HML Holdings: Undervalued with at least 50% upside potential

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HML Holdings: Undervalued with at least 50% upside potential
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The Richmond, Surrey based HML Holdings (LON:HMLH) is one of the largest providers of property management, insurance and ancillary services to residential property blocks in the UK. It has had an excellent record of organic growth over the last few years and is now expanding through sensible acquisitions around the UK.

The late November 2018 £496,000 takeover for cash of the block management business of Dauntons Soar Management, a sister company to the Belgravia estate agents Dauntons Soar, brought in another 600 units in 110 blocks in the SW1 area, as well as a very useful incursion into the central London marketplace. A strategically important acquisition.

With over 20 offices across the country HML is now expecting new legislation for estate agents and lettings management, due in April this year, will see many companies be offered to them by owners who do not want the hassle of complying with the additional regulatory restrictions. However, to HML they see this being a big opportunity for further expansion.

HML was originally set up by LTC Holdings plc in 1991 to manage their property portfolio. In 2001 the management embarked upon an expansion programme and has since grown significantly, both organically and through acquisition. It was demerged from the LTCH group in June 2006 and came to the AIM market later that month.

Its acquisitions have been structured geographically, allowing it to create local property management hubs throughout London and the south of England. More recently, before the Dauntons purchase, the company has branched out in the North West of England by acquiring businesses in Cheshire, Greater Manchester and Eastbourne in addition to acquisitions in BristolCheltenham and Bath.

The Group focuses on providing the best possible property management services, together with the provision of professional and tailored services. It offers: Residential Property Management; Lettings; Concierge Services; Company Secretarial; Health and Safety; Building Surveying; Insurance; and House Builders and Development Management Strategies.

On the face of it that is a lot of services to offer for an as yet small group, but a determined efficiency programme is ongoing to streamline its systems, especially as it expands. It is consolidating into one back office operation in West Croydon, whilst growing its cross-selling opportunities intragroup. It is now developing its Regional Director structure and expects to gain efficiencies from consolidating the group’s databases.

It also anticipates further establishing its lettings division and it will focus on specific new build structures in gaining additional business. It had just 19,000 units under management when it came to the market in 2006 – it now has over 76,000 properties supervised.

The end September 2018 Interim figures are a good indication of the balance of the revenue earned from each of its services. Out of a first half total of £13.56m (which were up 7% on the 2017 half timers) they showed the following: Block Management fees brought in 49.4% of the total; Company Secretarial 4.5%; Lettings fees 3.2%; Insurance Brokerage 10.5%; Surveying fees 4.7%; Pre-contract enquiries and consents 5.1%; Accountancy and Administration fees 3.1%; Concierge Management 10.7%; and other fees and charges 8.6%.

I consider that to be a good spread of services on offer and a well-balanced contribution to the Group’s earnings.

Over the last six years the steady management of this group has shown through with a progressive growth from £12.8m revenue to end March 2013 up to £26m in 2018, with pre-tax profits increasing from £0.76m to £2.2m last year. Despite a somewhat difficult property market in the last year or so the company, which is cash generative (£1.56m in the first half), saw a reduction from £1.47m to just £0.96m in net debt.

For the year to end March 2019, even against an uneasy market, brokers finnCap expect revenue to increase to £27.3m, whilst pre-tax £2.3m is estimated, giving earnings of 4.3p per share.

I would rate these shares, currently 32p, as being seriously undervalued. It is obviously a well-managed business that is very capable of steady expansion in a marketplace that is soon to offer more opportunity for growth.

The shares have 50p written all over them and even at that level, as growth continues, they will look cheap.

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