Companies: SVN   

Equity release property specialist Sovereign Reversions is almost the only quoted company with significant exposure to a home reversion market now offering attractive long-term growth prospects. Floated on AIM last year by broker Charles Stanley, Sovereign buys homes cheaply from old people who carry on occupying them on below-market terms until they die. Then the company can dispose of the property as it wishes.

With an ageing population increasingly drawn to such deals, the overall home reversion market has been growing at an annual rate of 45 per cent compound since 1998. Chief executive Graeme Marshall has set himself the objective of more than doubling net assets to £100 million through acquisitions.

In the year to end-April, the Bedford-headquartered company increased net assets by 14 per cent to £45 million, though dilution from share issues reduced the per share gain to one of 8.3 per cent at 330.5p. Embedded value, assuming vacant possession of the company's properties, rose 12.5 per cent to 564.4p a share. That compares with a current share price of only 290p.

The last financial year saw pre-tax profits rise a modest £100,000 to £1 million ⓠbelow brokers' expectations ⓠbut at this stage it is asset growth that Sovereign is pursuing. In the same period, the company made several acquisitions, including the purchase of the outstanding minority holding in an associated company, Capital Reversions.

Marshall makes it clear that more acquisitions are on the way, admitting that the company failed to clinch two hoped-for purchases in 2004-05. He says Sovereign, whose directors include former Environment Secretary John Gummer, is prepared to gear up with borrowing and probably issue more shares to fund one or two chunky deals.

The company invested £11.7 million over the last financial year in new reversionary properties and saw its average stake in each property rise from £117,000 to £127,000, with 39 per cent invested outside the south of England (in areas where life expectancy is shorter). Some 38 per cent is invested in properties where Sovereign's reversionary interest is 100 per cent, and the average tenant's age rose one year to 78.

Marshall concedes that the current cheerful outlook for the equity release market could be called into question if a speculative boom (like the recent buy-to-let excitement) pushed up prices beyond levels that would yield acceptable returns. But most analysts agree this is unlikely to happen in today's climate.

Recent legislation could see the equity release market more fully regulated by the beginning of 2007. Marshall, who cites an often ignored proviso that 'you cannot sell a lifetime mortgage without offering a reversion', says he hopes these changes will bring in more independent financial advisers with an interest in stimulating the market.

Valuing Sovereign is made harder by the absence of directly comparable quoted concerns. The nearest is the much larger, fully-quoted Grainger Trust, which has a plethora of other activities and interests besides home reversions.

Broker Numis argues Sovereign has recently traded at an appreciable discount to Grainger, which has an agreement in the sector with one of the big life insurance companies â“ an arrangement Sovereign would be happy to replicate. If Marshall and his colleagues can pull off the right deal, the market is likely to cheer.

Sovereign recently found itself among the targets of an attempted American-based fraud in which its shareholders were solicited to put up money for a performance bond to back a bid for the company allegedly pitched at several times its market price. The authorities on both sides of the Atlantic were alerted and, apart from some executive time and expense, Sovereign has not suffered.

Sovereign Reversions	AIM	£31.09m	225.00p	5.00p
Click here for interactive charting
Other company articles:
Sovereign changes the mix			22/07/2008
Charles Stanley			05/10/2007
Build your defences			05/10/2007
A new phase for Broker Network			09/08/2007
Sovereign enters new realms			16/07/2007