UK Mortgages lets investors set future after rejecting M&G

UK Mortgages, the £148m homeloans investment company that fended off a bid approach from M&G in the summer, is to consult with shareholders over whether it should continue.

UK Mortgages (UKML ), the £148m homeloans investment company that fended off a bid approach from M&G in the summer, is to consult with shareholders over whether it should continue.

Announcing the conclusion of a strategic review this week, the five-year-old Guernsey closed-end fund said it would give shareholders a vote before the end of the year on whether to plough on with a revised investment mandate or wind up, sell its assets and return the cash.

Chairman Christopher Waldron, who also chairs investor activist Crystal Amber (CRS ), said ‘there was a reasonable case to be made for both options’, considering the improving outlook for the UK housing and mortgage markets.

At the same time, the directors acknowledged the uncertainty over prospects next year given a resurgence of Covid-19 cases and the planned end of the stamp duty holiday, which has driven the pick-up in the residential property market.

Broker Stifel said the proposal provided investors with an ‘effective continuation vote’.

‘We believe this is a sensible outcome and that the manager will have to put forward a persuasive revised mandate to convince shareholders that winding down the fund is not the right way forward. We await further details on what the revised mandate would be,’ said analyst Sachin Saggar.

M&G revealed its bid interest in the largely buy-to-let mortgage portfolio run by credit specialist TwentyFour Asset Management in July.

At the time UKML’s shares had been trading at around 55p – having nearly halved from their launch in 2015 – on a steep discount of 30% below net asset value (NAV). Market turbulence in March had forced UKML to delay the refinancing of its largest pool of loans, while mortgage holidays had further eroded returns that had been depressed by the slump in the Bank of England base rate to a near-zero low.

M&G’s opening offer of 67p per share, valuing UKML at £183m, was rejected, as the board argued it materially undervalued the company. While the cash bid was at a large premium to the prevailing share price, it was also pitched about 16% below the latest NAV.  

M&G’s final £191m offer to buy up the shares for 70p apiece was also rejected on 13 August, following which the asset manager walked away, but in between UKML’s under-fire board had announced several measures to prove it was trying to improve the situation for shareholders.

Those measures included instituting a strategic review, as well as reinstating a 4.5p annual dividend target which had been withdrawn at the start of the coronavirus pandemic.


Big share buybacks

Annual results on Tuesday showed the board had started to use the proceeds of the refinancing of UKML’s large ‘Oat Hill’ pools of loans to buy back shares in volume.

The company bought back 40.9m of its shares in September, equivalent to 15% of the share capital, for £27.8m, according to Numis, which is also UKML’s corporate broker. Numis estimates a resulting uplift of around 2.2p or 2.7% to the July NAV.  

NAV total returns since launch in July 2015 stand at 11.3%, or 2.1% annualised, according the broker. Meanwhile the share price total return has been -11.9%, due to the discount.

However, the catch-up dividend of 1.5p announced during the tussle with M&G to hit the 4.5p annual target, has put UKML on a 7% yield.

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