Don't be fooled by the name. Since property giant Liberty International last year hived-off its London estates as a separate listed entity and rechristened itself Capital Shopping Centres (CSC), it has had no exposure to the capital whatsoever. And that's the problem. With no stake in London's international economy, which has been buoyed out of recession by the weak pound, it looks like a pure play on austerity Britain.
- High-quality portfolio
- Decent dividend payout
- Finding tenants will be tough
- Little scope for valuation gains
- No organic growth in the rent roll this year
- No major development plans
The company claims it will be protected by the top-notch quality of its portfolio. CSC owns some of the largest out-of-town shopping centres in the UK - including the vast Trafford Centre in Manchester - as well as a number of smaller city centre malls in cities such as Cardiff and Norwich.
It's true that shopping centres are withstanding the current squeeze on consumer income much better than most high streets. As retailers reduce their store numbers, they are refocusing their footprints around one-stop-shop centres that still attract a steady stream of shoppers. CSC estimates that retailer sales at its centres increased 3 per cent in the first half, suggesting it is increasing its slice of the shrinking retail pie.
CAPITAL SHOPPING CENTRES (CSCG) | ||||
|---|---|---|---|---|
| ORD PRICE: | 341p | MARKET VALUE: | £2.93bn | |
| TOUCH: | 340-341p | 12-MONTH HIGH: | 428p | LOW: 294p |
| DIVIDEND YIELD: | 4.5% | TRADING STOCK: | £10.4m | |
| DISCOUNT TO NAV: | 27% | |||
| INVESTMENT PROPERTIES: | £6.8bn | NET DEBT: | 104% | |
| Year to 31 Dec | Net asset value† (p) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2009** | 339 | -129 | -35.2 | 15.0 |
| 2010 | 390 | 446 | 68.3 | 15.0 |
| 2011* | 406 | 265 | 29.8 | 15.0 |
| 2012* | 468 | 682 | 75.3 | 15.3 |
| % change | +15 | +157 | +153 | +2 |
*Jefferies estimates Normal market size:10,000 Matched bargain trading Beta:1.1 **Restated pro-forma figures to reflect the demerger from Liberty International †Adjusted | ||||
But there's a difference between weathering austerity and generating growth. CSC's earnings won't fall off a cliff, but it's not clear how the portfolio can meaningfully appreciate in value until regional shoppers start feeling flush again. With the UK economy struggling, that could take years.
The group congratulated itself on a "sound operating performance" in 2011's first half, but the net adjusted value (NAV) of its assets - the key metric for property companies - actually slid sideways from 390p in December to 391p. Admittedly, that was partly due to the big final dividend on half a year's cash flow. But even assuming an equal split between the half-year and final payouts (so 7.5p per half), NAV would have grown by less than 1 per cent - and by nothing at all if the 3p boost from the Trafford Centre acquisition is stripped out. CSC funded the deal by issuing shares at a premium to NAV, which was only possible because a timely but unsuccessful takeover attempt by Simon Property Group briefly pushed its share price above 420p.
The group put in a better performance with recurring profits, another important metric: net rental income grew 6.1 per cent year on year, after stripping out the impact of the Trafford Centre. But that was thanks to second-half lettings, when retailers were more optimistic about the economic recovery. It has been much tougher to find tenants this year.
Occupancy dipped from 98 per cent to 97 per cent between December and June, while the number of short-term leases in CSC's portfolio increased from 202 to 240. Most tellingly of all, the rent-roll stagnated over the period, again ignoring the Trafford Centre, as letting activity was offset by lease expiries. All these indicators suggest the balance of negotiating power has swung back towards the tenant. Unless that changes in the second half, which seems unlikely with a deteriorating economic backdrop, growth next year will be thin; broker Jefferies anticipates underlying earnings growth of just 4 per cent.
