UNITE Group (UTG) is a rather unusual animal. To quote their own words:

“…the UK’s leading specialist provider of affordable, high quality accommodation services for students and NHS key workers…” – Read their website for more detailed information:

http://www.unite-group.co.uk

Essentially UTG should be valued as a Property company – albeit a rather unusual one, especially with its difficult debt structure of securitisation.

That apart, most would agree that UTG is operating in a rather attractive sector – residential lettings to two tenant sectors where income stream is pretty well guaranteed and the market growing. Certainly the rise in both commercial and residential property values will not be doing UTG’s portfolio any harm.

So, why is it that whereas over the past year the property sector has risen to the extent that the average NAV discount has now closed from an excessive 40% to a more reasonable 20%, UTG on the other hand, even allowing for the green shoots of a recent share price recovery, still stands at a 32% discount to the end 2003 NAV of 302p (see yesterday’s Finals Statement in the link below). Furthermore it stands at a quite staggering 44% discount to the prospective NAV of 370p when adding development surpluses already declared – see the Operational Review in September’s Interim Statement.

FINALS:
http://www.uk-wire.com/cgi-bin/articles/200403230700258154W.html
INTERIMS:
http://www.uk-wire.com/cgi-bin/articles/200309091212505524P.html

Well, I suspect that the discount to the sector is down to the following:

# Jan’01 – 23m shares issued @ 370p – so there are a large number of disappointed institutional investors who are long on memory – short on judgement. Look out for them getting back on board once the share price is back over ?3, as that will be our cue to sell

# May’02 – Securitisation scheme effectively mortgages and capitalises a substantial %age of their portfolio – an imaginative process which has the one drawback of confusing the analysts

# Jun’02 – Has to adopt the new accounting procedure which requires companies to write-off contract tender costs against current year P&L, rather than capitalising and amortising over the length of any ensuing contract. Has the effect of moving UTG from profits to losses. Shares plummet. Sure, it’s only an accounting procedure, but the City tends to think in headline terms, hence perception can be very important to investment valuations

# Aug ’02 – Issued Cap increased by 40% with the placing & open offer of 33m shares @ 175p. However most of the stock is left with the underwriters; and the very next month the share price collapses again when negotiations for a major contract with Sheffield University surprisingly fail at the very last moment

So, a Comedy of Errors, but frankly, the Company hasn’t really put a foot wrong in all that time. Over the past 18 months the share price seems to have justifiably turned the corner. In the Market spike down of Spring’03, the price touched a low of 105p versus the 425p peak just two years earlier; and in so doing effectively retraced to the level the shares opened at after their AIM listing in Jun’99. Since Mar’03 the price has extensively consolidated and in T/A terms, at the turn of the year it moved up through the neckline of a major Reverse Head & Shoulders @ 180p – an extremely bullish chart formation (see chart below).

CHART
http://tinyurl.com/2ce7r

In a series of steps since, the price has progressed to the current 206p (down from the recent peak of 222p), with at times quite lumpy volumes - as per yesterday. The technical analysis would suggest further positive moves to make good the “Gap Down” from the 300p level of Spring’02.

What could bring this about? Well, two things:

1. An acceptance that the NAV of 370p is real and not illusory

2. An acceptance that UTG just might be the perfect company for conversion to a REIT (Real Estate Investment Trust – or the Chancellor’s preferred name of a Property Investment Fund – see last week’s Budget)

It is the prospect of REIT conversion that is credited with lifting the property sector by 35% since Jan’03. It is further suggested that the Government may yet stifle the project with the heavy hand of excess red tape, as their real wish is to stimulate the house-building and letting market rather than provide incentives to the commercial property sector. In this regard, UTG has to be viewed as a favourite in the PIF Stakes. With this in mind, it is more than of passing interest to read the CV profile of the recently appointed non-exec Director – Stuart Beevor:

“Stuart is a representative of the Investment Property Forum and the RICS on the UK REIT industry working group and is a Trustee of the Investment Property Forum Educational Trust. He is past Chairman of the Investment Property Forum, a past member of the Property Advisory Group of the Office of the Deputy Prime Minister and previously a member of the external examination board of the College of Estate Management.”

Not only is Stuart Beevor an acknowledged expert on REITs, he is also experienced in the political arena – manna from heaven I would say, & likely to earn every penny of his fees over the next year or two.

Whilst on the subject of the directors, it is singularly encouraging to note three of them (inc. the recently appointed FD) lining up today to buy a total of 52341 shares @ 210p. For me, that is the sort of commitment which inspires shareholder confidence, especially the very next day after the release of the Finals Statement takes them out of a closed period.

The upshot? Well, in my opinion UTG has a 6-month upside to the 300p level from the current 206p, ie c.45% upside. Confirmation of the NAV @ 370p or higher (quite possibly 400p by now) will take the price higher; especially if accompanied by any statement suggesting just the possibility of conversion to a REIT. The company chose to make no reference to REITs with yesterday’s Finals Statement; however it has to be considered likely that the matter will be raised at the AGM in May.

With 45% upside – What’s the downside. Well, the rising 50day MA passes through the current price; and there is also recent support @ 200p to hold the price. A back-stop would be the 200day MA @ 175p. In fact there are solid support levels at all prices between 175p & 200p. So by any calculation, the downside appears to be limited.

& FINALLY: This is the last paragraph in yesterday's Chairman's Statement:

"Looking forward, the Group will be moving away from a purely debt-funded capital expenditure programme and is beginning to explore other effective sources of capital. Our investment decisions will be driven by the creation of shareholder value for the long term and, with a strengthened team and stable financing base, we have every confidence of achieving our objectives and moving into profit."

With the UBS uprating it is even more surprising to see UTG down @ 200p:

# The Finals confirmed the encouraging trading progress; the increased and increasing NAV; and the focus on the creation of shareholder value
# Directors purchased 52341 shares @ 210p the day after the announcement of the Finals
# Employee Share Ownership Trust bought 86/- @ 207.74p the very next day
# The RSI shows the shares to be significantly over-sold
# UBS are the first broker to come out with an upgrade

Well, the AGM has been set for 6th May; and I would expect that opportunity to be used by the Company to clarify their NAV position and, perhaps more pertinently, to state whether conversion to a REIT (“PIF”) might be the best way to maximise shareholder value.

I’ve averaged down today as the current price looks anomalously GOOD VALUE.