.8x hence applying a notional 20% discount to this for the tiny mcap and assuming 2.6p EPS for FY20 gives a valuation of 18.3p (£10.6 million) almost double the current share price. This doesn’t take into account the potential £2 million value of PHL which is currently shown in the Ashley House accounts at a notional value of just £1.
I’m expecting this valuation anomaly to shortly unwind towards £10 million and look forward to seeing a year end trading statement from the Group sometime in July.
At the time of publication, the author holds a long position in the company mentioned.